In this week’s instalment, guest columnist Alan Goodrich outlines his views on the challenges and opportunities of Credit Reference Bureaus (CRBs) in the wake of recent developments on the regulatory front. Goodrich is the Managing Director of the Financial Clearing Bureau (FCB).
Financial Sector Spotlight by Alan Goodrich
After many years in the melting pot, it looks like the pace at which a formally regulated credit reference system will be implemented by the Reserve Bank of Zimbabwe (RBZ) has picked up significantly. Amendments to the Banking Act have been made to allow for both the licensing of private credit reference bureaus (CRBs) and the establishment of a Credit Registry by the central bank. No doubt there will also be complementary legislation put in place to cover the consumer protection aspects of credit information sharing.
Evolution: From negative to positive It’s been a long journey. Both Transunion (formerly Dun & Bradstreet) and the Financial Clearing Bureau (FCB) have been operating in Zimbabwe for over 25 years. FCB, arguably the leading CRB in Zimbabwe, has evolved over the years. Starting life as an intelligence database for credit protection used by the security departments of a closed user-group of banks at its inception, it grew in the late 90s to be a more open, but nevertheless still negative, clearing bureau for its members (banks and non-banks) to “blacklist” clients. In recent years, FCB has matured further to resemble a modern CRB capable of handling both positive and negative data regarding account behaviour and scoring to assist in the assessment of risk for credit providers. Indeed, FCB members now enjoy access to a database containing information on over 2,3 million individuals and close to 150 thousand companies. This means that over 70% of the circa 50 thousand searches made each month find some information already in the database. Only 5% of those have open adverse items, which means that FCB is positively empowering around 33 000 individuals every month.
Imperative for Regulatory Reform: Challenges & Opportunities Given this apparently quite rosy picture of the state of the existing CRBs’ capability and usage, why was it important for the RBZ to introduce legislation and regulations? In short, we believe the RBZ has taken the steps it has, primarily, to help maximise the opportunities for the credit provision market by assisting the private CRBs to overcome some of the key challenges they had been facing in the absence of a formally regulated credit information sharing or reference system.
Firstly, the inward facing challenge: As with any analytical or decision support tool, the quality as well as the quantity of available data is paramount. While credit providers may all agree in principle, publicly, that the benefits of information sharing far outweigh the potential downside of greater competition, behind closed doors the story is often different. It is no secret that loan portfolios have become quite toxic in a number of institutions as a result of cronyistic or nepotistic lending. There are generally two consequences of this, both of which dampen the enthusiasm to embrace open, full-file, credit information sharing. Firstly, on a micro level, sharing such information on specific individuals or companies becomes highly sensitive. Secondly, on a macro level, the real extent of portfolio at risk (PaR) or non-performing loans (NPL) is veiled and provisioning for bad debts is actually inadequate to cover the real exposure. The net result is that the quality and quantity of data being submitted to CRBs has never been as good as it could be, or indeed should be for the economic advantages to be fully realized. The RBZ’s initiatives will force the issue with regard to the challenges experienced in data submissions to CRBs, which will, in turn, accelerate the opportunity presented by “cleaning up” the balance sheets of credit providers.
Secondly, the outward facing challenge: The lack of regulation and legislation covering CRBs has also presented issues of recognition and credibility. Up until quite recently, it was not uncommon to read press reports quoting officials as saying that Zimbabwe had no CRBs. Presumably,this was an official line necessitated by the fact that the three CRBs actually operating in the market were not regulated or licensed and despite the reality that the CRBs were being used extensively by those denying their very existence. Indeed, FCB is partially owned by an association of its members, which includes; all the banks, the biggest microfinance institutions (MFIs), the largest retail credit providers and many significant trade credit providers. As a result, the general public was simply not aware that every time a bank account or loan was applied for by them, a CRB was being referenced. The general public did not appreciate the potential and opportunity presented by having a positive financial identity. By recognising them, the RBZ’s initiative helps the CRBs to introduce innovative new products that will open up to millions of people, who already have established track records, the opportunity to access and manage their credit profile and credit score and maximize their economic empowerment potential.
Alan Goodrich is the Managing Director of the Financial Clearing Bureau. He can be reached on [email protected]
