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  • CM-8 CM-8 Consumer finance

    • CM-8.1 CM-8.1 Overview

      • CM-8.1.1

        This chapter sets out various requirements regarding the provision of consumer finance within the Kingdom of Bahrain, by BMA licensees. The aim of these requirements is to encourage:

        (a) prudent lending by licensees providing consumer finance; and
        (b) the transparent disclosure of the full costs and terms on which licensees offer consumer finance.

      • Application date

        • CM-8.1.2

          The content of this chapter is to be applied to all consumer finance facilities entered into or renewed after 1 January 2005.

    • CM-8.2 CM-8.2 The Agency's approach to consumer finance

      • CM-8.2.1

        The Agency favours an open, market-based approach to the operations of licensees, to the extent consistent with its regulatory objectives of ensuring a stable financial system and the fair treatment of licensees' customers.

      • CM-8.2.2

        Bank licensees are reminded of their obligation to implement a sound internal controls framework, including an effective credit culture (see, for instance, section CM-2.3). Bank licensees are also reminded of their obligations more clearly to display and communicate charges and APRs (see, for instance, section BC-4.3).

      • CM-8.2.3

        The Agency has noted the growth in consumer finance as a proportion of outstanding credit facilities over the past few years. The Agency is concerned that this growth should not be at the cost of declining credit quality. Furthermore, the Agency wishes to see further improvements in licensees' transparency in their dealings with their customers, as regards the costs and terms of their lending. Strong competition in this segment of the market increases the need for licensees to be vigilant and to resist pressures to relax standards.

      • CM-8.2.4

        The measures presented in this chapter should be viewed as minimum standards, rather than best practice. They are aimed at encouraging prudent lending and full, frank and fair disclosures, rather than dictating comprehensively how licensees should engage in consumer finance.

      • CM-8.2.5

        These measures will be kept under review in the light of market developments and adjusted accordingly. If the Agency assesses that credit quality and effective transparency are being significantly undermined, then additional prescriptive measures will be considered.

      • On-going effort by the Agency

        • CM-8.2.6

          These measures form part of a wider response by the Agency. The Agency recognizes that a key contributor to ensuring a sounder credit environment is the credit reference bureau.

        • CM-8.2.7

          The Agency supervisors and examiners will also focus more on consumer finance, in their on-going supervision of licensees, to monitor and encourage sound lending practices.

    • CM-8.3 CM-8.3 Definition of Consumer Finance

      • CM-8.3.1

        Consumer finance is the provision of any form of credit facility to an individual excluding:

        (a) any loan secured by a first charge on residential property to an individual, where the borrower lives in, or intends to live in the property;
        (b) any credit facility secured by cash or investments, where the security provided more than covers the principal of the credit facility; and
        (c) the provision of any form of credit to an individual for business purposes where the facility is to be repaid from the business activities of the borrower.

      • CM-8.3.2

        For the purposes of the Rulebook, "credit facilities" includes personal overdraft facilities, credit cards, consumer loans or other financing facility. "Consumer loans" are defined as loans for a fixed period to individuals for non-business purposes.

    • CM-8.4 CM-8.4 Maximum limits

      • Total repayments ratio

        • CM-8.4.1

          Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount such that the borrower's total monthly repayments on all his consumer finance commitments do not exceed 50% of his monthly gross income. This limit may only be exceeded in the circumstances described in paragraphs CM-8.4.6 and CM-8.4.10.

        • CM-8.4.2

          When reviewing an applicant for a consumer facility, licensees may only take into consideration regular income. A spouse's income may only be taken into consideration when the credit facility would be in joint names, such that the spouse would also be legally liable for the obligation incurred.

        • CM-8.4.3

          Notwithstanding the above limit, licensees must review in detail an applicant's personal financial standing and ability to service their obligations. Where a spouse's income is being taken into consideration, then their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50% of monthly gross income.

        • CM-8.4.4

          Licensees must enquire as to applicants' sources of income, their past credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention should be paid to housing costs (such as payments to the Housing Bank). A person's regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents. Licensees should also take into account likely future trends in income and outgoings, and the impact this may have on the 50% ratio.

        • CM-8.4.5

          When factoring in credit cards into the repayment limit in paragraph CM-8.4.1 above, licensees should include 5% of the total of credit limits available on these facilities. If the amounts outstanding (including profit) under such facilities exceed their limit, then this higher amount should be included in full in the repayments ratio calculation. Charge cards are not included under this definition.

        • CM-8.4.6

          In the case of high earners — defined for these purposes as persons earning more than BD 3,000 / month — the 50% limit may be relaxed, providing that the licensee has undertaken the review required in paragraph CM-8.4.4 above and is satisfied that the borrower can comfortably support a higher facility service ratio.

        • CM-8.4.7

          The review undertaken to satisfy requirements in paragraph CM-8.4.4 above must be documented and made available to the Agency's examiners on request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners granted a facility in excess of the 50% limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.

      • Maximum tenor limit

        • CM-8.4.8

          The maximum tenor for instalment consumer finance facilities is seven years. The tenor may not be extended more than twice during the period of the agreement.

        • CM-8.4.9

          The Agency does not believe it prudent for licensees to encourage lending by offering long-term borrowing to fund short-term consumption. The Agency will review the development of market practices in this respect and will consider further measures if required.

      • Non-compliant facilities

        • CM-8.4.10

          Where a customer's monthly gross income falls (e.g. due to redundancy or disability or a similar event outside the control of the customer), the bank must identify such accounts as "technically non compliant". If a customer requests an extension to the tenor of the facility due to reduced income, then the bank may increase the term to assist the customer. The bank must take account of the 50% limit outlined in paragraph CM-8.4.1. Such facilities must also be identified as "technically non compliant". Banks must report all "technically non-compliant facilities" to the Director of Banking Supervision Directorate on a quarterly basis.

    • CM-8.5 CM-8.5 Disclosure requirements

      • Disclosure of key terms

        • CM-8.5.1

          Licensees must make clear to potential borrowers, prior to entering into a consumer finance agreement, all relevant key terms of the agreement.

        • CM-8.5.2

          These terms should be summarised in plain English and Arabic in a short "key terms disclosure" document; this document must be signed and dated by borrowers (in duplicate) as having been read and understood, prior to signing a consumer finance agreement. One copy should be retained by the borrower and the other must be retained by the licensee in their customer file.

        • CM-8.5.3

          The "key terms disclosure" document must, amongst other things, make clear:

          (a) the amount being borrowed or the credit limit being offered, its maturity and repayment schedules;
          (b) the nominal rate of interest to be charged on the consumer loan/facility;
          (c) whether this rate of interest is fixed or can go up and / or down, and under what circumstances;
          (d) the basis on which interest is charged and when capital repayments are taken into account in the calculation, together with an illustration of the calculation method;
          (e) a breakdown of all non-interest costs not included in (b), (c) and (d) above and associated with the loan or facility, such as arrangement fees, documentation fees, late payment fees, and obligatory payment protection insurance costs;
          (f) the full costs associated with top-ups of instalment loans or early repayments of amounts due including the treatment of remaining interest and the payment of premium for insurance; and
          (g) the Annual Percentage Rate, as defined in paragraph CM-8.5.5 below.

        • CM-8.5.4

          Licensees are free to design the layout and wording to be used in their "key terms disclosure" document, as they see fit, providing they contain the information specified in paragraph CM-8.5.3 above. The BMA will monitor compliance with the spirit as well as the letter of the requirements in this chapter. If necessary, the BMA will consider prescribing a standard template to be used by all licensees engaged in consumer finance.

      • Annual Percentage Rate ("APR")

        • CM-8.5.5

          The APR is a standard measure that allows consumers to compare total charges for credit facilities to be compared on a like-for-like basis. The APR allows the consumer to compare the total charge for credit over differing periods (e.g. — two versus three years) with differing payment profiles and taking into account the payment of any other fees payable as a condition of the contract, such as documentation fees or insurance premiums.

        • CM-8.5.6

          The APR should be shown clearly on the facility document and "key terms disclosure" document (as set out in paragraphs CM-8.5.1 to CM-8.5.4 above).

        • CM-8.5.7

          The APR methodology should also be utilised in advertisements for credit. Any deferral of profit or principal announced by the bank should also take account of the APR methodology, and the new APR should be given to the client or made public in advertisements.

        • CM-8.5.8

          The total charge for credit payable by a consumer includes the following items:

          (a) Interest payable on the loan or credit;
          (b) Documentation or administration fees;
          (c) In the case of finance lease contracts, any fees for purchasing the asset (e.g. an option to purchase fee payable at the end of the contract); and
          (d) Any fees or charges payable under any linked or mandatory contract entered into as a condition for the granting of the credit facility, such as payment protection insurance.

        • CM-8.5.9

          The APR must be calculated using the following methodology:

          K=m
          ∑
          K=1          		 Ak
          (1 + i) tk          		 = K'=m'
          ∑
          K'=1          		 A'k'
          (1 + i) tk'

        • CM-8.5.10

          The meaning of letters and symbols used in the above formula are:

          K is the number identifying a particular advance of credit;
          K' is the number identifying a particular instalment;
          Ak is the amount of advance K;
          A'k' is the amount of instalment K;
          ∑ represents the sum of all the terms indicated;
          m is the number of advances of credit;
          m' is the total number of instalments;
          tk is the interval, expressed in years between the relevant date and the date of advance K;
          tk' is the interval expressed in years between the relevant date and the date of instalment K';
          i is the APR, expressed as a decimal.

        • CM-8.5.11

          For the purpose of this chapter, the "relevant date" is the earliest identifiable date on which the borrower is able to acquire anything which is the subject of the agreement (e.g. delivery of goods), or otherwise the "relevant date" is the date on which the credit agreement is made.

        • CM-8.5.12

          In the case of instalment finance such as a loan, where there is no reimbursement of cost of credit in the event of early repayment, then the residual interest (or cost of credit) in the old loan must be added to the cost of credit for the new facility, and the APR amended accordingly.