Gulf oil producers are considering a plan to create a common credit information agency to provide information on banks’ clients and avert a fresh debt default crisis in the region, the Arab world’s top banker has said.
The Beirut-based Union of Arab Banks (UAB), which groups nearly 470 commercial banks in the region, proposed the joint GCC credit information network at talks by the Gulf central bank governors in Kuwait in November, said Adnan Youssef, UAB’s Chairman and CEO of Bahrain-based Al Baraka Bank.
In press comments on Monday, Youssef said such a network is needed to avoid a repetition of the default problem that jolted the GCC’s financial sector in 2009 at a time when they were suffering from the 2008 global fiscal turmoil.
“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 an 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.”
Youssef said regional companies that defaulted on loans last year were not subject to any information network that could reveal their real debt.
“The proposed network will tackle this problem. Its information should remain secret and confined only to banks, central banks and relevant financial institutions. Through this network, a mechanism can be devised to include regulations and laws that will protect banks and govern the lending process.”
Youssef’s remarks followed a report by the Saudi daily Aleqtisadiah last month that the GCC countries are discussing plans to set up a common network for the exchange of credit information.
It said the GCC central bank governors had discussed the project at previous meetings and are expected to hold more talks on the plan in the near future.
The paper said the presence of some local credit agencies would facilitate the project but added it would take time as more discussions are required.
"The GCC countries are in the process of setting up a joint network involving linking their financial institutions electronically in the field of credit information with the aim of exchanging relevant data to protect them against credit risks," it said.
"The GCC central bank governors have already discussed the project and some member countries have shown strong interest in it. The governors are now determined to push ahead with this project at talks in the next period."
The report said the plan followed the 2008 global fiscal distress, the ensuing credit tightness worldwide, and regional debt default problems.
"Many GCC banks have been affected by those developments. This has given rise to the idea of linking credit information networks in the region," it said.
"Had the GCC banks possessed enough information about the credit and financial position of defaulting companies, they could have encountered the problem in a more active way," the paper quoted one source as saying.
Spearheading regional efforts to upgrade transparency and credit data, Dubai last month selected the Emirates Credit Information Company (Emcredit) as the appointed body for providing credit information services in the emirate.
Kuwait, Bahrain and Qatar have credit information agencies, but their functions are confined to providing data on personal loans. Saudi Arabia, the largest Arab economy, also has a credit agency serving local individuals and companies.
In a recent study, a Saudi investment firm said the default crisis underscored what it described as poor transparency and outdated credit practices.
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.”