Credit reference bureaus: A case of when, not if


The recent flurry of debt restructuring activity by some banks in respect of the likes of Lobels Holdings Limited and RioZim Limited betrays the irony of a dysfunctional credit market in which banks jostle to grant credit to the same customers in a disturbingly “me-too” fashion, sometimes without due regard to fundamentals.

In an effort to outdo each other during such stampedes, banks appear unwilling to share critical information with each other.

This competitive spirit can potentially render them blind to distress signals they should otherwise be reading easily — like someone in love who often finds out too late that love is blind. It is difficult to see the picture when you are in the frame, as the saying goes.

It is only when they realise that they have been partaking of a poisoned chalice that they immediately get organised, huddle in a corner and begin to share information.

We have a saying for that in Shona, Kuyeuka bako wanaiwa, which literally translates as remembering the cave when you are already rain-drenched.

The big question must be, if banks can cooperate so easily after the material event of default, why can’t they cooperate before the event and proactively share information under some functional framework such as that offered by a credit reference bureau?

In other words, why has it taken so long for credit reference bureaus(CRBs) to flourish in Zimbabwe? Is it because of too much self-interest at the expense of the common good? But that is a question for another day, for now, we will concern ourselves with the rationale for CRBs.

One need not look any further than the statistics for non-performing loans (NPLs) in Zimbabwe today to appreciate the importance of CRBs. As at March 31 2010, the ratio of NPLs to total loans was 2,43% and by June 30 2011, the ratio had risen to 5,83%.

“Serial defaulters”, those who would deliberately borrow from multiple sources with no intention of repaying loans, thrive on the information asymmetry that prevails without a systematic mechanism for sharing credit information.

Yet functional CRBs can easily stop these serial defaulters dead in their tracks and prevent them from abusing credit.

Besides, a systematic information sharing industry is widely acknowledged as an integral part of financial sector reforms in developing economies such as ours.

By definition, CRBs collect, collate and disseminate customer credit information to lenders under an appropriate regulatory framework, thereby helping lenders to make faster and informed, hence more accurate, decisions.

The essence of CRBs is to package customer credit behaviours in order to enable borrowers to take their credit histories from one financial institution to another as a necessary input to the credit evaluation process which leads to the act of lending or credit underwriting.

As a result, credit markets become more competitive hence more affordable and a reduction in risk and fraud is often another key outcome.

The overall impact is to make credit available to more people as banks and other financial institutions become more willing to lend in a transparent credit market.

The rationale of CRBs is also reinforced by what emerged during the recent Agricultural Finance Symposium hosted by the Zimbabwe Agricultural Competitiveness Programme.

Apparently, the cancerous issue of defaulters is not only of concern to the banking sector.

It is also a cause for concern to other non-financial players in the agricultural space who, because of the banking sector’s inability to meet all of agriculture’s financing needs, have been venturing into traditional banking space by providing inputs on credit under various schemes ranging from simple credit schemes to contract farming.

Clearly, there is also a need for a systematic mechanism for sharing information in order to curb incidents of default on debt arrangements and to curtail side-marketing under contract farming arrangements, as identified by the participants as the symposium.

The Bankers’ Association of Zimbabwe (BAZ) acknowledges the importance of systematic information sharing arrangement, especially given the current circumstances of rising default risk and say that the association is seized with the matter.

“We are still working on it together with the Reserve Bank of Zimbabwe (RBZ), but because of the need to ensure that we adopt the appropriate format, it has taken time.

We are looking worldwide for a model that suits our circumstances, subject to appropriate customization” said Sijabuliso T Biyam, executive director at the BAZ.
In January 2010, the RBZ said it encouraged banking institutions to consider funding the setting up of a CRB.

Perhaps that is where the drawback is — funding. If funding for new market infrastructure is an issue, wouldn’t it be worthwhile considering strengthening existing infrastructure instead of reinventing a wheel that is taking too long to turn?

Players such as Portcullis (Pvt) Limited trading as a financial clearing bureau and others have been in existence for several years to service the credit protection needs of the banking and financial sector, but it is perhaps their lack of scale and an inability to respond in a timely manner to the changing financial markets landscape that militates against their effectiveness.

Earlier in the year, Spectip Investments a local company, announced plans to launch a credit bureau, but not much has been heard from them since then.

Overally, the credit markets have become riskier due the emergence on the supply side of numerous alternative/non-banking providers that will do anything to lend as they seek to plug the gap left by mainstream banking, while the demand side is characterised by cash-hungry consumers who have been hardened by liquidity challenges and will not miss an opportunity to pile up additional debt, regardless of the consequences.

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Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.