The Bahrain Monetary Agency (BMA) has published a consultation paper, setting out proposed rules on consumer finance.
The proposed rules aim to introduce more uniformity and transparency into the consumer credit 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 overall objectives of the proposed standards is to protect consumers and clarify their rights and to ensure that banks compete and operate fairly in the area of consumer finance, said Executive Director of Banking Supervision at the BMA, Khalid Abdulla Ateeq.
"BMA has an ongoing program to review and upgrade, when necessary, all regulation, including rules on consumer credit," he said. 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.
"The BMA would not wish any continuing growth in consumer finance to be at the cost of declining credit quality," said Ateeq. The proposed 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. The definition does not include loans secured for residential property or for business activities.
A highlight of the proposed rules 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," said Ateeq. Banks will also be required to use the APR for any advertising they undertake for consumer credit.
The proposed rules also limit the indebtedness of an individual. The total available credit to an individual should not exceed 20 months of the person's gross salary. Also, an individual's total consumer finance repayments must not exceed 50 percent of the person's monthly gross salary and the tenor of a loan may not extend beyond five years.
The rules also set procedures to be adopted in the event of early repayment, to make the early settlement of loans clearer and fairer to consumers.
The consultation paper has gone out to the Bankers Society of Bahrain as well as Bahrain's commercial banks. "We welcome comments from the industry and other interested parties, including auditors and law firms, to the proposals detailed in the consultation paper," said Ateeq. The consultation period runs until April 15, 2004. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
