General Requirements

1. 7.1.4.1Affordability 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.
2. 7.1.4.2A 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.
3. 7.1.4.3Licensed Financial Institutions must assess the financial stability and needs of their Consumers before offering them a Credit Product. Licensed Financial Institutions must:
   1. 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;
   2. b.Apply an appropriate level of stress testing to assess affordability given a scenario of increased interest /profit rates:
      1. i.The results of the testing must be taken into consideration by the Licensed Financial Institution before granting the credit;
      2. 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
      3. 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.
4. 7.1.4.4Licensed 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.
5. 7.1.4.5The 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.
6. 7.1.4.6A 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)

1. 7.1.4.7Licensed 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

1. 7.1.4.8Licensed 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.
2. 7.1.4.9With respect to the assessment of the Consumer’s credit application, the amount of credit to be approved, shall take into consideration the following:
   1. a.The amount of the proposed scheduled repayment/payment of principal and interest/profit (including any Fees as part of the financing amount);
   2. 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;
   3. 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;
   4. 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;
   5. 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;
   6. 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
   7. 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

1. 7.1.4.10In assessing income for the determination of the DBR, Licensed Financial Institutions must consider:
   1. 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;
   2. 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
   3. c.The Licensed Financial Institution should exclude one-off variable income such as windfall gains in the assessment of income.
2. 7.1.4.11The Licensed Financial Institutions must obtain a signed confirmation from the Consumer identifying all his/her sources of income and existing liabilities.
3. 7.1.4.12Licensed 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

1. 7.1.4.13The 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.
2. 7.1.4.14Licensed 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:
   1. a.Monthly food expenses, which are affected by the number of dependents;
   2. b.Housing (rent) and maintenance services’ expenses, which depend on whether the Consumer is the owner or tenant of the house or otherwise;
   3. c.Property taxes;
   4. d.Wages to be paid for domestic workers;
   5. e.Average Education expenses, which are affected by the number of dependents;
   6. f.Average Healthcare expenses, which are affected by the number of dependents;
   7. g.Travel expenses;
   8. h.Insurance/takaful expenses (cars, health, life, property);
   9. i.Utility, internet and mobile costs;
   10. j.Child and spousal maintenance, support for extended family;
   11. k.Costs of maintaining services of other owned properties; and
   12. l.Any other expected costs or expenses.
3. 7.1.4.15With 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.
4. 7.1.4.16If 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.