Al Etihad Credit Bureau to debut scoring system next year

The country’s fledgling credit bureau is finalising plans for a new scoring system that should make it easier for banks to make lending decisions.

A credit scoring system set to start in the first quarter of next year will make it easier for banks to process loan applications and give them greater clarity on risk, said Marwan Lutfi, the head of the credit bureau.

“Sometimes in the past it was more like jumping off a cliff,” he said. “You did not know whether the ocean was 10 metres away or 100 metres away.”

Defying expectations of bankers that the pace of loan growth would slow amid a higher rate of rejections and slower economic growth, the country’s nascent credit bureau said that consumer loans have grown 10 per cent since the beginning of the year.

While Mr Lutfi attributed the gain in loans to a growing population and shied away from linking it to the rise in the cost of living, bank industry executives have said in recent months that soaring prices have increased the demand in personal loans.

Sharjah-based United Arab Bank said last month that the rising cost of living was stoking demand for short-term loans to pay rent and school fees, and the consumer prices indexes in the UAE have increased by as much as 5 per cent this year.

“I know some of the newspapers have said that there has been a decline since the credit bureau started. A 35 per cent decline, which is not true – at least not across the board” Mr Lutfi said. “Overall, the market has actually increased.”

Most of that debt is in the form of personal loans and credit cards, and the average resident with debt has two loans. According to the latest figures available to Mr Lutfi, about 3.1 million residents have 6.69 million active loans. Both those numbers are up 10 per cent from the end of December, he said.

The data chimes with what banks have been reporting in their earning releases for the first quarter. Emirates NBD, the largest bank in the Middle East in terms of assets, said its first-quarter profit jumped more than 60 per cent as it made more money from individual customers through credit cards and international money transfers.

Mr Lutfi declined to say how many people had applied for credit bureau reports, as Al Etihad Credit Bureau is a private company and is not obliged to reveal those figures, but said he was happy by the uptake so far.

He also said it was too early to start deciphering patterns of behaviour and levels of defaults among consumers, but by the end of the year the overall picture would become clearer.

Al Etihad Credit Bureau opened for business in November, but a hiccup regarding liability for incorrect data made some banks hesitant to use it initially. While that has since been resolved, banks are not obliged to use the bureau when making decisions about whom to give credit to.

The federal Government passed a law in 2010 to establish the bureau, requiring all banks to participate in giving data.

The bureau’s database of the credit history of all retail borrowers enables banks to build an accurate picture of a potential borrower’s indebtedness, and allow them to assess their ability to honour the debt. Previously, banks could not check the credit history of customers relating to other lenders.

Experience in other countries shows that credit bureaus can help to stop individuals with a poor credit history from amassing further debt while easing the flow of credit to those able to repay loans. Banks benefit by having to build smaller provisions, or money put aside to cover bad debts against the risk of defaults.

Eventually the credit bureau will add to its reports other forms of consumer obligations, such as telephone bills and other utilities, Mr Lutfi said.

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