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Personal guarantees waiver on bank loans

Al Etihad Credit Bureau will eliminate the personal guarantees model in loan sanctioning and help due diligence process instead, said Haji Younis Al Khoori, undersecretary of the Ministry of Finance.

Currently, financial institutions and banks are lending through personal guarantees and different collateral where they always conduct a detailed due diligence before extending any facility to SMEs, he said.

In comparison to 2008, when nearly all the doors were shut for new credit, there is now a 50 per cent approval ratio amongst the banks and SMEs. A credit bureau once fully implemented at the federal level will eliminate the personal guarantees model and help this due diligence process, Al Khoori said.

“It will enable banks to better understand the underlying risk associated with the entity and enable the facility. This can favourably impact the pricing of SMEs and also boost the appetite among banks for lending into this segment,” the undersecretary said.

He said the bureau’s formation will be completed in four stages in 2015. Launched in early this year, the Bureau will become something akin to an X-ray machine, making borrower information available to financial institutions for review in a transparent and neutral manner, said the undersecretary in an interview.

The undersecretary, who is also the vice-chairman of the bureau said: ”The country has the largest banking sector and the second-largest economic the region, and it has a very strong growth pattern.” The demand for loans has heavily increased in recent years, contributing the growth of the sector. “With this demand and growth there is a heightened need for greater transparency,” he said.

The bureau will significantly help to reduce national debt and the provisioning of banks and will 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, the vice-chairman said. “It is crucial for banks not to lend money to those that are unable to pay back their debt. The bureau will allow lenders to assess a candidate’s total indebtedness and calculate a borrower’s capacity to honour their debt,” Al Khoori said.

However, he said the key beneficiaries will not only be individuals and companies, with a good history of paying and meeting financial obligations on time, but also those who are new to the loan market, including SMEs. It will have a proactive approach to data sharing, enabling banks to assess on an individual basis, where there is limited financial information available, he said.

The bureau indirectly will open new financial avenues and in due time also encourage more entities to provide credit facilities, such as car rental or retail businesses. “It will help to build an informed financial society, as consumers and organisations 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,” Al Khoori said.

The bureau will be launched in four stages, with a completion date of 2015. As with all projects of this nature, at an early stage there will be certain challenges. However, with the pace at which the credit bureau has been developing until now, any lending slowdown that the market may encounter will ultimately turn out to be a very temporary issue, the undersecretary said.

— haseeb@khaleejtimes.com