The Central Bank of the UAE is to introduce regulations by the end of 2008 to prevent individuals sidestepping personal lending limits by claiming to run small businesses to gain access to larger loans.

Unsecured loans to individuals are capped at AED250,000 ($68,000) in the emirate, but small businesses can borrow up to AED2m.

According to bankers, some borrowers are now applying for small-company loans without operating a business.

“There is a practice where some banks in the country will ask for a small-business licence to be provided and use that to circumvent regulations on personal lending, even though there is no real small-business activity,” says the head of retail banking at one large UAE-based bank.

Bankers in the UAE say the central bank is keen to stamp out the practice and issued draft regulations earlier this year as part of a consultation process.

Douglas Beckett, head of retail banking at Dubai-based Mashreqbank, says he is aware of the practice and has had conversations with the central bank about the need to regulate lending.

“The central bank has issued a consultative document on new rules for personal lending and we would encourage it to take a strong lead on this issue,” he says.

Weak restrictions on lending are a widely recognised problem in the country.

“A customer can get five different loans from five banks with the same salary slip,” says Sanjoy Sen, manager of retail banking for Citi in the UAE.

He adds that regulations to force customers to submit their credit histories to a central credit bureau are needed.

Currently, Emcredit, the UAE credit bureau that was set up in January 2006, operates on a voluntary basis, meaning the information it has on prospective borrowers is often incomplete.

“Discussions have been going on with the central bank about its endorsement of a credit bureau,” says Sen. “It is not clear if this would involve the creation of a new central bank-endorsed credit bureau, or if it would regulate the submission of information to the existing bureau.”

Beckett says Mashreqbank would support mandatory submission to a central credit bureau. “We have been encouraged by the new draft regulations, which clearly show the central bank is working on these issues,” he adds.

Sami Salem, head of the domestic banking division at National Bank of Abu Dhabi, also supports the idea. “There is no shared database on repayment history or defaults of customers, only the names of blacklisted customers, which is held by the central bank,” he says. “A properly regulated credit bureau would give us access to that.”

Sen says the country’s high inflation rate, which is expected to be more than 12 per cent for 2008, could be contributing to borrowers becoming overstretched, meaning they are eating into their savings and taking on more loans.

The central bank did not respond to requests to comment.