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With Al Etihad Credit Bureau and credit scoring, banks now have tools to practise responsible lending

During the global financial crisis, banks experienced a rise in the number of individuals defaulting on loans and the UAE was no exception.

But over the years that followed, the UAE government introduced a series of measures to prevent people from getting into excessive debt. They included a cap on total monthly repayments for all loans and credit cards, limits on how much homebuyers can borrow, and the launch of a credit bureau to monitor behaviour in the market.

“These milestones show how the industry as a whole has thought about and taken responsible lending seriously"

- Pankaj Kundra, Senior Vice-President, Head of Payments, Business and Personal Banking at Mashreq

Banks such as Mashreq work with information provided by Al Etihad Credit Bureau (AECB) to assess a customer’s creditworthiness. Kundra says it has significantly helped mitigate the risk of lending since its launch. “[Before the launch of AECB], if a customer wanted a personal loan, mortgage, credit card or any kind of credit facility, all the customer had to do was provide their income and supporting documentation.”

That meant banks did not have a full view of a customer’s personal debt and would take a lending decision based only on the limited information that was available. “So what the bureau has done is give banks the ability to look into the credit profile of a customer and decide whether to lend or not and how much to lend,” he says. “Those decisions have become a lot easier, which, in the long term, will be helpful because the industry will have lower provisions and banks’ confidence in lending to customers will increase.”

The combination of the Credit Bureau and the limits imposed on borrowing helps prevent individuals from becoming over-leveraged, say experts. “A unified database that records all the loans, credit cards and mortgages makes it far harder to exceed the sensible credit limits set by the UAE Central Bank,” explains Keren Bobker, Senior Partner at Holborn Assets.

Banks work with the AECB to assess a customer’s creditworthiness Image Credit: Supplied

Earlier this year there was a further development, which makes it even easier for banks to assess credit applications – the launch of the credit score. Common in mature markets, a credit score is a three-digit number assigned to each borrower — in the UAE’s case between 300 and 900 — which represents their creditworthiness and future risk of default. The higher the score, the better the borrower.

“All established markets have credit scoring and credit reports,” says Jon Richards, co-founder and CEO of financial comparison site yallacompare. “Anyone who is rejected for finance won’t feel like it’s a good thing, but if it is protecting them from spiralling into debt they can’t manage, then that has to be a positive thing for their financial well-being.”

Because the credit score reflects a range of factors, including how much debt a person has and whether they are comfortably able to pay it back each month, it provides a barometer of a customer’s creditworthiness and risk of default.

While credit scoring is good for both banks and customers, it will not remove the risk inherent in lending, says Kundra. “The bureau itself is not a solution, but it is an enabler. Because if someone loses their job or the SME sector is under stress in a particular economic cycle, then some customers, largely expats, may try to skip the country.”

But it can help banks such as Mashreq, which was an early adopter of the bureau’s reports and scores, to take more informed lending decisions. “Mashreq has been in the lead when it comes to innovation, responsible lending and transparency,” says Kundra. “We are uniquely positioned — both from our product proposition, fantastic distribution network and digital orientation.

Combining these with responsible lending, using tools such as the Credit Bureau, hence better underwriting of the risk, the future is looking good.

“There’s no doubt the customer will have a lot of choice. It all depends on how quickly the awareness of the bureau’s score, the creditworthiness of an individual, spreads.”

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