Bahrain’s banks are being required to maintain higher levels of disclosure and pay greater attention to individual indebtedness, under new regulations governing the consumer credit business.
The new rules, issued earlier by the Bahrain Monetary Agency (BMA), have come into effect from the start of 2005.
“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. BMA’s aim is to achieve more responsible lending as well as borrowing,” said Dr Khalid Ateeq, Executive Director, Banking Supervision, at the BMA.
As such, the regulations tackle, for the first time, the issue of over-indebtedness on the part of individuals. For licensees, the rules aim to ensure prudent lending by all providers of consumer finance, along both conventional and Islamic lines, as well as transparent disclosure of the full costs and terms on which banks offer consumer finance.
The rules 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.
Highlights of the new regulations include limiting an individual’s total consumer finance repayments to a maximum of 50% of a person’s gross monthly income, while the tenor of a loan has been capped at 7 years.
Banks are required to review in detail a loan applicant’s personal financial standing and ability to service their debts. Licensees are required to inquire into, and document, applicants’ sources of income, their past credit history, their regular outgoings and other financial commitments.
The regulations also introduce, for the first time, 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, to enable consumers to compare like-for-like.
Banks are also required to make clear to all potential borrowers all relevant key terms of the loan agreement. A ‘key terms disclosure’ document, which must be signed and dated by the borrower, will include such information as the amount being borrowed; the nominal rate of interest being charged; whether the interest rate is fixed or variable; a breakdown of all non-interest costs; as well as the APR.
“The new regulations followed a consultation with the industry and a review of the responses received,” said Dr Ateeq. “However, these measures will be kept under review. If the BMA assesses that credit quality and effective transparency are being significantly undermined, then additional prescriptive measures will be considered.”
