7.1 Responsible Financing

7.1.1 General Provisions for Responsible Financing

7.1.1.1 This Article must be read in conjunction with Article 2: Disclosure and Transparency and Article 5: Business Conduct of these Standards and the Regulation regarding lending/financing and related services offered to Consumers.

7.1.1.2 The provisions of this Article apply to any form of lending/financing/Credit Products granted by Licensed Financial Institutions to Consumers through any channel of distribution (e.g. online, mobile apps, branch walk-in, etc.).

7.1.1.3 Providing lending/financing to Consumers must be subject to the credit risk policies of the Licensed Financial Institution. The Licensed Financial Institution must assess the ability of its Consumers to meet credit obligations and comply with Debt Burden Ratio (DBR) limits prescribed by the Central Bank.

7.1.1.4 The required Consumer assessments in these Standards assists in determining if a Borrower/Financee could meet both current and future repayment/payment obligations, thereby reducing issues of over indebtedness, insolvency and vulnerability to unexpected adverse events and income shocks.

7.1.1.5 Before granting any Credit Product, Licensed Financial Institutions must educate their Consumers by:

a. Explaining in plain language the application and approval process;

b. Explaining and providing a copy of the Licensed Financial Institutions’ offer to provide credit as well as the Key Facts Statement for the type of Credit Product being offered;

c. Clearly informing Consumers of any risks associated with the use of lending/financing, including the variance of interest/profit rates/costs, consequences of violating the terms and conditions, late payment Fees, Early Settlement Fees, for Shari’ah financing any Commitment to Donate to charity, etc.;

d. Explaining to Consumers and guarantors the implications of pledging any collateral, post¬dated payment cheques or other guarantees that are required in obtaining the loan/financing; and

e. Informing Consumers of the potential consequences of late payments or non¬payment of their liabilities. The consequences to be explained may include, but should not be limited to:

i. A negative Credit Information Agency rating and the possible limitations on the ability to borrow/obtain financing in the future;

ii. Collection measures involving collateral, collection Fees and claim on guarantees; and

iii. Legal actions through the courts.

7.1.1.6 Prior to offering, recommending, arranging or providing a Credit Product to Consumers for the purpose of consolidating / refinancing existing loan/financing, Licensed Financial Institutions must provide Consumers, in Writing, a comparison of the total interest/profit charged over the tenor of the loans/financing payable if they continue with the existing facilities versus the total interest/profit payable based on the consolidated facility being offered. Any assumptions used in calculations must be reasonable, justifiable and clearly stated and communicated. The comparison must be retained and a copy is to be provided to the Consumer for review during the Permissible Cooling-off Period.

7.1.1.7 Licensed Financial Institutions may agree to defer installment(s) as they deem appropriate, provided that such deferments do not result in the amount of future deductions from salary being in excess of the DBR percentage as prescribed by the Central Bank.

7.1.1.8 Licensed Financial Institutions must only take from the Consumer the number of post¬dated cheques covering the instalments and of value not exceeding 120% of value of the loan/financing or the debit balance. It is prohibited to take signed blank cheques. When one or more cheques are provided to the Licensed Financial Institution, the Licensed Financial Institution must provide the Consumer with a photocopy of all the properly completed cheques that were provided to the Licensed Financial Institution. The copies are to be stamped as accepted by the Licensed Financial Institution and given to the Consumer as proof of possession. When the lending/financing is paid off early, the remaining postdated cheques must be returned to the Consumer within 7 complete business days of the loan/financing being paid off.

7.1.1.9 Consumers can request a written confirmation at any time from their Licensed Financial Institutions confirming if there are any liabilities owing or not. Licensed Financial Institutions must provide a Consumer with a “letter of no liability” in such cases in accordance with Article 5: Business Conduct of these Standards. If liabilities are owed, the Licensed Financial Institution must instead issue a “letter of liability” stating the details and amounts of the liability still owing. The relevant letter must be issued to the Consumer within 7 complete business days from the date of the Consumer’s request.

7.1.2 Training and Remuneration

7.1.2.1 Representatives of the Licensed Financial Institution involved in providing lending/financing must be properly trained and qualified in assessing and approving the suitability, affordability and appropriateness of applications for credit/financing using established criteria and applying the Licensed Financial Institution’s lending/financing policies and procedures. Training of the Staff must cover the characteristics of the Credit Products sold/extended financing, identification of Consumer risks and procedures for carrying out proper verification of Consumer information.

7.1.2.2 The remuneration structure for Staff of the Licensed Financial Institutions must be designed to encourage responsible business conduct in lending / financing and fair treatment of Consumers and to avoid conflicts of interest. Refer to Article 5, Clause 5.1.1.62.

7.1.2.3 Licensed Financial Institution must monitor their sales representatives’ conduct to ensure they do not apply any unethical measures to profit from volume sales based incentives or commission based lending/financing objectives.

7.1.3 Consumer Assessment for Suitability

7.1.3.1 Staff of Licensed Financial Institutions responsible for assessing suitability and granting credit to Consumers must be qualified for the level of credit granting authority that the Person is authorized to give.

7.1.3.2 Suitability is defined as the degree to which the Financial Product and/or Service offered by the Licensed Financial Institution matches the Consumer’s financial situation, investment objectives, level of risk tolerance, financial need, knowledge and experience.

7.1.3.3 Where a Licensed Financial Institution is required to carry out an assessment of a Consumer regarding the suitability, affordability and/or appropriateness of a Credit Product and/or Service, a summary copy of the assessment must be provided to the Consumer without charge.

7.1.3.4 The Licensed Financial Institutions’ Consumer assessment control framework must include:

a. Methods for assessing the profile and circumstances of the Consumer for which a Credit product would be suitable; and

b. Clear lines of authority for approving the offer of a Credit Product and/or Service to a Consumer and the parameters for allowing exceptions from the assessment policy, procedures and established criteria. The basis for the approval or exceptions should be properly documented and supported with information relevant to the decision. Such approvals or exceptions should be subject to independent reviews by appropriate Control functions of the Licensed Financial Institution to ensure that they do not undermine the Consumer assessment procedures that are in place.

7.1.3.5 When providing a Credit Product, Licensed Financial Institutions must:

a. Assess the purpose of the credit/financing and the appropriate amount required;

b. Verify personal information, employment income and any other sources of regular income and revenue;

c. Assess the status of the Consumer’s credit worthiness including verifying information with the Credit Information Agency;

d. Provide General Advice on the appropriateness of the lending/financing request and provide any other reasonable options that the Consumer may or should consider; and

e. Not issue or bundle a credit card with the Credit Product or automatically increase a credit card limit, except upon expressed consent of the Consumer. Licensed Financial Institutions may offer a Consumer an increase in the limit of an existing credit card but must comply with the following:

i. Must perform a new check with the Al Etihad Credit Bureau for an updated credit history of the Consumer; and

ii. Must obtain expressed consent of the Consumer before applying the increase in credit/financing to the card.

7.1.3.6 Licensed Financial Institutions may decrease the credit limit on a card or close the card due to business reasons; Consumers must be provided a notice and the reason for limit decrease or closure.

7.1.3.7 If a Licensed Financial Institution engages in bundling of products and/or services with a Credit Product of any kind, it must provide the Consumer with the option to refuse the other bundled product(s) and retain the right to obtain the amount of credit based on the original offer from the Licensed Financial Institution. Offering Shari’ah compliant products and/or services must comply with the relevant Shari’ah requirements. The Licensed Financial Institution must disclose, in Writing, and explain the benefits of accepting a bundled product. As an exception, where credit insurance/takaful is a requirement of a proposed Credit Product, the Consumer must be informed in Writing that the Consumer must obtain the insurance/takaful from regulated companies proposed by the Licensed Financial Institution.

7.1.4 Consumer Assessment for Affordability

General Requirements

7.1.4.1 Affordability refers to the ability of a Consumer to reasonably afford the costs of existing and/or additional liabilities given the Consumer’s level of stable income, financial obligations/dependencies and basic personal and life style expenditures.

7.1.4.2 A Financial Product and/or service is considered affordable based on compliance with the DBR prescribed by the Central Bank as well as consideration of the level of basic personal and life style expenditures and other financial obligations and dependencies. Affordability assessment methodologies may be prescribed by the Central Bank.

7.1.4.3 Licensed Financial Institutions must assess the financial stability and needs of their Consumers before offering them a Credit Product. Licensed Financial Institutions must:

a. Assess that the Consumer will be able to make the payments without suffering substantial hardship given the Consumer’s financial, personal commitments and potential to retire in the near term;

b. Apply an appropriate level of stress testing to assess affordability given a scenario of increased interest /profit rates:

i. The results of the testing must be taken into consideration by the Licensed Financial Institution before granting the credit;

ii. If the stress testing results shows that the potential increase of a future interest/profit means the Consumer would exceed DBR set by the Central Bank, the Licensed Financial Institutions must document the reasons why they still provided the Credit Product; and

iii. Licensed Financial Institutions must provide a written summary of the results of the stress testing to the Consumer so that the Consumer is informed of the potential risks of an increase in the interest/profit rate. The Consumer must sign an acknowledgement of receiving the summary.

7.1.4.4 Licensed Financial Institutions must examine the credit record of the Consumer to verify his/her solvency, ability to meet monthly credit obligations and past credit behavior. The information obtained must be documented by the Licensed Financial Institution.

7.1.4.5 The Licensed Financial Institution must determine the level of affordability of a Consumer from the information collected by the Licensed Financial Institution including information provided by the Consumer and the Credit Information Agency.

7.1.4.6 A summary of the completed affordability assessment should be dated and signed by the Consumer and the Licensed Financial Institution credit granting Staff. The Consumer must be given a copy.

Debt Burden Ratio (DBR)

7.1.4.7 Licensed Financial Institutions must comply with the DBR prescribed by the Central Bank for Consumers. Licensed Financial Institutions must take reasonable steps to establish that Consumers are offered financing products that are appropriate to their financial circumstances and ability to repay by observing a prudent level of DBR. Licensed Financial Institutions must not grant excessive credit only on the basis of the Consumer’s affordability criteria (e.g. attempting to lend/finance in excess of what is required or requested by the Consumer).

Assessment of a Consumer’s Debt Repayment/Payment Obligations

7.1.4.8 Licensed Financial Institutions must conduct a comprehensive due diligence on the Consumer’s overall indebtedness by obtaining information on the Consumer’s outstanding debt obligations, including both secured and unsecured financing. Verification with the Credit Information Agency must also be completed.

7.1.4.9 With respect to the assessment of the Consumer’s credit application, the amount of credit to be approved, shall take into consideration the following:

a. The amount of the proposed scheduled repayment/payment of principal and interest/profit (including any Fees as part of the financing amount);

b. For interest/profit-only residential mortgages extended during the construction phase of new housing development projects, Licensed Financial Institutions must include both the principal and interest/profit payment that would apply at the end of the interest/profit- only period;

c. Where discounted interest/profit rates apply in the early part of a financing plan, the highest applicable rate that will apply to the financing at the point of assessment should be used. Should the higher rate result in payments that will exceed the DBR, this type of financing is not permitted;

d. Licensed Financial Institutions cannot use balloon structures/facilities to circumvent any existing or future forecasted DBR, personal loan/financing limits, or loan/financing to value ratio;

e. Where discounted rates and/or lower introductory payments are offered by re¬allocating a portion of the front-end interest/profit and/or principal by scheduling a large re-payment at a future point in time within the tenor (balloon payments), the Licensed Financial Institution must demonstrate and document how the applicable balloon payment will reasonably be within the Consumer’s DBR at that future date when it is due. Where it is not reasonable that the Consumer would be under the DBR when the balloon payment is due, this type of financing is not permitted and Licensed Financial Institutions cannot use balloon structures/facilities to circumvent any existing or future forecasted DBR, personal loan/financing limits, or Loan/financing to Value (LTV) ratio;

f. Where there is evidence of financing granted by the Consumer’s employer, friends, or relatives and any other finance that must be repaid through instalments on a monthly, semi-annual, or other basis, it must be considered in the assessments; and

g. Evidence of financial obligations such as being a guarantor on other debts, having margin and leveraged loans/financing for investments, court order payments, etc. must also be considered in an affordability assessment.

Income Assessment

7.1.4.10 In assessing income for the determination of the DBR, Licensed Financial Institutions must consider:

a. If variable income is taken into account, Licensed Financial Institutions are to evaluate the variability of such income and only include a prudent portion of the average amount as the Consumer’s income while assessing affordability. This flexibility should not be used to manipulate the DBR calculation. Where the Consumer has no permanent employment or is self-employed, Licensed Financial Institutions must evaluate the stability of the primary sources of income by requiring the Consumer to provide reasonable evidence of income;

b. Where a high month-to-month variance is observed for Consumers, a longer period of evidence of variable income than that specified in the previous paragraph must be applied to establish the amount that may be regarded as the Consumer’s stable income; and

c. The Licensed Financial Institution should exclude one-off variable income such as windfall gains in the assessment of income.

7.1.4.11 The Licensed Financial Institutions must obtain a signed confirmation from the Consumer identifying all his/her sources of income and existing liabilities.

7.1.4.12 Licensed Financial Institutions must, where reasonably possible, verify the Consumer’s income against reliable sources and must not rely solely on the Consumer’s self¬declaration of income. If the Licensed Financial Institution finds material discrepancies in the information provided by the Consumer, the Licensed Financial Institution must perform further verification. The Licensed Financial Institution must document its verification findings.

Assessing Life Style Expenditures

7.1.4.13 The concept of affordability considers the DBR calculation based on income but must also assesses the Consumer’s monthly basic personal and life style expenditures and obligations and whether they exceed the level of Disposable Income.

7.1.4.14 Licensed Financial Institutions must calculate the Consumer’s level of affordability by identifying and classifying the Consumer’s basic personal and life style living expenses as well any family and financial dependencies/obligations. The calculation should cover, at a minimum, the following groups of expenses as may be applicable:

a. Monthly food expenses, which are affected by the number of dependents;

b. Housing (rent) and maintenance services’ expenses, which depend on whether the Consumer is the owner or tenant of the house or otherwise;

c. Property taxes;

d. Wages to be paid for domestic workers;

e. Average Education expenses, which are affected by the number of dependents;

f. Average Healthcare expenses, which are affected by the number of dependents;

g. Travel expenses;

h. Insurance/takaful expenses (cars, health, life, property);

i. Utility, internet and mobile costs;

j. Child and spousal maintenance, support for extended family;

k. Costs of maintaining services of other owned properties; and

l. Any other expected costs or expenses.

7.1.4.15 With the calculation of the basic personal and life style expenditures, the Licensed Financial Institution must determine if it exceeds Consumer’s Disposable Income. A copy of the calculation must be given to the Consumer.

7.1.4.16 If the life style expenditures and dependencies exceed Disposable Income, the Licensed Financial Institution must discuss with the Consumer and evaluate whether the Consumer can make reasonable reductions in expenses, to an acceptable level. Such agreed to changes must also be documented and signed by the Consumer with a copy maintained on the Licensed Financial Institution credit file.

7.1.5 Terms of Financing

Financing Decision

7.1.5.1 Licensed Financial Institutions must comply with the DBR and loan to value (LTV) limits prescribed by the Central Bank when advancing loans/financing to the Consumers and must not lend/finance to the Consumer beyond his/her affordable limit. Licensed Financial Institutions must set a prudent level of DBR & LTV in their risk policies for financing decisions that allows sufficient buffers for expenditures and contingencies, having regard to the stress test results and the relevant circumstances of the Consumer. This may include appropriate consideration of the nature and security of employment, number of dependents, location of residence and other relevant factors that have a bearing on the Consumer’s financial obligations and the level of expenditures.

7.1.5.2 Licensed Financial Institutions must establish a control framework and systems that include the required financial assessment tools to measure the Consumer’s ability to meet monthly credit obligations and to what extent such Credit Products are suitable based on the Consumer’s profile, needs and circumstances.

7.1.5.3 Licensed Financial Institutions must ensure both the efficiency and effectiveness of their financial assessment tools that are used to measure the Consumer’s ability to repay the finance being provided.

7.1.5.4 The basis for a financing decision shall be properly documented and backed with information that supports the decision. This should facilitate internal risk management and supervisory reviews of the Licensed Financial Institution’s credit underwriting standards and compliance with these guidelines. The consideration of collateral alone should not lead the Licensed Financial Institution to extend financing to a Consumer who has otherwise been assessed by the Licensed Financial Institution to be unable to afford the financing.

Tenor of Financing

7.1.5.5 Licensed Financial Institutions must abide by the lending/financing tenor as prescribed by the Central Bank.

7.1.5.6 Licensed Financial Institutions must not increase the tenor of the loan/financing to decrease the DBR, with an intention to lend/finance further to the Consumer. For compliance purposes, the Central Bank will supervise loans/financing that have extended the tenor and increased the amount borrowed.

7.1.5.7 Licensed Financial Institutions must not purposely avoid the prescribed DBR by closing off a loan/financing as paid only to open another with an extended tenor and amount greater than the closed loan/financing. Licensed Financial Institutions must document from where the funds for the payment to close out the loan/financing came from.

7.1.5.8 Licensed Financial Institutions must provide borrowers / financees the funds approved on a Credit Product, except for mortgages and credit cards, within 10 complete business days of Consumer signing the contract or within such other time frame that is agreed to by the Consumer and specified in the financing contract. Complying with the period of time for making funds available by the Licensed Financial Institution is subject to the Consumer and / or third party providing the required and properly completed documents and meeting agreed to conditions. If it is not possible to release the funds in the agreed time limit, the Licensed Financial Institution must advise the Consumer in Writing immediately as to the reason for the delay and the date by which the funds will be available. As a consequence of any delay caused by the Licensed Financial Institution, the Consumer retains the option to cancel the contract without cost or penalty before the funds are to be made available.

Interest/Profit Rate

7.1.5.9 This Section should be read in conjunction with Article 2: Disclosure and Transparency of these Standards.

7.1.5.10 The Annual Percentage Rate (APR) which includes the total amount of the interest/profit payable and the cost of other Fees compounded over a year must be disclosed.

7.1.5.11 Licensed Financial Institution must not charge excessive margins or interest/profit rates.

7.1.5.12 Pursuant to Article (121) in Decretal Federal Law No. (14) of 2018, Regarding the Central Bank & Organization of Financial Institutions and Activities, Licensed Financial Institutions are not permitted to charge interest/profit on accrued interest/profit on any Credit Products granted to Consumers. In addition, Licensed Financial Institutions are not permitted to charge future unearned interest from the date of full early settlement of the credit facility. In the event of a partial early settlement, the interest must be proportionately adjusted based on the principal remaining.

7.1.5.13 Licensed Financial Institutions must calculate the APR/profit amount charged for the loans/financing and overdraft facilities as well as unpaid credit card balances using the Reducing Balance Method.

7.1.5.14 Licensed Financial Institutions, in case of credit cards, must not levy interest/finance Fees on the outstanding balance (excluding cash advance transactions) when the new balance outstanding shown in the statement is paid in full by the payment due date. In the event of part payment of the balance on or before the maturity date (excluding cash advance transactions), interest/finance fees are to be calculated on the outstanding balance from the period from the contractual due date to the date on which payment of the outstanding amount is made.

Fees on Financing Facilities

7.1.5.15 Refer to the Annexure on Maximum Limits for Fees and Commission Charged on Retail Customer Service of the Consumer Protection Regulations for the application of approved Fees.

7.1.5.16 Also refer to Article 2: Disclosure and Transparency and Article 5: Business Conduct of these Standards.