Borrowing money from banks relatively cheaply has never been difficult for consumers in the UAE. Due to the absence of a formal credit rating system, consumers have always been able to receive loans or credit cards easily, often leveraging themselves beyond their means. However, things are set to change
soon with the UAE’s new credit bureau, which will make consumers’ financial history available to banks.
The bureau, widely reported to become fully operational this year, is expected to provide crucial regulation in curbing excess lending and rise in consumer debt. Nikola Kosutic, Research Managerat business information provider Euromonitor International, says, “A group of 12 banks have already started collecting data and running trials ahead of the full introduction. However, one point of controversy that is still looming is whether banks should ask consumers’ consent to probe their credit history, something that banks argue should be compulsory.”
The overall consumer lending environment is projected to undergo a positive transformation when the official credit bureau begins operations. Credit reports will make individuals more aware of financial management and should make them more cautious about getting into debt. It will go some way to ensuring individuals borrow within their limits and maintain a good repayment profile. “In time, the bureau will have an impact on retail borrowing in the UAE, since it will help lenders make more accurate lending decisions and, therefore, better manage risk and reduce credit defaults,” says a spokesperson for Al Etihad Credit Bureau.
Formal system in place
Bankers in the UAE also point out that the formal credit rating system will have a positive impact in helping the UAE’s retail borrowing sector mature in a way that will allow for long-term growth, while at the same time, avoiding the debt-related vulnerabilities witnessed during the financial crisis.
Devendar Agarwal, Cards and Loans Business Head, Citibank, says, “The credit bureau is good for both customers as well as banks and it is a welcome move forward.” He adds, “The absence of a credit bureau has impacted the sector adversely with some customers getting overleveraged beyond their means. In addition, there is a challenge with recovery in case a customer leaves the country without settling his debts. The launch of a credit bureau will help stabilise the sector.” Consumer credit in the UAE grew from Dh217.5 billion in 2012 to Dh224.9 billion in 2013. It is expected to reach Dh242.3 billion in 2015, according to a recent study on the consumer finance sector in the UAE by Euromonitor International.
Since 2011 — as the UAE began to recover from a 5 per cent drop in real GDP, decline in construction and property sales from the 2008-2010 economic downturn and burst of the Dubai property bubble — several factors have been driving growth in the consumer lending segment. During the downturn, lenders and borrowers, not knowing if or when economic recovery would come, shied away
from lending and spending, preferring to remain cautious by mainly turning to saving.
However, this scenario is changing with current growth in consumer lending being fuelled by an increase in bank competition, a rising number of expatriates returning to the UAE in response to a surge in job opportunity, particularly in the construction and real estate sectors, and a strong, stable economy, the report highlights.
Growing risk appetite
Banks reported strong growth in the personal loan segment in 2013 and are upbeat about the health of the industry
this year. “The personal loans segment has seen a tremendous resurgence in the past two years with business increasing at a rate of 25 per cent year-on-year. We expect a similar growth this year,” says a spokesperson for ADCB. “Along with the economic growth in the UAE and increased job security, which is strengthening the risk appetite of borrowers, the depreciating Indian rupee is also fuelling increased uptake of personal loans from the Indian expatriate community.”
Jamal Alvi, Head of Retail Assets, ADIB, is also looking at a strong revival in the personal loan segment. He says, “The demand for personal loans has been fairly high this year, as the economy has recovered significantly. This has led to a rise in customers’ confidence.” ADIB’s customer financing
category grew above market average by 20 per cent in 2013.
The overall lending environment in the UAE has improved since 2011, also, in part, due to the UAE Central Bank’s introduction of a loan cap in March 2011, says Kosutic. According to regulations of the Central Bank of the UAE, the loan amount cannot exceed 20 times the monthly salary or income of the borrower, with repayment instalments to not exceed 50 per cent of the salary and it should be paid back over a maximum loan repayment period of 48 months.
Lower rates
Consumer credit also benefited from a sharp drop in the Emirates Interbank Offered Rate (Eibor) in 2012. “The Eibor is the interest rate charged by UAE banks for interbank transactions. The rate fell to an eight-year low after being held high in 2009 and 2010 by banks wishing to encourage deposits and remain cautious against increasing non-performing loans,” explains Kosutic.
In a bid to grow their lending books, banks in the UAE have now started to offer competitive interest rates and exciting packaged deals on personal loans. However, they are all taking steps to reduce the incidence of defaults. “The loans are risk-priced and the rate of interest is set according to risk that a segment has. Apart from that, we offer personal loans with the commitment of salary transfer to the bank. Loans, where a customer does not transfer his salary, are priced higher to mitigate risk,” says the ADCB spokesperson.
Considering that personal loans have a relatively high level of risk of default, banks routinely analyse customers’ creditworthiness before lending. Citibank, for example, targets high-risk segments at the underwriting stage to ensure that the customer is able to pay, says Agarwal.
Other banks seek to educate customers about responsible borrowing. ADIB’s financial education programme, Smart Money, is an example. “We offer advice on how to save, budget, finance and grow your money along with tips on investment, takaful insurance and finance,” says Alvi.
Unlocking the true potential for credit
New credit bureau will shake up the UAE’s financial sector