Al Etihad Credit Bureau: Making the UAE Creditworthy!

• The absence of a formal consumer credit rating system in the UAE resulted in consumers having easy access to loans without any check on the repayment capacity. However, the launch of the Al Etihad Credit Bureau is expected to change the scenario by providing banks access to consumers’ credit history, thereby curbing excess lending and raising the quality of retail lending in the country.

Al Etihad Credit Bureau (AECB) will start providing consumer credit reports to financial institutions from September 2014, and this is expected to have widespread implications for consumers, banks, and the UAE’s economy. However, in order to assess the impact that the Al Etihad Credit Bureau (AECB) is expected to have, it’s important to understand the history of credit check activities in the UAE.

The first step in the credit check history of the UAE was the creation of the Emirates Credit Information Company (Emcredit) in January 2006. Emcredit, the first private credit company in the UAE, was expected to be compliant with international standards of data protection and security. It provided industry information to a federal technical advisory committee working for creating a regulatory framework to share credit information across UAE. Between 2006 and 2008, Emcredit established a database of 5.6 million consumer identification records, and also gathered payment behaviour information on consumer and commercial borrowers, and held 35 per cent of mortgage data in the UAE.

However, the global financial crisis in 2008 impacted the UAE as well, most notably the real estate sector in the country. As the real estate bubble burst, the regional economic boom in UAE came to an end, and banks suffered the most with large scale debt default. This forced the banks to revisit their existing portfolio and take a strategic decision on their future lending activities.

Among other things, it made the government and lenders (banks and other lending institutions) realize the importance and urgency of strengthening the process of gathering and sharing credit information on consumers. In March 2009, the Credit Information Law was approved by the Cabinet, allowing the establishment of a Federal credit information company that would provide comprehensive services and solutions related to credit information. In July 2010, a law was passed making it mandatory for all the lending institutions, utilities and telecoms companies, to share client information within the UAE with Emcredit.

Timeline of Credit Check Activities in the UAE

Source: TheNational, Arab Business Review Research

With increasing need for a centralized consumer credit information system, bylaws were prepared for establishment of a federal bureau and Al Etihad Credit Bureau (AECB) was established in 2012. The ministry of finance established the AECB with a paid-up capital of Dh200 million. It started compilation work in 2013 and is expected to start providing consumer credit reports to financial institutions from September 2014. In addition, the bureau is also expected to come up with regulations to curb excess lending and rising consumer debt.

AECB is aiming to achieve its goals in a multi-phase process. The first phase will be launched in September 2014 allowing the banks and financial institutions to access existing and potential customers’ credit reports electronically. This information can be purchased as credit reports on submission of required documents. The lending institution will, however, need a written consent from the borrower to obtain the report. The customers can also access their credit reports by paying a fee through customer service centres. The report will include name, current address, and employment, credit repayment history for last 24 months, credit and loan histories, and overdues and default records for past 24 months.

To start with, the reports will be based on UAE data only, however, in future there is a plan to work closely with international credit bureaus like Experian, Equifax, CIBIL, SIMAH etc. to provide a more complete report. As of now, the credit report issued by the bureau will have no relevance overseas as the bureau will not get access to credit history of the banking consumers outside UAE.  By 2015, the AECB is expected to provide credit coverage on companies as well.

The retail lending environment in the UAE is expected to undergo a radical change, as the bureau becomes operational and start issuing credit reports.

For banks, the credit reports from bureau will provide much needed inputs in the lending process and therefore improve the quality of credit. The reports will highlight unclosed bank accounts, non-cancelled or unused credit cards, outstanding payment and loans on several credit cards and overdraft facilities. Therefore, it will enable the banks in decision making and reject requests for loans and credit cards to individuals having a poor repayment history even if they have the capacity to pay. It will also help the banks to charge high or low interest rates depending on the risks associated with each consumer. As banks will have more clarity on consumer’s payment history and current loans status, they can ensure that they do not over-lend, and therefore have a relatively high-quality loan portfolio.

It is also likely to lead to a growth in the personal loans for debt settlement with consumers consolidating their debt positions. As a result, products such as Abu Dhabi Islamic Bank’s Al Khair Liabilities Settlement are set to benefit from the AECB’s consumer data reports.

For consumers, these reports will act as bitter pills as they will stop individuals from applying for multiple loans beyond their repayment capacity, and ensure that they do not fall into a debt trap. Individuals with better credit profiles will be rewarded as banks will be keen to lend to individuals with a good credit profile. Further, with the UAE Central Bank setting limits on the share of government-related enterprises (GRE) lending in banks’ loan portfolio, banks will seek to increase their lending to private companies, SMEs and individuals – once again, companies and individual with a strong credit history will stand to benefit.

The short-term impact will include slower credit growth, which could have its spill-over impact on the overall economy; however, in the long-run, the bureau will help improve the credit environment for consumers and lenders, alike.

As the UAE transitions from its current lending environment to a new one, credit growth is likely to be impacted as over-indebted customers may not be able to get new loans. This will impact banks like Abu Dhabi Islamic Bank and Dubai Islamic Bank that have retail loans as a major contributor to their loan book. For consumers, access to credit will no longer be as easy it was in the past, and growth in credit for existing borrowers will be much slower. A tightened lending regime will likely reduce liquidity and thus spending, and might pose a short-term challenge to UAE’s economy, that has recently shown signs of recovering from the 2008 financial crisis.

However, on the positive side, growth in new customers without any credit history will be rapid. Also, credit reports will make UAE nationals more aware of financial management and ensure that they maintain a good repayment profile to improve their future credit prospects. In the long-run, the system is expected to lower the default rates, improve customer pricings and improve the risk charged on personal loans.

In a nut-shell, if executed well, the AECB’s roll-out will put an end to free-for-all lending and support the economy via a more sustainable credit cycle.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

A Banker’s Primer to Saudi Arabian Family Offices

 

• Major global banks have established a presence in the Kingdom, only a few years ago, though with an almost exclusive focus on corporate and private banking.
• The predominant banking business model involves a partnership between a local bank with an International partner, where critical areas such as risk and asset management are under the purview of International partner.
• At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families.
• There are several type of family offices in Saudi Arabia, and they are constantly evolving due to the influence of the Western world.

The Kingdom of Saudi Arabia was never a banking hub for the GCC in the tradition of Bahrain, and later Dubai. That is, foreign banks were never historically established in Riyadh, Jeddah and Dammam with active mandates in servicing the local economy or with the intent to be utilized as a springboard for access to other nations in the GCC. Instead, the commercial linkages between the seat of Islam’s holiest sites and the rest of the world were first based on the general trade in goods, and later—the defining moment in the nation’s history—the discovery of crude oil occurred in the early twentieth century. In the wake of oil’s discovery was the founding of the energy behemoth Saudi Aramco (the Saudi Arabian Oil Company), having begun operations in 1933 as the California-Arabian Standard Oil Company.  With the technological advances and labor-intensive expertise required to extract and manage the world’s most precious tradable commodity came legions of skilled workers from the United States and other nations, critical in establishing what was once considered the consummate American outpost in the Middle East.

The Aramco camps in Eastern province were akin to transplanted Midwestern US cities.  Based on this model in the utilization of crude oil and the reliance on its financial dividends for economic development and later growth, no absolute national consensus was ever formulated on the internationalization and broad-based opening of the Kingdom’s market to foreign banks with the aim of establishing bricks-and-mortar presence.  It is only in the last several years that a few of major global banks established a presence in the Kingdom, with an almost exclusive focus on corporate and private banking.

Historically, the predominant banking business model in Saudi Arabia has been for local banks to include a non-Saudi partner institution, typically with a stake of 40 percent. Critical areas of bank management, including, heads of finance, risk management, asset management—just to name a few—were within the purview of the banking partner by contract. Over time, wealthy Saudi clients have become accustomed to dealing with their local banks for corporate loans and regional brokerage and investment services. When it comes to sophisticated investments, packaged as funds for example, the reliance continues to be on US and European private banks—many of which have been reliant on the “briefcase banker” approach. This entails flying bankers to the Kingdom for a few days of marathon one-on-one client meetings to introduce a product and collect a tidy sum of money—with the hope that the fees generated from client investments will ultimately cover the banker’s costs.

At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families. In Saudi Arabia there are several types of these entities and it is worth our while to outline them.

The Mega Family Office:

The minute a foreign banker lands at an airport in the Kingdom, these family offices are the first few stops to make as they represent the wealthiest fifty families in the Kingdom. By their very nature, they were established decades ago and have highly sophisticated departmental structures, for example splitting managerial investment functions among Equity, Fixed Income and Private Equity teams. There is a formal investment committee process in which new proposals are discussed on voted on and IT expenditure to support detailed reports and investment analysis are standard. In a few cases, these billionaire families have offices in Dubai, Europe (primarily London and Geneva) and the US to complement their Saudi presence. The logic behind this is approach is to remain closer to their investments abroad while vetting ideas from the source. But also from a practical standpoint, many senior investment staff members are precluded from leaving their families due to personal obligations in their home countries.

Multi-Generational Office:

This structure supports various owners from many branches of the family. In the Kingdom Due to the participants in this office structure, the internal challenge is to accommodate various points of view regarding investments (type, time horizon and risk). These types of offices at times allow other families, generally maternal relatives, to participate while functioning as a multi-family office to increase the purchasing power of the owning family group. In effect, multi-generational offices reflect the current state of Saudi Arabian family businesses with young sons and daughters, typically freshly minted university graduates, being brought into the family business in the hope of an inter-generational succession proceeding smoothly one day.

The Corporate Group:

This type of entity supports the shareholders of operating business. The primary role is to maintain business control through effective wealth transfer, providing strategies for internal stock transactions among shareholders or leverage as needed to generate liquidity for owners. The office also supports owners’ financial needs for income, diversification of assets, and risk management.   A head of finance for these groups will typically handle both the company’s day-to-day affairs as well as individual investment management for the Chairman and associated family members.

The Single Provider Office:

In the last few years, some families have decided to stop granting bankers calling for an appointment to hold sales meetings, as a matter of policy. Instead, they have relied on an internal staff member to vet various product providers and settle on a single institution to manage the office’s affairs. It then becomes the mandate of the bank advisory professional handling the relationship to suggest investments from third party banks or investment houses. This “gatekeeper” approach has a major benefit for the families involved as there is a simplification of the process and reporting is handled by the hired bank, an ostensible cost savings.

Philanthropy/Foundation Office:

The Kingdom has an immense number of philanthropic institutions that families have established apart for their corporate alms-giving that is compulsory in Islam. Many of these offices are distinct from the family’s investment arm and, as would be expected, their investment universe is typically more limited. When it comes to the plethora of foundations which dot the Arabian landscape, the majority that bankers deal with are affiliated with religious or university funds. Bankers visiting Saudi Arabia are frequently surprised by the risk-return profile of these investors, with many delving into products that are far more esoteric than one would expect. Of course Sharia-compliance remains of paramount importance.

The Royal Family Office:

The trend today within these offices is launching new businesses and offering value-added projects for the benefit of Saudi society. Most of the initiatives undertaken by these investors will target a particular rate of return on a project or a feeder fund to a project, instead of seeking an income-generating fund investment—for example. The due diligence on the banker at the beginning of an introductory meeting is critical and being asked for a return visit is not assured. Knowledge of local market deal flow is key in these relationships.

The evolution of the family office unit, much like business itself, relies on constant change. There are trends in Europe and the US that are having an impact both on the vision and operational aspects of establishing, managing and growing a family office. Despite the influence of corporate practices and financial institutions on the most sophisticated investors in the Kingdom, most of them continue to hold sacred one slogan: “Made in Saudi Arabia.”

 

[1] (Source:  https://www.familyoffice.com/understanding-family-office/types-family-offices)

 

The article is written by Ragheed Moghrabi for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Bitcoin in MENA Market

• Financial Institutions in the MENA region remain skeptical about bitcoins, despite a slow but steady growth in bitcoin adoption.
• Small groups and Entrepreneurs are developing platforms to promote the digital currency, which can address the long-standing problem of financial inclusion in the region.
• Low credit card penetration and difficulty to acquire a credit card or a bank account in the MENA region will drive the demand for the Bitcoins in the region. However, cultural and technological challenges exist.

Bitcoin was created in 2009 by an unknown person, or group of people, using pseudonym Satoshi Nakamoto. It is a decentralized (digital) currency, without any authority, company, website or symbol.

Bitcoins are created by a slow and highly iterative computing process called ‘bitcoin mining’, enabling individuals or companies engage in this activity in exchange for transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services, and users can send and receive bitcoins electronically for an optional transaction fee using wallet software on a personal computer, mobile device, or a web application. Bitcoins can also be bought from bitcoin exchanges by paying through other payment methods including cash.

Currently, 50 bitcoins are generated every 10 minutes; however, the mining process will get slower and complex with time. However, this payment method is getting increasingly popular, especially in the developed world. According to Coindesk.com, as of 26 June, one Bitcoin is worth about USD 570 and on average, 80,000 Bitcoin transactions worth over USD 100 million occur daily. In Dec 2013, daily value of Bitcoin transactions crossed Western Union transactions.

Global Bitcoin Transactions

Source: seconmarket.com

Large number of financial remittances, low level of financial inclusion, and high mobile penetration rates in the Middle East creates a good market for the Bitcoins.

MENA region is home to large number of expats who send significant amounts of salaries back home. The region accounts for nearly 15% of global remittances and the bitcoin being a low cost money transfer option (compared to average 8% transfer fee for other money transfer modes), help save significant amounts of remittance fee.

The low levels of financial inclusion in the MENA region has led to limited access to any sort of financial services. According to Findex, MENA has the lowest percentages of adults with a formal bank account (18%) and of poor people with formal access to financial services (9%). The recent success of mobile banking is an example of how alternative payment methods can make their place in the market.

The mobile and internet penetration is high when compared to the global average. As per the Global Media Intelligence Report by eMarketer, at 525.8 mn, the Middle East and Africa had the second largest mobile phone population in 2013. Also the internet penetration is 37%, which is above the global average. These two channels can facilitate the use of Bitcoin and can help the region address the issue of poor financial inclusion.

Some groups are continually working on new platforms for Bitcoins in the region to make them popular and easy to use. In June 2014, BITBOX launched the Middle East’s first bitcoin ATM in Tel Aviv (Israel). The vending machine allows both purchase and sale of Bitcoins. Although Bitcoin is witnessing significant growth trend in Israel, however, at present all the transactions have to be through a bank, involving lot of bureaucracy. With the launch of the Bitcoin ATM, it will help the users to transact without being hassled by the bureaucracy of the banks. This will encourage the users to exchange Bitcoins for local currency and also create a wallet to store Bitcoins. This platform will enable sending Bitcoins via email and phone and redeeming them at any of the similar ATMs. The ATMs are priced at about $15,000 and includes biometric features which may be activated depending on the local requirements.

Iranians got a Bitcoin Marketplace, CoinAva, which allows people to buy and sell Bitcoin. Bitcoin Exchange is similar to a traditional exchange except that it is entirely online.

Lack of innovation, knowledge and skepticism are the main hindrances for the Bitcoin growth in the region. Although with lot of potential for growth of Bitcoins available in MENA, it is one of the toughest regions to operate and acquire Bitcoins. Some of the reasons that may be pulling down the potential are:

• Absence of incentives to use bitcoin
• Lack of innovation as the environment is still more reactive than proactive
• Lack of confidence in the security and trustworthiness of the currency
• Broader community in Middle East is still in the early learning phase about bitcoin
• It was difficult to find options to exchange other forms of local digital money with Bitcoins till Bitcoin Nordic recently introduced CashU as a payment option

The central banks in the region have issued warnings against the usage of the Bitcoins making it tougher for the people to trust this digital currency. 

• According to the Central bank of Jordan, the virtual currencies are not legal tender and there is no obligation on any central bank in the world or any government to exchange its value for real money issued by them.
• According to the Lebanese Central Bank, due to its relatively small user base, the value of Bitcoins is subject to intense volatility and as the money is not backed by any central bank, the value of Bitcoin is not stable, and the price can drop to zero.

However, people in favor of Bitcoin argue that the technology is desirable as there is no issuing authority making it a borderless currency on Internet. Anyone having access to the Internet or a phone can access Bitcoin and leverage the financial services around it.

Combined efforts by governments and businesses is needed to drive the growth in the region. There is a lack of trust in online payments in the region leading to low credit card usage and growing but comparatively small e-commerce sector. It has to be tackled by educating people about bitcoin and related terms like wallets and exchanges and addressing issues with the conventional online payments.  Bitcoin entrepreneurs in the region are focusing on education and outreach which will include:

• Showcasing at events like ArabDigital;
• Building contacts at other tech start-ups; and
• Reaching out to the region’s merchants and consumers.

Another challenge is incentivizing the use of the digital currency. However, it is a catch 22 situation because there is a need for more users to incentivize businesses to use it, and more businesses to incentivize users to use it. The region needs more innovators and risk takers, more ideas and solutions as the market is more reactive than proactive.

Bitcoin appears to be destined to grow big in MENA, however, it remains to be seen how long the cultural barriers and lack of technological integration stopping it from penetrating deeper in the region.

Cases of acceptability of Bitcoins in the Region and Warnings issued by Regional Banks

Despite being a favourable market, Bitcoin has a very low presence in MENA region with only two merchants accepting Bitcoin in the entire region: a restaurant in Dubai and a coffee shop in Jordan. UAE homegrown F&B brand “The Pizza Guys” became the first restaurant in the wider region to accept Bitcoin. According to these pizza guys, they are able to accept the volatility in the price of Bitcoin because of their small transaction size According to the owner of the coffee shop in Jordan, accepting Bitcoin payments, there is very low risk of losing money given the small size of the transactions

 

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review