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Credit referencing can promote financial sector development

Business
There is a growing consensus among players in the financial services industry, including regulators that credit reporting is a critical component of the financial infrastructure of a country.

There is a growing consensus among players in the financial services industry, including regulators that credit reporting is a critical component of the financial infrastructure of a country. The advent of the central credit registry, which is administered by the Reserve Bank of Zimbabwe, has ushered in a new era, in the development and deepening of Zimbabwe’s financial markets. Like any financial innovation, the existence of a credit reference framework opens up new opportunities for credit givers and lenders, borrowers and consumers of financial services, researchers and policymakers as well as regulators. It also spawns a new dawn for entrepreneurs in the credit reference space as well as providers of ancillary services such as credit advisers. However, any positive development almost always has its own challenges.

By Clive Mphambela

Clive Mphambela
Clive Mphambela

Today’s discussion focuses on consumer protection issues around such credit reference frameworks. The general principles on consumer rights require that firstly, customers should be allowed to give or deny their consent for the use of their private credit data. Secondly, an individual consumers, who is in effect the owner of his/her credit data must be assured of unfettered access to the data collected on him/her and thirdly and most importantly, consumers must be offered an easy and cost efficient pathway and process by which any errors in the data can be speedily corrected.

In order for privacy rights to be protected, customers must also be adequately informed and educated about how credit referencing affects them. Furthermore, their rights and responsibilities as consumers of financial services and the impact of credit referencing on their borrowing lives, need to be put forward in a transparent and easy to understand manner. Given that credit referencing can particularly impact those at the bottom of the pyramid in both positive and negative ways, it is important for policymakers to ensure that a framework exists for financial services providers, non-governmental organisations involved in financial education and inclusion and the credit referencing industry itself, to educate and empower consumers about the benefits of credit reporting.

How individual clients benefit from credit referencing

Individuals will rarely interact with a central credit referencing system in the normal course of business. However, when there is greater financial inclusion, it becomes almost certain that those who pay their financial obligations promptly stand to reap the benefits of such a system, while those with a questionable credit score will tend to find it difficult to operate in such an environment. One of the most obvious and immediate benefits of having a credit reference framework in an economy is that those paying clients will be able to use their credit histories as clear testimonials to their creditworthiness and suitability as users of financial services. The information that resides in the credit registry will include not only the customers’ prior interactions with formal financial institutions such as banks but will gradually also include payment patterns observed through such customers’ interactions with entities such as utility service providers such as municipalities, credit retail stores, landlords, mobile telephone companies and others. Customers will now be incentivised to behave responsibly, knowing that any defaults and delinquency will affect their continued access to both credit services. Customers will soon realise how credit and repayment behaviour information will translate into either a favourable or unfavourable credit score. Importantly, customers will also very quickly learn how they confirm that any information held by the credit reference system about them is accurate and how they can improve their creditworthiness.

The biggest advantage of a well-managed and credible central credit reference system is that every customer will be uniquely identified, and in the long run, will be able carry their financial histories with them wherever they go, including across borders, giving them freedom to choose among local and foreign service providers.

How credit providers will benefit from credit referencing

Financial services providers and other providers of credit-based services will naturally derive a lot of value in the credit reporting systems and will view credit reference services as an essential part of their daily risk management and customer acquisition processes. Credit providers will have the benefit of being able to price their services more accurately with credit default risks fully taken into account. Users of the system, such as financial institutions will be able to provide accurate and timely information to the credit registry systems, feeding in both positive and negative information about their clients credit behaviour, without incurring unduly excessive costs. According to best practice rules, each user of the system is required to have clear and efficient internal processes for processing information from both the central credit registry as well as any independent credit bureaus, resolving data errors and handling disputes.

How the financial markets will benefit from a credit reference framework

Credit reporting has been shown to promote financial stability in an economy. By providing information on consumers’ financial behaviour and allowing central banks to have an appreciation of the level of outstanding debt in the economy, credit reporting systems help financial institutions lend to clients who can sustainably use credit and at the same time allow central banks to execute their mandate as macro prudential supervisors of the monetary sector. At the macro level, this potential is particularly essential for preventing over-indebtedness crises in the economy, such as those that have recently affected the financial sectors of a number of countries, allowing central banks to monitor credit trends and be able to fine tune monetary policies to suit underlying credit patterns or to indirectly influence the allocation of credit to different sectors of the economy.

As already been alluded to in the first two articles in this series, centralised credit reporting can have immense benefits for financial inclusion as well as driving generalised financial innovations across the economy, facilitating the deepening of financial markets. This is made possible because by their nature, the centralised credit registry infrastructure must facilitate the widespread collection, protection and disclosure of credit information with information gathered from multiple sources where possible. To be fully effective, the centralised credit referencing systems should be able to cover everyone who has access to financial services and has consented to their credit data being shared. The space includes low-income or previously financially excluded populations, and should cover all types of financial institutions, both regulated and unregulated as well as other credit givers such as telecoms and utility companies, credit retail shops and all those who will also see the value of sharing information and actively participating in the central credit reference 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 [email protected] or on numbers 04-744686, 0772206913