Credit reporting has taken a strong hold in financial markets across the globe. Credit referencing has grown tremendously over the last few years and the World Bank and the International Finance Corporation, in their annual joint report, on Doing Business, state that more than 146 countries around the world have either a credit bureau or a credit registry. The number of credit bureaus around the world between 1990 and 2016 is estimated to have more than tripled, with the most rapid growth recorded in countries in Central and East Asia, the Caribbean and Europe.
By CLIVE MPHAMBELA
Despite the rapid growth of systems, credit reporting remains underdeveloped in many countries, and a relatively small number of countries have effective coverage at the bottom of the pyramid. The Zimbabwean market has joined many other markets, which are evolving from a past in which credit reference checking was limited to commercial banks and a handful of consumer goods retailers who offered hire purchase credit to a comprehensive system in which one’s universal credit score will either be an asset or a liability.
Recently, the Reserve Bank of Zimbabwe announced the rollout of Zimbabwe’s Centralised Credit Registry, which ushers in a new era in credit information reporting and sharing in Zimbabwe. This development, which is expected to have a lasting positive impact on the development of credit markets in Zimbabwe, will see a dramatic shift in credit behaviour, by all classes of consumers of financial products and other credit services. Under the new framework, Zimbabwe is also moving away from a system where credit data was offered by one or two service providers, with only negative data on loan or debt defaults being collected for blacklisted clients to a modern system where a multiplicity of registered and licensed players will provide credit data, which will be updated frequently and probably in real time and will be usable across sectors. If credit reporting is going to be useful enough to contribute to deeper financial inclusion, the limitations of the past system must be overcome.
The general principles which underpin an effective credit referencing system begin with data quality. Data is of high quality only if meets certain basic criteria.
Firstly, credit data on individuals and in some cases companies, must cover both positive as well as negative behaviour. Secondly, data must come from relevant and credible sources. Thirdly, the credit behaviour data must be current and accurate. If these three basic conditions are satisfied, then credit data will be valuable enough for providers to actively participate in a credit referencing system.
Achieving this level of data quality in turn requires secure and efficient processing and governance that allows all parties to have sufficient confidence in the system. Confidence in the system can only be built on the back of a very clear and predictable legal environment that balances the efficient collection and sharing of credit data, with the delicate task of protecting consumer rights. This is the very kernel of a successful credit reference system, without which credit data will be unreliable and ultimately consumers will not be able to benefit from their credit histories. A robust credit reference system should also enable consumers to transport their credit histories across borders.
At the core of this principle is that client information must first and foremost be closely and jealously protected, and this requires that necessary legislation that curtails the potential exploitation or misuse of private customer information by those users of the credit reference system who are merely driven by profit-seeking interests.
Effective credit reference organisation must also be viable businesses in their own right. To be sustainable, a market for credit data is required in which credit reference bureau services sell their credit reports to financial institutions, and other credit givers who should also contribute their customer data as a precondition for receiving credit reference reports. Thus credit bureaus will only be financially viable only if a sufficient number of credit givers are willing to both contribute their customers’ credit data and to pay to access credit reports. Users of credit information such as financial institutions, will only use and pay for credit data if the credit reports actually enhance their ability to attract good customers and manage the risks of carrying bad customers. When it comes to financial inclusion, where loan and credit accounts are very small but numerous in numbers, these challenges are further magnified.
Because of the multiple interests involved, the process of establishing a well-functioning credit referencing system require robust coordination among different stakeholders. Typically, as in the case in Zimbabwe the government, because of its overarching responsibility for protecting consumer rights and maintaining financial sector stability, is usually called upon to lead the co-ordination and implementation processes of a centralised credit reference system. This approach, however, can often result in the over stretching of the capabilities and resources of regulators and policymakers. External financial and technical support from institutions such as the World Bank and other financial sector development partners therefore become imperative success factors.
It is refreshing to note, however, that to implement a successful credit reference system, the government and regulators do not always have to re invent the wheel, but can benefit directly from templates for model policy frameworks, legislation and regulations from countries that would have implemented similar projects. What will be key is having a deep self understanding of the local context so all that the complexities of setting up a sound credit reporting system, which promotes fair competition among providers, the challenges of overseeing the system as well as technical capacity issues, are fully addressed.
Next week, we will delve into the challenges of building a financially inclusive credit reference network, followed by another article that will address the benefits to consumers and market players of having a robust, well functioning credit reporting framework.
Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers Association of Zimbabwe. BAZ expressly invites stakeholders to give their valuable comments and feedback related to this article to him on firstname.lastname@example.org or on numbers 04-744686, 0772206913