UAE Federal law looks at national credit bureau creation (page 1 of 2)

UAE banks were forced to write off an estimated 6.4% of the loans they extended in 2010, in the wake of the global economic downturn and the subsequent increase in the non-payment of debts and business loans. As a consequence institutions have tightened credit flows and lending, which is required to spur growth in the country and aid economic recovery, has slumped alarmingly.

"One of the major impediments to the recovery of the banking sector in the UAE, particularly in the loans sector, is the lack of transparency on the balance sheets of potential borrowers," says Mark McFarland, Emerging Markets Economist at Emirates NBD.

"It's difficult for banks to judge which borrowers are credit-worthy or not, who is a likely defaulter and who isn't. So everybody is branded in the same way, which is not a good thing."

UAE Central Bank indicators show that specific provisions for Non-Performing Loans by banks in the UAE had reached a record $10.8bn by end-October 2010, compared to $8.9bn and $5.4bn in the whole of 2009 and 2008 respectively. And over the first nine months of 2010 loans, advances and overdrafts to the private sector dropped three percent to $160bn.

Transparency of lending risks

According to Abdulaziz al-Ghurair, CEO of Dubai-based bank Mashreq and a member of the UAE's Federal National Council, the new credit bureau will provide "complete transparency on the status of clients", better allowing the UAE's 23 national banks and 28 foreign units to assess lending risks.

"It should make it far easier to differentiate between risky clients and less risky clients, which is good for everybody - apart from those who are a poor credit risk," says Raj Madha, a banking analyst at Dubai-based investment group Rasmala.

"I don't think it's going to necessarily increase the flow of credit in the UAE, but it will be good for the system as a whole as those with good credit will be able to borrow more easily while those with bad credit are prevented from doing so. Consequently, it should reduce the level of risk, while maintaining the level of borrowing."

In July 2010, the government of Dubai passed a law making it mandatory for local and international banks in the emirate to share client information within the UAE with Emcredit, a private credit data bureau which was established in 2003 by Dubai's Department of Economic Development.

"There have been a number of false dawns for a UAE-wide credit bureau with access to, and the ability to provide reports on, all of the credit information in the system," notes Madha. The UAE government has yet to confirm whether Emcredit will be expanding its operations, or a new bureau will be launched entirely.

Bureau to charge banks for information access

According to UAE Central Bank governor Sultan bin Nassir Al Suwaidi, the new bureau will go far further, even charging banks for information on borrowers' financial positions. "The credit information company being established will cover only individual borrowers and small firms seeking loans....