adminSanderson Abel
On July 15, the central bank in collaboration with the World Bank held a one- day stakeholder conference on the establishment of the credit reference system in Zimbabwe.
The workshop was meant to create awareness among stakeholders on the benefits of a credit reference system, the processes and requirements for the successful implementation of the credit reference system.
The conference managed to bring together a number of stakeholders to the table. There is need for congratulating the central bank for taking such a participatory approach to national issues. Needless to say ,at the end of the day there was general consensus among the participants that the credit reference system is long overdue in the Zimbabwe.
The creation of credit reference system is one of the effective means to reducing the amount of NPLs in the economy. The introduction of Credit Reference Bureaus in our financial landscape is an effort to encourage sharing of information by institutions so as to reduce the incidences of serial defaults by bank customers as well as minimise the incidences of non-performing loans.
The recent study by the Bankers Association of Zimbabwe shows that there is appetite for bank loans by the informal sector players who are presumed not to qualify for bank credit given they don’t have any credit records. The introduction of the bureaus will help players in the sector to start building their capacity to borrow from the sector since the credit information sharing will allow banks to distinguish between good and bad borrowers.
What is the role of CRBs?
Credit reference bureaus are meant to complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions. They collect, manage and disseminate customer information to lenders within a provided regulatory framework. Credit histories not only provide necessary input for credit underwriting, but also allow borrowers to take their credit history from one financial institution to another, thereby making lending markets more competitive and, in the end, more affordable.
Credit bureaus assist in making credit accessible to more people, and enabling lenders and businesses reduce risk and fraud.
These risks typically increase the price of credit in an economy. Sharing of information between financial institutions in respect of customer credit behavior, therefore, has a positive economic impact. Banks play a central role in extending financial services within an economy. In support of this role, credit bureaus help lenders make faster and more accurate credit decisions.
The credit reference bureaus are meant to deal with the moral hazard and adverse selection problems through monitoring the behavior of borrowers. The operations of the credit reference bureaus should be underpinned by strong legal framework so as to be better able to deal with the adverse selection and moral hazard problems.
Adverse selection is the problem created by asymmetric information before a transaction occurs, whilst adverse selection in financial markets occurs when those potential borrowers who are the most likely to produce an undesirable (adverse) outcome – the bad credit risks- are the ones who actively seek out credit and are the most likely to be selected.
The moral hazard problem is thus created by asymmetric information after a transaction has occurred. Moral hazard in financial markets occurs when the lender is subjected to the hazard that the borrower has incentives to engage in activities that are undesirable (immoral) from the lenders point of view, because those activities make it less likely that the loan will be repaid back.
What are the Broader
Benefits of the CRBs?
Some of the benefits of creating a credit reference bureau are:
Identification of “serial defaulters”, who borrow from various banks with no intention of repaying the loans.
Resolving the “information asymmetry” problem which arises because of the environment of lack of a credit information sharing mechanism.
reduces borrowing costs and loan delinquencies to a significant extent;
Enhances effective risk identification/monitoring and credit extension
Ensuring that credit flows to deserving borrowers and is reduced to those less deserving.
Maintaining financial stability in an economy.
Benefits to the Lenders
Expanding the customer base with better access to more consumers, including those with good credit records
Better understanding the relationship customers have with other lenders
Increasing application quality and profitability. Lenders can offer targeted pricing to customers based on the level or risk involved with extending loans
Positioning and designing better marketing strategies. Unlike, negative data, which can be used only for the approval process, positive data may be used to derive policy setting, modelling and customer segmentation.
Consumer Benefits
Encourages consumers to maintain good credit records
Rewards consumers who maintain good payment histories
Positive data reporting provides a more comprehensive picture of consumer financial behaviour. A disproportionate number of consumers with a good track record can be unfairly penalised by negative data reporting.
Citizens should understand that the introduction of Credit Reference Bureaus will inculcate a culture of observing credit terms and respecting credit contracts.
SMEs and individual borrowers stand to benefit greatly from the introduction of Credit Reference Bureaus since they will be able to use their credit histories as collateral unlike in the past when they were constrained from accessing credit due to lack of physical collateral.
There is therefore for the various stakeholders to support this noble cause by the monetary authorities which will bring order and stability into the financial system and allow the circulation of resources without them being unnecessarily blocked by willful defaulters.
- Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers’ Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 <tel:04-744686> and 0772463008 <tel:0772463008>
Online Reporter