Interview: Younis Al Khoori
How will comprehensive credit reporting benefit both corporate and retail borrowers?
YOUNIS AL KHOORI: The UAE has the largest banking sector and the second-largest economy in the region, and it has a very strong growth pattern. The demand for loans and bookings has heavily increased in recent years, contributing to the growth of the sector. With this demand and growth there is a heightened need for greater transparency. AECB is set to become something akin to an X-ray machine, making borrower information available to financial institutions for review in a transparent and neutral manner. The bureau will significantly help to reduce national debt and the provisioning of banks. It will bring about higher growth rates for businesses and individuals, and therefore the economy, through an increase in credit lines to those who wish to borrow. It is crucial for banks not to lend money to those that are unable to pay back their debts – the credit bureau will allow lenders to assess a candidate’s total indebtedness and calculate a borrower’s capacity to honour their debt. However, the key beneficiaries will not only be individuals and companies, with a good history of paying and meeting financial obligations on time, but also those who are new to the loan market, including small and medium-sized enterprises (SMEs). It will have a proactive approach to data sharing, enabling banks to assess on an individual basis, when there is limited financial information available. AECB indirectly will open new financial avenues and in due time also encourage more entities to provide credit facilities, such as car rental or retail businesses. It will help to build an informed financial society. Consumers and organisations will become more aware of their financial exposure and turn to better financial management tools to grow and protect their wealth effectively and manage their finances more closely.
To what extent will credit reporting limit lending?
AL KHOORI: AECB will be launched in four stages, with a completion date of 2015. As with all projects of this nature, at an early stage there will be certain challenges. However, with the pace at which the credit bureau has been developing until now, any lending slowdown that the market may encounter will ultimately turn out to be a very temporary issue.
In what different ways will SMEs benefit from a credit assessment system?
AL KHOORI: In comparison to 2008 when nearly all the doors were shut for new credit, there is now a 50% approval ratio amongst the banks and SMEs. Currently, for example, financial institutions and banks are lending through personal guarantees and different collaterals where they always conduct a detailed due diligence before extending any facility to SMEs.
A credit bureau, once fully implemented at the federal level, will eliminate the personal guarantee model and help this due diligence process. It will enable banks to better understand the underlying risks associated with the entity and enable the facility. This can favourably impact pricing for SMEs and also boost the appetite among banks for lending into this segment.
SMEs that already have a track record of performance in addition to a good credit history captured through a credit bureau mechanism will always have a greater ability to negotiate financing from banks. However, one of the biggest challenges faced by many organisations face is their minimal or non-existent financial history. This is especially the case for new start-ups, where it is not feasible to assess the overall financial health of the company. A credit bureau addresses this challenge by allowing organisations to submit credit history from a different sector, utility payments and credit card or loan payments to create a history.
Lastly, studies show that there is a direct correlation between how an individual manages personal and company finances. Since most SMEs evolve around an individual, banks are likely to draw on this correlation when there is a shortage of financial data on an SME and look at the individual’s credit rating instead.
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