Dunia: How Its World Worked
The UAE, a confederation of seven emirates,2 had one of the most developed and technologically efficient banking sectors in the Middle East.3 An increase in population (roughly 5.5 million) and high wealth levels had created much demand for financial services, so by 2012, the country was heavily banked; there were 24 local and 28 foreign banks with full operating licenses and 70 other financial institutions.4
The Central Bank of the United Arab Emirates (Central Bank), created in the 1980s to license companies for investment and specialized financing activities, also worked with the UAE government to set policies and act as a supervisor. Although the Central Bank did not have a federal credit bureau, there was a separate independent credit bureau called Emcredit based out of the Dubai International Financial Center (DIFC), which was founded in January 2006. The extent to which banks shared customer credit information with the central credit database (which stored an individual’s negative and positive credit history) was unclear. Emcredit had another product called Embounce. The source of Embounce data was not individual banks but public prosecution in Dubai. As a criminal offense, any bounced check reported to police was recorded and submitted to Embounce. The database covered 100% of Dubai’s population, but the data only included infractions, so it was not as rich as Emcredit’s credit database. Moreover, check-bounce information of emirates other than Dubai (such as Abu Dhabi) was not included.
The Central Bank licensed Dunia to offer credit cards, personal and auto loans, simple insurance products linked to all of these, and corporate deposit services and financial guarantees for companies. In 2009, a new government policy offered Dunia another market opportunity: the Wage Protection System. This government regulatory system required private-sector employers to pay wages monthly through approved financial institutions. After gaining government approval, Dunia signed up companies to facilitate these transactions. “Liquidity is key to the success of any financial institution,” Venu Parameshwar, Dunia CFO, said. “One of Dunia’s key priorities is to ensure that our balance sheet reflects the highest degree of liquidity.”
Revenue was generated through fees from originating and servicing loans, commissions, interest on credit card and loan balances, and services such as credit card protection plans and loan insurance. Dunia needed customers who carried loans but did not default, or who maintained revolving credit card balances and still made a card payment each month. In addition, the longer Dunia held a customer, the more profitable the relationship became; therefore, ensuring customer loyalty was very important. In addition, the firm needed new customers to grow and had to spend more to keep the pool a healthy size. Hurbas described a few differences between the U.S. and UAE markets:
In a developing market like the UAE, there would be higher costs of doing business, including credit and operational cost. In the U.S., a company like ours could get 10 million names from the credit bureau and a half-percent response rate, with which you would be happy because it gives you about 30,000 or 40,000 customers. If you do that twice a month, that gives you pretty good numbers. Whereas over here, in a good month, we may still book a fraction of this kind of volume partly because UAE’s population is far lower than the U.S.’s, and we don’t have full-blown credit bureaus, so you can’t say, “I want the customers with xyz criteria” and know exactly what type of risk you are taking. You have to rely on internal data in a developing market in order to grow prudently, which is a bigger risk challenge. Moreover, while UAE is a market full of growth opportunities, we should also be cognizant of, and factor in, several macro event risks surrounding us. The Middle East is a region going through significant changes, which bring about many risks, as well.
Another difference between the U.S. and a developing market is the human capital required across all functions, not only in strategic analytics. A manager in a large U.S. bank typically controls a much narrower area but can afford to dig far deeper, so can be a true specialist within his/her function. On the other hand, a developing market banking associate must have broader coverage in his/her function and also needs to have a strong understanding of several other functions in order to be effective.
Another variable that increased the risk lenders faced in the UAE was its transient, expatriate work force population. When non-nationals lost their jobs, their residence visas were canceled and they had to leave the country within 30 days; by leaving the UAE for their home countries, customers could run out on loan and credit card payments, leaving banks with large credit losses. Raman Krishnan, the chief risk officer, had a tough job ensuring that the right credit policies were put in place and were dynamically assessed based on portfolio experience and market conditions. He worked closely with Hurbas to analyze the portfolio and make certain that the right metrics were in place for managing risk and reward simultaneously. Raman Krishnan explained, “Data is our most important tool in risk management. In an environment where risks are plenty, not having accurate data could lead to significant financial losses, while understanding and using data could give us a significant competitive edge.”