UAE banks will have to buy information they need on the financial position of borrowers before they embark on lending when a landmark credit data firm is launched, the central bank governor was reported on Saturday as saying.
Sultan bin Nassir Al Suwaidi said the planned Credit Information Company would provide data on individual borrowers and local small firms seeking loans from the country’s 23 national banks and 28 foreign units.
In comments published in the semi official Arabic language daily Alittihad, Suwaidi said such information would allow the banks to obtain complete and accurate data on any client before they approve any loan.
“The credit information company being established will cover only individual borrowers and small firms seeking loans….banks wishing to get information about those borrowers will have to buy data from the company,” he said.
“This of course will enable banks to get full and accurate information about the clients seeking loans as the information to be provided by this company will be comprehensive…it will include the size of the existing debt of the individual or firm and their financial obligations inside the UAE, including those owed to national establishments such as Etisalat and the electricity and
Suwaidi said the central bank is coordinating with the Ministry of Finance to devise the organisational structure of the planned credit company, adding that the company would be launched once it is approved by the federal cabinet.
“The company’s structure will determine whether banks will be bound to enquire about clients seeking financial facilities and who will be included in the category of borrowers by the company,” Suwaidi said.
“As for the central bank, it is ready to immediately supply the technology and programmes needed to operate this credit information system, which will constitute a comprehensive credit information bank.”
The Ministry of Finance said in mid 2010 it was conducting a study on the creation of a credit information bureau in collaboration with the central bank.
It said the project’s functions would include preparation of reports, statements and credit ratings that will help financial institutions take appropriate lending decisions. The bureau will also collect and document credit information from financial authorities, companies, establishments,
individuals and banks in the UAE, and then classify and analyze the data.
It will also maintain a credit database with a view to assessing repayment capabilities of current and potential creditors.
"Establishing a federal credit information centre is a positive step and will be a huge support for lenders, borrowers and the macro-economic stability of the UAE. It will also enable lenders to gain a more comprehensive view during their decision-making,” said Younis Khouri, the Ministry’s Director General.
The UAE, the second largest Arab economy, already has a credit data bureau, which was set up in Dubai nearly seven years ago on orders by HH Sheikh Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and Prime Minister, and Ruler of Dubai. Emcredit was initiated by Dubai’s Department of Economic Development in 2003 and is the first private and independent credit information services company in the country.
In recent remarks, a top Arab banker said the UAE and other Gulf oil producers need to set up local credit rating systems to avert lending risks and ensure a severe debt default crisis that hit the region in 2009 will not be repeated.
Adnan Youssef, chairman of the Beirut-based Union of Arab Banks (UAB) said he had proposed the project at talks with the central bank governors in the six-nation Gulf Cooperation Council (GCC) in late 2009.
“The proposal is still under discussion by the GCC… it was also debated by the Gulf Monetary Council. I expect it to materialise in the next few years,” he said.
“I believe the GCC countries need such a credit agency as much as they need to put their monetary and financial sector in order. They need information about the local financial institutions, the size of debt, banks’ balance sheets and data on the banks’ clients for their monetary union.”
Youssef said a common GCC rating network would provide detailed information on existing and new clients of banks as well as their relations with foreign banks, adding this would allow regional banks not to get involved in risky loans.
“What happened last year was a result of the absence of an inter-bank data network in the region. This has allowed many debtors to exceed the authorised limit and get more than one loan from various banks at the same time,” he said.
“This credit network has become a pressing need in the GCC following the emergence of several financial loopholes. I think it was a lesson and a bitter experience for the GCC banks, which should now be more careful.”
In a recent study, a Saudi investment firm said the default crisis underscored “poor transparency and outdated credit practices” in the region.
NCB Capital, owned by Saudi Arabia’s largest bank, National Commercial Bank, said the crisis that involved billions of dollars in bad debt was the main factor in dampening investor confidence and obstructing economic recovery in the GCC.
“Even as the regional corporate sector has generally performed well in the face of the crisis, the scandals have offered evidence of over-extension and poor risk management at some companies. The impact of the crises has been amplified by poor transparency and the relative lack of well-defined and broadly accepted mechanisms for dealing with situations of distress,” it said.
“From the regulatory perspective, the crisis has highlighted the risks and limitations of many outdated credit practices but new standards have yet to fully replace them. The poor sentiment in the corporate sector has gone hand in hand with highly restrictive lending practices by regional banks.”