Most UAE banks ready to sign up with Emcredit

Emcredit, recently declared the official credit bureau of Dubai, has received "very positive" response on data sharing from a large majority of banks operating in the UAE, said a senior official.

"Emcredit has established contact with nearly 90 per cent of the banks operating in the UAE," said Zaid Kamhawi, Chief Business Officer. "Naturally, our immediate focus will be on the largest local and foreign banks that hold about 80 per cent of the banking credit information in the country.

"The feedback we have received till date has been very positive, highlighting the vital need for comprehensive credit reporting services to support their performance for this and coming years. We have also put in place project plans with most of the banks to bring them on board as members of the bureau."

Access to information

Vimal Kumar, Head of the Cards Business at Mashreq, the largest credit card issuer in the UAE, confirmed that talks with Emcredit are on. In order for the bank's consumer banking business to thrive in the next five years, "it will be very important for us to make sure that the bureau is up and running", he said.

On the question of when the entire database will become accessible to all banks, Kamhawi said Emcredit's "flagship product", CreditScope, which provides banks with information on a borrower's total credit exposure and payment history, gives its current members – six banks – access to information on 30 per cent of the country's banking population.

"However, as more banks join the network, both the coverage and the value that banks will obtain from CreditScope will exponentially increase," he said. CreditScope, Kamhawi said, is one of four different products and services "addressing different market segments and different stages of the credit life cycle". The other three are Embounce, a cheque default reporting tool; Enterprise Information Reports, a business verification tool; and Data Management Service.

Kumar's expectation is that it will take nine to 12 months for the information sharing process to be fully functional. As the database widens and everyone is able to access it, the economy of scale will bring down costs for the banks and the big picture will enable them to make more informed choices on lending.

"We should see banks offering interest rates that more closely reflect a borrower's risk profile (risk premium pricing)," said Kamhawi. "In principle, this means that individuals who have a strong and consistent payment history are less likely to default in the future. For a bank, this means that such individuals represent less of a credit risk and, therefore, are profitable customers. In order to attract profitable customers, banks need to offer them favourable interest rates and better credit terms." How soon the overall credit policy becomes more streamlined depends on "how fast banks can embed the use of credit reports into their existing credit policies" and on "which banks can extract the benefits of these reports", he said.

Lowering of costs

According to World Bank research, banks using a credit bureau's services are able to save time (in processing) and cost (of operations) by more than 25 per cent. "It helps banks lend sensibly," agreed Kumar. He added that now with its new official status, Emcredit is almost certain to get all banks' co-operation. "Now that the decree has come from the Ruler of Dubai and [it] is clearly mandated to all banks that if you want to do any lending activity in this land, you need to be in that bureau, everyone is signing up."

Kamhawi described the potential cost savings as "tremendous". Citing a survey by the International Finance Corporation, a member of the World Bank group, on the impact that credit bureaus have, he said: "We see a big difference between the least efficient financial systems (usually in emerging markets where it costs nearly $29 for every $100 lent to process an application), and the US market, where it costs only $4 to originate a loan.

"There are huge efficiency gaps between what we see in developing and developed markets, and credit bureaus play a critical role in helping to close that gap, and bring down the cost of credit, by decreasing processing time and reducing screening and transaction costs."

While credit sharing has major advantages, it will require some work on the part of banks, Kumar said. "Banks will have to restructure their workflow, both from a system and operational perspective," he said, "but it will bring a lot of benefit." One fallout of data sharing may be a dip in lending, at least for a while, he added. "I think the lending activity will slow down because once you have Emcredit, you will suddenly discover the quality of books that you have – all banks will discover that. "For a few months, this will bring the lending activity down, but over a period of time – once you get rid of the bad profiles – you will have a chunk of good customers, with whom banks can take risks."

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