Crying need for credit bureaus

Dubai: Driven by favourable economic conditions, the UAE banking industry witnessed fast growth in the last decade. An upsurge in domestic demand across the entire industrial spectrum created a consequent rise in the loan segment, enabling both domestic and foreign companies to grow. And then came the worldwide recession.

The global financial crisis served as a wake-up call for banks that saw liquidity shortages, a sharp rise in loan impairments caused by job losses and business failures, and a precipitous fall in profits. As a consequence of the tough conditions for banks globally last year, 2009 turned out to be a turbulent year for banks in the UAE as well.

The recent occurrence of defaults by major regional corporates such as the Saudi-based conglomerates Saad and Algosaibi group is another major cause of concern. It has been common practice for regional banks to lend on the basis of family name and reputation, but this practice has proven to be highly risky in recent times and left banks exposed.

It is not possible to overemphasise the importance of controlling loan losses. Usually, as loan volume increases, loan losses rise proportionally and it is only the remarkably high performing banks that are able to reverse this relationship. But, is restricting lending the ideal and long-term answer to the situation?

Indiscriminate

Sadly, most banks in the UAE were party to indiscriminate lending practices during good times. Excessive liquidity, high economic growth, few incidences of defaults and the high levels of competition pushed several banks to take bad decisions.

When the crash came and the defaults grew, loan loss provisioning became inevitable. Banks' profitability is however hurt by increased loan loss provisioning. Worse, this can quickly grow and erode years of built-up profits if not managed in time.

Most banks would agree that the key to profitable banking is being able to lend money while at the same time hold losses down. And that can only happen if banks are able to pre-assess their customers' ability to repay loans, and actually extend loans to them on the basis of their credit profiles. Informed and thus better quality lending through the use of credit information can help reduce the need for such provisioning.

Banks are now becoming increasingly aware of the threat that name lending poses. They also understand the importance of lending based on fundamentals by conducting a thorough due diligence process.

Stronger entities

Banks realise the need to change the way they do business and adapt to the current situation. As such, many of them have started seeking credit information in assessing the health of their current portfolios so that going forward, they can gradually but carefully expand their loan books. This will allow them to set the right platform so that when the economy improves, these banks become stronger entities.

Credit bureaus are institutions that specialise in the technical collection, processing, and safe distribution of credit information about individuals as well as companies. By allowing better assessment of the repayment capabilities of customers, credit bureaus provide banks with transparency, enhance risk management capabilities and offer a healthier lending environment.

Emcredit, the UAE's first credit information services company, was established in January 2006, Emcredit facilitates improved business performance by enabling information-driven strategies and providing automated decision management systems that can help banks acquire customers more efficiently, increase net customer value, lower operating costs and reduce fraud and bad debts. Information delivered to clients is timely, consistent and detailed, supporting decision-making functions through offering a comprehensive range of intelligent, information-based solutions.

The writer is chief business officer at Emcredit.