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COMMENT - The importance of credit bureaus.

Summary: The announcement of the UAE's federal credit information initiative will boost the economy and ensure good borrowers get preferential rates. Chris J de Bruin

As banks and regulators continue to fine-tune risk-management processes, the question of credit bureaus has increasingly popped up, especially in Asia, where they are still relatively new. The concept has come a little later to this region for a number of reasons.

Many banks have, in the past, been reluctant to share credit information with other banks for competitive reasons, although there has been a shift since the global economic downturn began. This shift occurred as financial institutions across the region started looking at new ways to provide a better level of service to the market. On the other hand, consumer advocacy groups opposed the concept because it was perceived to undermine rules protecting individual privacy.

In more and more countries, concerns over data sharing has given way to two basic realities: consumers and businesses want easier and quicker access to competitively priced loans and banks seek to make safer, more reliable financial decisions to drive growth. One of the best means of achieving both is through the establishment of a positive credit bureau.

A positive bureau is one whereby banks and other lenders share and receive all information on a borrower, allowing them to have a holistic view on a person's credit history. A bureau on the other hand only allows for banks/ lenders to view negative information on a borrower including where he/she has defaulted. Approximately 35 per cent of potential good customers are refused credit if an application is only based on negative information.

From a macroeconomic point of view, credit bureaus can bring about higher growth rates for businesses and individuals, and therefore the economy, through an increase in credit lines to those who wish to borrow. There are several other benefits of positive credit bureaus that end up benefiting the economy, organisations and individuals. It is always important for banks not to lend money to those who are already over leveraged and therefore unable to pay back their debts - credit bureaus allow lenders to assess a candidate's total indebtedness and calculate a borrower's capacity to honour their debt.

Credit bureaus also allow for greater information sharing which allows lenders to review how much and at what rate they lend to borrowers. Good borrowers should not be penalised as a result of a large number of bad borrowers - as is the case without a bureau. With the establishment of a positive bureau, good borrowers get access to credit at more beneficial interest rates.

The UAE Ministry of Finance's decision to introduce a Federal credit bureau is a step made by the government to improve transparency in the UAE's financial sector. Shortly after this announcement, emcredit was made the official credit information agency of Dubai. Both moves will bring about a greater sharing of information between banks across the UAE .

For both bureaus to be a success, getting the correct infrastructure right is essential as economic growth becomes driven by domestic consumption, although exports will remain important.

What the UAE and a number of other countries in the region have increasingly realised is an export-led strategy can put them in a severe boom and bust cycle, whereas personal consumption is a mitigating influence.

Additionally, by building an informed financial society, consumers will become more aware of their financial exposure and turn to better financial management tools to grow and protect their wealth effectively and manage their finances more closely.

To be successful, credit bureaus need to be either government-led, or industry controlled and regulated by the government. If it is to be a success, such a move must be a collective initiative by the financial services industry for the benefit of the sector and consumers.

Banks need to be aware of a number of dimensions to truly assess the credit risk of customers. Proactive and positive data sharing enables banks to get loans out to the vast majority of reliable borrowers faster, will help with good lending to drive growth in the economy and help protect the end user by providing beneficial interest rates to those who are financially responsible.

Chris J de Bruin, head of consumer banking, Standard

From a macroeconomic point of view, credit bureaus can bring about higher growth rates for businesses and the economy.

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Publication:Gulf Business
Date:Dec 28, 2010
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