October marked the first anniversary of the Al Etihad Credit Bureau (AECB). The credit bureau has redefined the way banks engage with borrowers and almost all financial institutions in the UAE now rely on AECB reports to assess applications. It now has 56 data providers and 52 subscribers who use the credit report scores for assessment, which means just four UAE financial institutions are not yet using the reports.
“The credit reporting system of AECB adds value to the UAE’s financial sector by enabling lending institutions to make informed decisions, while helping individuals and corporations to understand their current obligations, debt level and creditworthiness,” says a spokesperson for the bureau.
“This, in the long run, will reduce credit losses from bad or non-performing debts and allow those who maintain a good credit rating to benefit from greater access to capital and better interest rates, therefore, improving the profile of the UAE’s consumer credit market and the country’s global competitiveness.”
As more banks start using data from AECB to process applications, rejection rates of credit cards and loans are expected to increase. Although it is still early to quantify rejection rates on cards, Abu Dhabi Islamic Bank (ADIB) in September told GN Focus that it witnessed between 5 and 10 per cent reduction in approvals for consumer loans. The bureau is finalising plans for a new scoring system from early next year that should give banks greater clarity on risk and make lending decisions easier.
Prior to the launch of the bureau, banks had to rely on what an applicant wanted them to know when assessing credit applications. They would enquire how much debt the applicant had and ask them to provide bank statements to prove it. The trouble was the applicant might have more than one account, making it easy to hide the amount of debt they already had from another bank.
“The advantage is now with the credit bureau; the bank has no excuse,” says Ambareen Musa, founder of Souqalmal.com. “With the AECB now you know what the debt burden ratio of a customer is. You know whether they can afford the credit card or the loan. You don’t have to depend on the person anymore.”
However, they also offer the customer an advantage. The reports, which customers have been able to buy since last November, help them understand their financial obligations, debt level and creditworthiness. “The AECB credit reports have alerted consumers to the number of credit cards, often little used, they carry in their wallets,” says Tom De Waele, partner in Bain and Company’s Middle East office.
“Every credit limit that has been granted to a consumer, even if unused, partly counts towards that individual’s debt burden and therefore impacts his or her ability to get other forms of credit, for example, an auto loan or a home loan. As a result, people start being more disciplined on the number of plastics they carry and the associated credit limits, cancelling unused cards.”
A recent survey by YouGov on behalf of the bureau and Citibank shows that awareness of the service is growing. Almost a third, or 32 per cent of respondents, were aware of the bureau and of them about a quarter, at 24 per cent, had obtained a report. While most banks are now using the credit reports to assess applications, there is no actual obligation on them to do so. “It is also to be noted that banks have to pay to obtain the credit report, so some may opt to continue to rely on their existing methods of credit assessment,” says De Waele.
“Over time, we can expect that the vast majority of banks will spontaneously adopt the services provided by AECB as they fully appreciate the value of having a reliable and consistent source of information that can reduce the cost, resources and time of the credit approval process.”
Experts say all banks will eventually use the reports because if the majority of institutions are already consulting the bureau those that are not will be left with the riskiest customers no one else wants.
Citibank worked on a phased adoption of bureau reports and began consulting the institution on all customers in late October. “At Citibank, we work closely with credit bureaus across all the markets we operate in globally,” says Dinesh Sharma, Head of Consumer Bank Middle East, Citibank. “Usually bureau adoption in any market across all players takes anywhere between nine, 10 and 12 months from its inception date and the UAE is no different in that respect.
“All banks over a period of time will start utilising the bureau in their day-to-day credit decisions. This will help introduce more transparency in the market and will enable both the customers as well as banks to take prudent credit decisions.
“Accessing and using bureau actively require banks to build system linkages with the bureau as well as go through a learning curve, and it’s a matter of months before everyone gets there.”
