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Addressing data quality issues in credit referencing frameworks

Business
An individual with a strong credit reference score built on good credit behaviour can be a more valuable customer to a lender than someone who has vast tangible assets but also has a bad credit record. It is this principle that makes the introduction of the central credit registry by the central bank such an important development in Zimbabwe’s financial markets.

An individual with a strong credit reference score built on good credit behaviour can be a more valuable customer to a lender than someone who has vast tangible assets but also has a bad credit record. It is this principle that makes the introduction of the central credit registry by the central bank such an important development in Zimbabwe’s financial markets.

BY Clive Mphambela

It is now accepted fact that credit reporting systems and technology will not work well, unless implementers have built enough capacity and educate people on how to use the systems effectively.

The credit reference system will provide either credit behaviour data or, if so configured , actual credit report, but the users will still have to look at the data and reports and have the systems and know-how to use this information effectively.

In considering how to create a credit reporting system that contributes to financial inclusion, there are a number of issues that should be tackled.

In particular, there are three important challenges that are particularly salient for lower income customers of financial institutions.

These key aspects, which we introduced in our discussion last week, are: Providing adequate coverage of “thin file” customers; Building a strong business case for bottom of the pyramid lenders; and Having adequate systems for protecting customer rights.

Traditionally, credit information sharing and reporting is limited to commercial banks or other regulated financial institutions.

However, effective credit referencing which promotes financial inclusion requires the participation of all financial services providers, both regulated and unregulated as well as other providers of key consumer services such as utilities companies, as retail store that extend credit to consumers.

In many countries, policy changes must take place to enable credit reference bureaus to include the rest of the credit providers who service the base of the pyramid other than banks, such as microfinance institutions, non-governmental organisations, finance companies and savings and credit unions. Such changes will usually require working across regulatory agencies that oversee such institutions, and, as further discussed below, another challenge is to ensure that smaller financial services providers are willing and able to participate in a sustainable fashion.

Opening credit reference services to a wider range of financial services providers will facilitate coverage of many lower income customers.

However, it should still be appreciated that the financially excluded segments or those customers who have never received a loan from a formal financial institution may remain uncovered by credit reference bureaus.

Designers of the credit reference framework must understand that much of the financial activities of the poorer takes place in the informal sector where transactions are unrecorded and cannot be used to build an individual’s financial history.

The poor are therefore left with “thin files” that do not adequately capture their “reputational collateral” because their credit behaviour is not sufficiently documented or readily accessible in order to establish their credit worthiness.

Thus a prerequisite for building a financially inclusive credit referral system to covering all potential customers is the ability of the system to establish unique customer identity for all classes of consumers, regardless of the source of data.

Credit reporting systems typically use a variety of information to establish identity, but in the absence of widely used common standard, such as a national identity registration card, financially excluded people will fall through the cracks because they often lack the other forms of identification needed to link credit behavioural data to the correct individual.

This is still a contentious issue amongst researchers and implementing agencies and there is still some ongoing debate about the extent to which the implementation of national identification systems can alleviate this problem, with some evidence pointing to the fact that one identifier may not be sufficient for effectively establishing the financial identity of an individual. The next challenge is to obtain relevant data on clients new to financial services. Very promising developments are now occurring in the use of alternative data from sources other than financial institutions based on activity low income people already engage in.

These sources include mobile phone usage and payments, utility bill payments, rental payment information, remittances data, other behavioural data, including social media usage to demonstrate reputational collateral of individuals. Successful credit reference models that incorporate non-traditional data will dramatically change the credit referencing landscape.

However, regulatory barriers and restrictions as well as competitive market forces may at present impede the way in which such alternative credit information sharing portals can be implemented.

In addition , credit reference rules with respect to access to private client information may currently prevent credit bureaus from obtaining such information, and revisions to these rules may be required in order to ensure the cooperation of multiple regulatory agencies (for example, telecommunication company regulators).

Typically, alternative data providers, such as telecoms companies, may not wish to voluntarily share their client data as an expression of their desire to maintain dominant competitive market positions.

They would need significant incentives or regulatory coercion to do so and, in addition, they will either need to be paid or to receive some other tangible benefits from use of the credit reference services in order to make the decision to contribute their own information. It is incumbent, therefore, that both data providers and users of the credit referral system be provided with a business case for participating in data sharing and that an appropriate legal and regulatory environment which allows for that to happen is also in place.

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 [email protected] or on numbers 04-744686, 0772206913