Outdated confidentiality rules deny the credit rating bureau the access it needs to be effective.
UAE lags on credit data laws
Laws that govern credit reporting bureaus have not kept pace with the rising tide of consumer debt, industry officials have warned. Jamal M Saleh, the head of risk management at the Commercial Bank of Dubai, said that because of the lack of clear regulatory guidelines, banks are reluctant to divulge consumers' data, even if a credit agency was to ask for it. "No one wants to volunteer information if there isn't clearance from regulators," Mr Saleh said. "Right now, we have very important confidentiality regulations."
The law stipulates that banks must treat consumers' data as "confidential except for statistical data that may be published on an aggregate basis". The lack of clear legislation has become particularly topical as debt levels in the UAE continue to rise. The fear is household debt could spiral out of control, much as it did in the US, where a mountain of mortgage debt has pushed many homeowners to the edge of bankruptcy.
Other countries in the Gulf have effective credit reporting agencies, but the UAE has lagged behind. A centralised bureau, Emirates Credit Information Limited, or Emcredit, already exists, but its data collection is restricted under current environment. With better laws, Emcredit would gather more detailed information, said Zaid Kamhawi, the business development director at the bureau. "It would be a keystone for us."
The Dubai-based Emcredit is bound by Dubai International Financial Centre's (DIFC) confidentially regulations, until a federal law is adopted, Mr Kamhawi said. The company has data on 35 per cent of mortgage borrowers in the country, and the personal details of 5.6 million people. He said the company is talking to banks to supply it consumers' data when the law permits. However, it would take time to compile an effective database.
"Bigger banks have more to gain than smaller banks because they are more exposed to the credit market," Mr Kamhawi said. He said that 20 per cent of the country's banks issued 80 per cent of the country's loans. Mr Kamhawi added that Emcredit is also lobbying for a federal law to allow cross-border information sharing. Nasser Saidi, the chief economist at DIFC, said that an effective credit reporting agency would not only protect lenders and the market, but it would also create a more favourable credit environment.
"It would reduce risk because of better understanding of borrowers, and increase access to credit," Mr Saidi said. "Secondly, the cost of getting financing would be reduced, which would help capital markets and mortgage financing." Credit bureaus supply information about a consumer's incurred debt, repayment history and financial health, to a lender such as a mortgage bank. A centralised credit reporting system is therefore crucial to identifying bad risks. Credit reporting bureaus in developed markets are the pillars of the lending industry. In the US, for example, lenders buy a history of a potential borrowers' financial obligations, and assign him a standardised score. Credit bureaus compile the data on consumers from the information that financial services companies, like banks, supply them.
Credit bureaus in Saudi Arabia, Kuwait and Bahrain have been operating much the same way for a few years but the two-year-old Emcredit has been hampered by lack of clear laws at the federal level. In the US, financial institutions are allowed by law to share consumers' credit history with credit bureaus. They regularly sell consumers' credit information to lenders, especially credit card issuers. Employers too are allowed to purchase the credit history of potential employees.
Emcredit, which does not have this level of access to data, is therefore restricted in what information it can provide. As recently as this week, the Federal National Council officials pressed for tighter lending measures, and the fast-tracking of a centralised credit reporting agency. A committee report said that consumer debt in the nation reached Dh43.46 billion (US$12 bn) at the end of last year, a jump of almost 40 per cent from 2006.
Overall, the UAE's ratio of consumer debt, at nine per cent, compares well with many other markets; the UK is saddled with a debt ratio of 100 per cent. But the country's explosive economic growth rate, together with the type of debt that is mostly incurred, has lenders and the government worried. Ian Reed, the general manager of the credit consulting company PIC Solutions, said that while more than 90 per cent of the UK's consumer debt is mortgage-related, in the UAE its mostly from personal loans and credit cards.
This is debt which is not secured by assets, and thus less likely to be recovered. "I'll be very surprised if more than 50 per cent of debt in this country is secured," he said. "The over-indebtedness is not a crisis yet but it's at a level that should become a concern." Another risk for lenders is that a large proportion of borrowers are expatriates. They arrive in the country and open bank accounts, apply for credit cards and for car and housing loans.
"The UAE faces a unique challenge in the GCC in that most people can just pick up and leave," Mr Reed said. "Banks here have this extra element of risk." Saudi Arabia's Simah, Kuwait's Ci-net and Bahrain's Benefit Company are bank-owned credit bureaus. "Very generally speaking, the quality of data they provide in terms of the information they provide is very good and compares very favourably with developed markets," Mr Reed said. "They provide information about consumers' complete credit history."