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Dubai-based Emcredit, the UAE's first commercial credit bureau, was begun primarily to help small businesses obtain access to money.
Economists have long understood that these entrepreneurial firms are the most powerful engines of both economic growth and job creation. They also know that access to capital is their lifeblood - they cannot survive much less prosper without it.
But potential lenders have a problem, which is how to evaluate an entrepreneurial business to determine its credit worthiness.
"Lenders don't have the information they need," says Emcredit CEO Bashar Saleh Qallab. "Improving the reliability of credit information allows lenders to penetrate under-represented markets."
As Emcredit took shape, Qallab realised that questions about the credit of a small business could not be separated from the person who owns the business.
That's because loans to new and small businesses are typically made on the credit worthiness of the owner as an individual, not to a business with little or no history. Only later, when the business has an established track record, will loans be made without a personal guarantee from the owner.
In developed financial markets, credit bureaus accumulate substantial information about both businesses and consumers.
Rating services like Duff & Phelps, Dun & Bradstreet, Moody and Standard & Poor's monitor bonds and other debt for large companies, medium-sized and even smaller businesses.
This information can be basic like the company's address, jurisdiction where the business is organised, number of years in business and amount of capital. It can also include any legal penalties or court actions such as bankruptcy.
Another key piece of data is the experience suppliers and lenders have had with that business. If suppliers find that the company is slow paying debts or doesn't pay at all, that information is available through the credit bureau.
Over time, the accumulated data provides a highly useful snapshot of the company's financial habits. For example, while not common, some companies in the region have been known to take up to a year to pay.
Meanwhile, the suppliers that provided the merchandise or services are without their money. Few small businesses can afford that burden. Evidence clearly shows that firms like these typically fail because they are strapped for cash, not because they are unsuccessful as businesses.
Qallab notes that when a company takes a long time to pay that does not necessarily mean that other firms will not do business with it - though some might.
But it does mean that they will have the information they need to price their products and services so that the extra cost for the time they must wait to be paid is covered.
"The importance of this information is huge," says Qallab.
Credit reporting
Credit reporting for individuals works much the same way. The information usually includes the last known address, employer, length of employment, and earnings.
Information is also reported to a consumer credit bureau when a consumer purchases a home, auto or uses a credit card. This includes the amount of credit extended and the customer's payment history. In mature markets, credit information significantly improves lenders' ability to make sound credit decisions.
Fair Isaac, a firm that specialises in helping companies make these decisions, uses statistics and data analysis to build "predictive models". These are basically mathematical formulae that determine how reliably a consumer will pay, based on that person's credit profile.
As an example, the model might predict that a person who changes jobs frequently, has large amounts of debt, and pays bills erratically is a high credit risk. Since these predictions are based on very large amounts of information collected on many consumers, risk calculations are quite precise.
The objective is not to deny credit per se, says Qallab. Instead, banks, home loan lenders and others can develop specialised credit products.
"It's a question of how you price credit," says Qallab. That means a consumer with less than perfect credit will pay more because he or she is a higher risk. Consumers with the best credit will get the lowest rates on credit cards as well as home and auto loans.
Fair Isaac has also developed the commonly used Fico score which rates a consumer's credit. The Fico score can be as high as 850. A score over 700 is considered good, one in the 500s is considered relatively poor.
As an example, a person who is borrowing Dh600,000 to purchase a villa might obtain a six per cent mortgage loan (for non-Sharia compliant interest credit) if he has a credit score of 700 or above.
Based on actual, recent credit pricing in the US, a person with a Fico score in the low 600s would pay Dh4,500 more each year for the same villa. In the 500s, the loan would cost Dh9,750 more - a total of about Dh140,000 over the life of a 30-year loan.
Segmentation of the market based on risk means that a credit card is not a single financial product, says Qallab. The result is that some credit cards like the gold and platinum levels offered by many companies will be offered only to the best credit risk customers.
Currently, these privileges are extended locally on the basis of high earnings and assets. But having a big income or wealth does not always mean that bills are paid reliably or on time.
At the other end of the spectrum, consumers who are extremely low credit risks may still be able obtain credit cards. However, in extreme cases they would pay in advance and can only charge against that prepaid amount.
Consumers can actually get help to "manage" their Fico scores. For a fee, myfico.com will evaluate a person's current credit report online and give recommendations about how to improve the score.
Fico scores have already made their debut in the Gulf. Last summer Saudi British Bank, associated with HSBC, implemented the Global Fico® score, a version designed to work across credit bureaus from different nations.
But credit scoring requires sufficient credit bureau data. While that is now available in Saudi Arabia, the accumulation process is just beginning in the UAE.
As a result, Emcredit has no immediate plans to offer credit scoring. For now, says Qallab, it's enough to offer information on a company's current activities.
Emcredit was also designed from the start to gather international data flows. It could hardly have been otherwise given that expats comprise more than 80 per cent of the population. So Emcredit users will be able to obtain authenticated credit information from other countries.
Some countries make access to that credit easy. In some nations, stringent laws protect privacy, but if the consumer gives his consent, credit bureaus can readily provide information about that person. Credit information is more difficult to import from countries like Germany and India, says Qallab.
Economic Agenda
Bringing modern credit practices to Dubai will take more than simply flipping the switch at Emcredit. Some bankers are not yet convinced that they need help managing information about their customers. So understandably, initial resistance is likely.
That will, of course, melt away under competitive pressures as lenders and others use credit information to build specialised products and services - and also capitalise on the benefits of synchronising with global financial markets.
The public will also have some initial scepticism about record keeping on their financial doings. "All this is nothing new," says Qallab. It's the same road travelled by other economies.
In fact, Emcredit has leaped over many of the data privacy concerns that other nations struggled with in the past. Dubai has already passed a law specific to Emcredit that requires lenders and companies to share credit information. Without this cooperation, any central data repository would be worthless.
In addition, a national law is in the works, says Qallab, which will directly engage information privacy issues consistent with international standards. The right to collect financial data already exists, he notes, but adequate protections have yet to be added.
The new law will address how data can be collected, reported, and used as well as confidentiality. This puts Emcredit in the catbird seat since it is independent and has no vested interest in the credit data it collects.
Emcredit is organised as a standalone commercial enterprise, not a government entity - though some believe that credit reporting should remain in the public domain.
Currently, the Department of Economic Development is the principal shareholder which means that Emcredit could eventually be privatised.
It does not mean that Emcredit has a monopoly. The door has been left open to competitors, and it's worth noting that the US, for example, has three large credit bureaus.
Still Emcredit's appearance is timely. Qallab notes that Emcredit helps usher in international best practices that are required by any sophisticated financial market - and certainly a financial market with global aspirations.
These practices dictate that efficient credit reporting must be present to meet the goals of transparency and accountability.
The writer is a business professor at American University in Dubai.
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