credit card issuing risk in the middle east

CREDIT CARD ISSUANCE IN THE MIDDLE EAST – THE CHALLENGES IN UNSECURED LENDING

The Region

Credit cards have swept through the Middle East region at an astonishing rate over the last decade. At the start of the 1990s, the people in the Middle East region believed that cards are a luxury item reserved for the rich and famous. Today because of the overwhelming growth in technology and consumer spending, cards are now a common mode of payment and often form a principal link between banks and their customers.

But this success has its challenges. As card Issuers focus on launching new products and services to feed public demand and grow their business to reap in big profits, the burden placed on the Credit Manager to manage the lending portfolio cannot be trifled with. New opportunities created by technology such as Internet, Electronic and mobile commerce cannot obviate the fundamental lending risks and the basic need of sound credit decisions. Without sound risk management at individual, national and international levels, losses can become serious and business confidence in cards becomes seriously affected with severe impact on profitability.

The Middle East region offers card issuing banks all the many challenges that emerging markets offer but also present some unique hurdles to overcome, that it can be easy to overlook the fundamental areas in lending. Supporting a sustainable yet profitable pace of expansion, the threat of stiff competition, and the disruptive potential of new technologies are items on the agenda of every Credit Manager in the region. Inexperience contributes to the problem. Unlike the Europe and Americas where credit cards are now a part of everyday life and lending strategies/practices have reached an advanced degree of sophistication, the Middle East presents a scenario of rapid growth opportunities against 'anarchic' market background.

The Credit Risk Manager's job and the underlying challenges, in a card issuer can be summarized under the following heads:

Cultural factors

Religious factors/Shariah Law

Within the Islamic faith, Shariah Law does not recognise the concept of the lending of money for profit, (based upon interest). This principle presents a number of issues for card issuing banks. In addition, Shariah Law influences the legal processes available to banks in the Gulf region. This makes the lending process more complex and often presents a sense of hostility against the product itself. Moreover, the application of the law in recoveries often results in unviable situations where the card issuer is asked by the court to provide charge slips and receipts for every transaction forming the unpaid card debt!

The current political environment with a sizable number of people being anti-American and anti-West presents makes the credit screening process more difficult.
Demographics and population:

The Middle East has a unique workforce composition in that a sizeable majority is composed of foreign workers and expatriates. So, within the region, probably more so than any other region in the world, frequent, prolonged and extensive international travel is common. There are a number of factors associated with this phenomenon:

· During the summer months, particularly June to August, many members of the population take prolonged holidays to Europe and the USA. Often these trips are in excess of two months.

· Inter-Gulf travel is frequent and common for economic and social reasons.

· The large expatriate communities will return to their home countries at key times of the year, (particularly in the summer months and during key holiday periods such as December).

This ‘travelling’ culture creates a number of credit risk management issues that are specific to the Middle East region. These include peaks of high expenditure, frequent cash usage, ATM withdrawals, and missed payments. Missed payments may be due to the customer’s inability to pay for both geographic and economic reasons.

This issue generates the obvious credit risk management concerns – continuous spending but no payments. To manage this, Credit-Risk Managers often implement a fixed pre-payment capability. This may also be addressed by taking a fixed deposit, against which the bank may offset subsequent monthly card payments.

Cash Culture

The Middle East is very much a cash-driven society. Cheques and promissory notes are the least favoured methods of consumer payments. Paying by cash is an opportunity to negotiate a favourable discount and therefore ATM withdrawals have much higher value and frequency than seen elsewhere. This is exacerbated by merchants, who encourage cardholders to pay with cash in order to avoid paying Merchant Acquirer fees.

This cash culture also encourages cardholders to withdraw the full cash limit on the card account shortly after it has been issued. However, the fees, service charges and interest, (where applicable), for cash usage represent a significant source of revenue for all of the member banks. It is an important decision for the Credit unit to manage the cash withdrawal limits of cardholders at an optimal balance between risk and revenues.


Lax Payment Culture

Customers make payments when they consider it appropriate, (self determined), rather than when requested. This is a particular issue when the cardholder does not perceive the minimum payment due as significant, and is not aware of the consequences of non-payment. In addition, there is a belief that minor delinquency and slow payment is acceptable!

Many a Credit Manager faces accounts with a high level and value of delinquency, which paid in full when actions were taken that increased the perceived importance of payment to the cardholder.

Again, this culture will be very difficult to change. However, there are a number of areas where Credit management improvements may be made. These include:

· Enhanced customer education campaigns throughout all channels of communication, explaining the importance of regular payment and the customer service/credit implications of non-payment.

· Accelerated collection actions on persistently delinquent accounts, or accounts that have reached a high level of delinquency in the past. This will elevate the importance of regular payment to the cardholder.


Infrastructural Factors -Absence of Credit Bureaus

Within each of the countries in the Middle East, there are different levels of access to credit bureau or shared negative payment information. There is a marked reluctance in sharing positive information out of competitive beliefs.

Although there are credit bureau initiatives underway in many of the countries in the region, there are formidable obstacles to be overcome and it is unlikely for Credit Managers to reap the benefits of structured credit bureau information.

Banks believe that reliable credit bureau information is required to make a more prudent accept or decline decision on new account applications. Banks also believe that it is necessary for the Central Banks to impose legislation to ensure that data is submitted consistently to a shared negative or credit bureau file. Without Central Bank guidance and regulation, limited progress will be made.

Many card issuers in the region have formed 'informal' information sharing channels as a first step towards convincing potential contributing banks of the benefits of this type of service. Initially this comprises of a shared negative file with reciprocal participation and defined standards. Central Banks in most of the countries circulate C-Lists (list of known defaulters) that provide some limited benefits.

Judicial System for debt recovery

In some of the countries like Saudi Arabia, a promissory note can be enforced in the courts against a defaulting debtor, and many banks take this as part of the application process.

In the United Arab Emirates, a dishonoured cheque can form the basis of a criminal charge action through the courts. Most credit card grantors require new applicants to provide a signed undated cheque to the value of the credit limit. This can then be presented in the event of a subsequent default. Once dishonoured, the legal process can begin.

The majority of the banks in this region often find it difficult to take legal action against a defaulting debtor due to the complexities associated with the legal processes in each country. In Kuwait, for example, legal recourse is possible and generally effective, although it is costly and time consuming. In almost all circumstances, legal action, if successful, results in the recovery of the capital balance only.

Postal Services

The use of postal boxes as a mailing address is common within the Middle East & Gulf region. However, in general, it is a challenge for all card issuers to ensure that the monthly billing statements reach cardholders without fail and in time to pay by the due date.

Postal boxes are in short supply and are expensive for individuals. Cardholders typically utilise their employer’s postal boxes to receive mail, or share a postal box with five or more people. The speed and reliability of the postal service is regarded highly erratic and often unacceptable. It is also possible that cardholders use the poor mailing system as a convenient excuse for non-payment. As the majority of contact details held for the customers are postal box based, several banks experience problems with the quality of data for physical addresses. Many cardholders simply have a street name with no apartment or house number details.

The dependence upon postal boxes, the absence of accurate physical address details and shared common surnames, all present a number of challenges when attempting a physical trace of a delinquent cardholder.

There are number of steps that need to be implemented to lessen the impact of this issue:

· Implementation of enhanced audit and control procedures for the capture of the physical address details of new applicants. As bills for utilities, such as water and electricity contain a full physical address, these can be requested as part of the application process, to ensure correct data capture.

· Application capture screens or physical application processes should be modified to ensure that a full physical address is mandatory.

· As postal communication represents a problem, the application form should be modified to capture all alternate contact details, such as mobile telephone and e-mail addresses.

· The use of alternative customer contact channels, such as the use of calls to mobile telephone numbers, SMS text messages and e-mail should be tested within account management policies such as collections.

· Tracing facilities, such as automated batch or on-line directory enquiry facilities, (via national telecommunications companies or mobile telephone service providers), are other added value industry services that could be initiated by the bank membership association suggested above.

Floating Expatriate Population

One of the most unique social and commercial characteristics of the Middle East-Gulf region is the size of the expatriate population. The UAE has the highest proportion of expatriates as a percentage of total population, at 75%, with Kuwait next at 50% and Saudi Arabia with 30%.

The average tenure of employment varies between the UAE, Saudi and Kuwait, with expatriates working on average for 4 years in the UAE and between 2 and 3 years in Saudi and Kuwait. After these periods expatriate employees typically stay for another full term or leave the Gulf region and return to their home countries.

Many of the banks in the region (particularly UAE) have actively grown their account bases by targeting expatriates. As a logical corollary, they face significant credit losses as a result of expatriate cardholders ‘skipping’ the country and not returning, leaving their unpaid debts behind. This was rampant recently during the US led war in Iraq; a large number of Western expatriates left the region for security reasons – leaving behind a trail of unpaid debt.

Legislation exists to apply for a ‘travel ban’ to prevent account holders from leaving the country if they have outstanding debts and delinquent accounts. However, this process is cumbersome, expensive and slow.

As part of the application process, banks that offer credit cards to expatriates confirm valid employment details and stipulate a minimum employment period before accepting. In general, no employment contract information is captured, other than work permit details.

Some card issuing banks have stringent requirements, where an irrevocable salary assignment and an existing banking relationship are required before an expatriate can open a credit card account.

This issue is tricky to resolve without significant customer service implications or impacting upon the potential growth of card portfolios.

There are, however, a number of prudent risk management steps that can be implemented:

· As part of the account opening process, additional criteria could be applied to reduce the risk of ‘skips’, including irrevocable assignment of salary and or a fixed deposit as security against a credit limit.

· The card application form must request for applicant’s address in the home country, as well as their relatives contact details. This will assist in tracing if the customer ‘skips’ back to their home country.

· Copies of the passport of the applicant. Also, where applicable take copies of Social Security ID and driving licence information of the country of origin.

· Contract expiry details should be captured as part of the application process and confirmation calls to employers could be made close to the expiry date, to confirm contract renewal.

· Additional confirmation procedures should be considered for applications from individuals who are approaching the end of an employment contract, (verification of renewal of employment contract).

· The expiry date of the card can be synchronised with the employment contract expiry and additional confirmation procedures could be implemented as part of the card renewal process. If card collection is via a branch network, verification of renewed employment contracts could be implemented as part of the card delivery process.

· Subjective reviews of an account can be conducted a number of months prior to the employment contract expiry date to identify non-typical account performance, such as excessive balance build. This may proactively highlight potential ‘skip’ accounts. If the account shows early stages of delinquency approaching the end of the contract, a pro-active application for a travel ban may be filed, or discussed with the cardholder.

In summary, credit card lending in the Middle East is a formidable challenge to manage for a Credit-Risk Manager. It requires a combination of sound lending skills and tailored credit management practices in a 'fuzzy' environment. However, a credit manager can play a significant role in contributing to healthy profits of the institution as return on investment in the card business in the region is in the range of 15% to 27%. The importance of the Credit/Risk role in this business cannot be undermined in any way.