One sign of enduring strength in Dubai’s credit markets is that multiple obstacles have not hindered growth. This includes external factors, such as lower oil prices and a recent history of credit struggles. In the past year, another challenge to lending growth has been Al Etihad Credit Bureau. While in the long term this new actor is expected to enhance the lending market by helping banks to manage risk, in the early stages of a credit bureau’s introduction into a financial system, the sudden focus on consumer risks is often a disincentive to lend.
Banks are now obliged to conduct credit-specific background checks on their potential customers using the federally owned credit bureau. The federal government passed a law in 2010 mandating the bureau’s creation and requiring all banks to participate by both sharing and accessing data. Prices range from Dh70 ($19) for a report on the credit history of an individual to Dh220 ($60) for a larger corporate entity, according to the organisation’s website.
“The credit bureau, for the first time, has shown who owes what,” said Redmond Ramsdale, senior director of financial institutions ratings at Fitch Ratings Dubai. “People are fairly indebted.”
The full impact of the bureau is expected to take several years to come to fruition as it builds its database of consumer and corporate debt histories and as banks add to their culture of risk mitigation. But what is clear so far is that bank executives are using the information as intended. In October 2015 Citibank’s head of consumer banking in the UAE, Dinesh Sharma, said it had prompted more loan rejections. “If customers are overleveraged, we have no choice but to decline them,” he said. Shayne Nelson, the CEO of Emirates National Bank of Dubai, said during a conference call with analysts in late 2015 to discuss its third-quarter results that the credit bureau’s presence had impacted loan volume.
Areas of the economy outside the financial services sector that could be impacted by the credit bureau include real estate and automotive sales, as these goods are often paid for with credit. While it is likely that sales downturns in these areas are reflective of other factors as well, such as broader economic conditions, there have been some negative impacts on sales, specifically because consumers are having a harder time accessing credit.
One notable element of the bureau’s practice so far is its model for credit scoring. It has taken the approach of counting up existing debts as well as potential debts in the future when calculating consumers’ individual debt burdens. Credit cards are a banking product that could see less demand as a result, as the debt burden is calculated using 5% of available credit for each card a person carries, even if those lines of credit have not been tapped. “The debt-burden ratio takes into account both what you have borrowed as well as what you could potentially borrow,” said Ramsdale. This is atypical – in some markets, the more credit one has the easier it is to obtain approval for more. Regulations have also been put in place to limit credit-card solicitation, Ramsdale said, such as the hours salespeople are permitted to call customers between in order to pitch them new cards.
For credit cards as a line of business, the new scoring system removes incentives for consumers to collect credit and spend more than they can afford. Ihab Ayoub, general manager for the Middle East and Africa at VISA, told OBG about the positive role Al Etihad Credit Bureau has played. Ayoub said, “The region’s electronic payments industry is evolving rapidly, as fast-growth markets look to enhance their financial systems by introducing innovative digital payment solutions. The proliferation of smart devices and internet connectivity in these markets, moreover, is complementing this transition.”