The Bahrain Monetary Agency (BMA) has recently issued new regulations to govern Bahrain banks’ consumer credit business.
The regulations are aimed at bringing in more uniformity and transparency into this line of business by laying down rules on calculation of interest rates by banks, credit advertising, procedures on early settlement, as well as limits on an individual’s total borrowing.
The new regulations come into effect from 1st January 2005.
“BMA has been examining issues related to consumer finance for some time and has paid close attention to the continuing growth in this segment of the credit business,” said Mr. Khalid A. Al-Bassam, Deputy Governor of the BMA.
“The new regulations create new protections and strengthen existing protections for Bahrain’s borrowers and ensure that banks compete and operate fairly in the area of consumer finance.”
The regulations define consumer finance as any form of credit facility, such as an overdraft, credit card, personal loan or lease, to an individual or a family. Loans secured against residential property or loans for business activities are not included.
A highlight of the regulations is the introduction of a uniform methodology for calculating the total cost of credit to the borrower. The Annual Percentage Rate (APR) is commonly used to calculate the annual cost of loans, taking into consideration all additional charges, such as insurance and documentation/processing fees, besides the interest rate applied.
APRs will enable consumers to understand the true cost of a loan and to easily compare the offers made by different banks.
Banks will also be required to use the APR for any advertising they undertake for consumer credit.
The new regulations limit an individual’s total consumer finance repayments to a maximum of 50% of a person’s monthly income, while the tenor of a loan may not extend beyond 7 years.
The new regulations follow a study made by BMA on regional and international practices as well as consultations with the Bankers Society of Bahrain and all the commercial banks.
“The regulations are the result of an overall review by BMA of consumer finance,” said Mr. Al-Bassam.
In April 2004, BMA granted permission for the establishment of a credit reference bureau (CRB), which will serve as a database of information related to loans to individuals and corporates in Bahrain.
The central database on consumer and corporate debtors will be an important tool in assessing individual indebtedness. It would also provide lending institutions the information they need to ascertain the credit and payment history of a loan applicant.
The CRB will be operated by The Benefit Company, which operates the national automated teller machine (ATM) system.
The first phase of the CRB is scheduled to start during the first quarter of 2005. (menareport.com)
© 2004 Mena Report (www.menareport.com)
