The significant debt problems encountered in the UAE over the past couple of years have shone an uncomfortable light on a corporate culture that has allowed firms to attract funding on the basis of implicit guarantees, rather than sound balance sheets.

The financial crisis that came to a head in November 2009, when Dubai World requested a standstill on $25bn of debts, drew a volatile response from the markets, which focused on the information disclosure and transparency failures evident at the highest echelons of Dubai Inc, the network of government-related entities that dominate economic life in the emirate.

Key fact

Bank provisioning levels in the UAE reached $9.37bn as of March 2010 – a 44 per cent increase on March 2009

Source: MEED

This lack of detailed financial disclosure is also evident at the level of retail borrowers and individuals, with comparatively scant information held about their creditworthiness.

The 2004-2008 credit boom has resulted in mounting non-performing loans (NPL) across the UAE banking sector, forcing institutions to hike their provisioning levels. In March 2010, total UAE bank provisioning reached $9.37bn, a 44 per cent increase on the same period in 2009. Overall, NPL levels may be as high as 15 per cent of total lending, three times the officially recorded level, Swiss bank UBS suggests in a March 2010 report.

GCC Nonperforming Loans (NPLs) to Total Loans (percentage)
  2006 2007 2008 2009e
Bahrain 4.8 2.3 2.3 6.2
Kuwait 3.9 3.2 3.1 6.4
Oman 4.9 3.2 2.1 2.9
Qatar 2.2 2.1 1.4 3.5
Saudi Arabia 2 2.1 1.4 3.5
UAE 6.3 2.9 2.5 4.3
Source: Institute of International Finance



UAE financial sector  indicators (percentage)

  2006 2007 2008 2009e
Capital to Risk-weighted Assets 16.6 14 13.3 19
NPLs to Total Loans 6.3 2.9 2.5 4.3
Loan Loss Reserves/NPLs 98 100 102 79
Return on Equity 18 19.3 17.3 12.1
Liquid Assets/Total Assets 16.4 13.2 8.6 18.5
Loans to Deposits* 111 109 137 112
Loans to Deposits** 99 114 108 104
*Defined as credit to residents divided by residents’ deposits in the banking system (excluding government loans and deposits)
**Based on central bank definition: total loans to total deposits, regardless
Source: Institute of International Finance

The inevitable response has been a severe tightening in credit lines, which has hit the UAE’s small and medium enterprises (SMEs) with particular venom.

Yet some of the pain inflicted on the sector could have been avoided if lenders had access to data on credit behaviour. This would have enabled them to distinguish between customers able to repay on schedule and those with a history of default. Lenders simply lacked the tools to make informed lending decisions.

But this data gap may about to be plugged. In early May, Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum issued a decree appointing Emirates Credit Information Company (Emcredit) as the authorised body to collect and process credit information in Dubai.

It’s the comprehensive data, accurate assessment and informed decision that makes the difference

Zaid Kamhawi, Emcredit

Established in 2006 by the Dubai Department of Economic Development, Emcredit has kept a low profile until now. But Sheikh Mohammed’s ruling will change this.

“This decree will augment Emcredit’s growth and expansion plans, and enable Emcredit to further expand its coverage of credit information, allowing it to provide greater value to banks in return,” says Zaid Kamhawi, Emcredit’s chief business officer. Emcredit says the decree will significantly strengthen the credit-reporting infrastructure in Dubai – and therefore the level of transparency and efficiency in the emirate’s economy.

The company, based at Dubai International Financial Centre, will be responsible for collecting, storing, analysing and disseminating credit information in Dubai, with a mission to become the leading source of credit information needed to support every credit decision in the UAE.

Credit history

The firm claims a rich database, holding 5.6 million consumer identification records, payment behaviour information on consumer and commercial borrowers, and 35 per cent of all mortgage data in the UAE.

The new decree mandates banks, financial institutions and government bodies operating in Dubai to provide Emcredit with all the credit records required to support its information services.

“In the case of loan applications, the borrower has more information about his ability and willingness to repay than the bank and this causes what is known as adverse selection,” says Kamhawi. “Credit bureaux play a key role in bridging this gap and providing lenders with enough information to make that repayment assessment to a certain degree of accuracy.”

Emcredit will operate both as a consumer and a commercial credit bureau to ensure a comprehensive view of a borrowers’ creditworthiness.

“Banks and financial institutions provide us with all information related to credit facilities extended to their retail and SME customers, including all type of loans, such as mortgages and credit cards, and then update this information on a monthly basis with the latest payment history,” says Kamhawi.

Banks are the main source of information for Emcredit and are also the biggest beneficiaries of credit reports. But other types of credit-related information, such as utility payments, details of financial crimes or bounced cheques also help to build credit profiles. Such data is effective in assessing customers who previously have not been part of the banking sector or do not have any banking history, acting as a proxy indicator of the creditworthiness of the customer.

Emcredit does not have a federal mandate covering all seven emirates, and its current level of access to banking data is estimated at only one-third of the UAE’s total. Yet since many banks operating across emirate boundaries, the firm expects to be able to access substantially more data over time.

Analysts say Emcredit represents an important first step in addressing the lack of financial transparency in the UAE. “Having some methodologically consistent, systematic way of amassing and processing credit information is what the region desperately needs – so in that sense it is a very positive move,” says Jarmo Kotilaine, chief economist at Saudi Arabia’s NCB Capital.

Centralising information

Generally, the more centralised credit information is in a country, the more comprehensive and valuable the insights are that can be extracted from it, Kamhawi acknowledges. Yet he points out that many countries have multiple credit bureaux operating side by side, providing a range of value-added products and services to complement the core credit information sharing services.

Emcredit will seek to cooperate with other regional credit bureaux. In 2005, Saudi Arabia’s 10 commercial banks founded the Saudi Credit Bureau to enable credit providers to make improved lending decisions quickly and more objectively. Qatar is also in process of establishing a bureau.

Emcredit joined with regional credit bureaux in November 2009 to establish the Middle East Credit Reporting Association. The body aims to create awareness and promote credit reporting in the region, and explore initiatives to exchange credit information on individuals and commercial entities between its members.

The region as a whole has a strong transient population: Kamhawi says this is a strong driver for credit histories to be made importable and exportable to and from the individual’s country of origin.

“This also allows individuals to fully capitalise on the good credit reputation that they have built abroad and to create a disincentive for other borrowers from absconding and leaving debt behind,” he says.

A pan-regional dimension would solve other problems as well. “The problem that not doing it on a regional basis creates is that companies will then go next door to raise money and that can be very difficult to monitor,” says Kotilaine. A regional credit bureau would also overcome risks of negative regulatory competition between the Gulf’s various financial centres.

Emcredit says banks and borrowers will both benefit from improved data collection. In times when credit is tight, for instance, access can be influenced by the amount of credit information that is shared. 

Credit bureaux can help ration credit, and create stable credit markets. They also force borrowers to exert greater self-discipline to build up a strong credit rating. “It’s the comprehensive data, accurate assessment and informed decision that makes the crucial difference,” says Kamhawi. “The more comprehensive the information, the more value financial institutions will be able to get out of it.”

Emcredit aims to help lenders improve their risk management practices and in doing so protect themselves from unnecessary credit risk exposure. “By better distinguishing between high- and low-risk customers, banks can more accurately target, attract and retain the right mix of customers using customised credit offerings and risk premium pricing  – that is pricing credit in accordance with the risk profile of the borrower,” says Kamhawi.

Low-risk borrowers stand to gain from credit reporting systems, as their credit history becomes a valuable asset that they can use to negotiate better rates and loan terms. It also reduces general obstacles faced by borrowers when accessing credit by making them readily identifiable to lenders. Emcredit could also help banks penetrate new segments of the economy, such as the underserviced SME market.

Of the UAE’s 260,000 trading and industrial companies, 80 per cent are SMEs, accounting for 80 per cent of the country’s non-oil gross domestic product and 65 per cent of employment.

Yet a 2008 survey by US credit reporting agency Dun & Bradstreet revealed that more than 55 per cent of UAE SMEs faced difficulty accessing capital.

At the retail level, demand for Emcredit’s services will increase as the UAE’s mortgage market matures.

“So far, mortgage markets have developed from a very low base, and that bit is easy – you just go to the lowest-risk clients and you can expand the market without having to worry too much,” says Kotilaine. “However, after a while you start moving up the risk curve and you start creating more cyclical vulnerability. In that sense, it’s good to know who it is you are dealing with.”

Greater transparency

Emcredit has had a slow-burn inception, but the growing realisation that the Gulf’s ‘nod and a wink’ financial relationships have run their course should afford the institution a key role in developing a credit culture that can meet the economic aspirations of its people.

In the wake of the Dubai World debt crisis, Dubai has been forced to take the initiative to drag its financial architecture into the 21st century. A new Federal Statistics Law and the establishment of the National Bureau of Statistics form parallel steps towards the development of a federal culture of financial transparency and disclosure.

Dubai’s credit bureau will provide lenders with a stronger picture of individual and SME creditworthiness, yet Dubai will need to offer a deeper insight into the financial status of its own Dubai Inc corporations for credit reporting infrastructure to gain any momentum.