Wednesday, December 17, 2008

Credit reference bureau takes root in Uganda

Written by EDRIS KISAMBIRA, Business Week, Saturday, 06 December 2008

KAMPALA, UGANDA - Uganda last week made the first step towards eliminating access to credit as one of the greatest barriers and constraints to doing business when the Bank of Uganda (BoU) officially launched the Credit Reference Bureau (CRB).

The CRB will be operated by the South African firm, CompuScan.

Its absence has been a major bottleneck to the expansion of the volume of private sector credit and stymied especially small and medium enterprises that do not have collateral security.

Ugandan firms - large, small and medium - consistently cite limited access to credit as one of the greatest barriers to their operations.

Up to now, the infrastructure for information sharing and unique borrower identification has been non-existent. The banks and other credit institutions had no way of checking and sharing information on the credit history of borrowers.

On the lender side, these institutions have continuously been exposed to high credit risk on account of inadequate information on borrowers' creditworthiness.

This inevitably resulted into increased cost of borrowing, which made credit more expensive than it would otherwise be.

BoU governor, Emmanuel Tumusiime-Mutebile said as the data system gets built up, the information will make loan processing simpler and faster, collateral requirements will be streamlined, default rates will be reduced and ultimately loans will become cheap.

The CRB, Mutebile said, is expected to improve the performance of Uganda's financial sector and stimulate economic development by making lending and borrowing easier, faster and ultimately cheaper.

Borrowers, he said, can use their positive credit history as 'collateral' to access loans at better rates and seek more competitive terms from different lending institutions.

By addressing the problem of information asymmetries, Mutebile said, the CRB supports an increasing level of trust between lenders and borrowers - resulting in an increased volume of credit in the economy.

This trust will also increase transparency and competition between lenders.

With a CRB, timely and accurate information on borrowers' debt profiles and repayment history enables lenders to make more informed lending decisions.

He said participating institutions will be able to offer new products and offer competitive interest rates due to availability of information on customers' credit risk profiles.

Uganda's credit market is served by 15 commercial banks currently, a number of microfinance institutions and a myriad of shylocks. The irony of it all is that lending rates continue to remain high, averaging 25% per annum.

It is anticipated lending rates will gradually reduce and a larger credit market will be attained in the country as one of the key benefits of a CRB.

Uganda is the first country among the East African Community (EAC) member states to have a fully operational CRB.

Kenya has a semblance of the type of service that Uganda has launched but it is a preserve of a few financial institutions and is narrow in scope. In Kenya, some institutions share information but it is limited in scope and the information is generally negative.

The fact that Uganda did not have a CRB causes commercial banks, amongst other reasons, to charge high interest rates.

The risks of lending blindly, for banks, without good quality external information are extremely high. High interest rates recovered on loans compensate for some of the risks.

The existence of defaults is compounded by the lack of good credit information and the banks will seek higher lending rates to manage their risks adequately.

Put together, these factors keep lending rates high. Now, over time, financial institutions will be expected to rely more on the combined information offered by the CRB and lending rates should come down favourably for all borrowers.

BoU contracted CompuScan on a five-year term to provide credit bureau, risk and identification services to the customer.

Banks, credit institutions and micro finance deposit taking institutions (MDIs) will participate in the services and will be able to reduce their risks and their clients will benefit as a result of this service.

In addition to the CRB, CompuScan will deliver a biometric based customer numbering system for each borrower in Uganda.

The biometric finger print system, known as the Financial Card System (FCS), will allow all the licensed financial lenders, with the help of the CRB, to link borrowers' fingerprints to their loan repayment information across any institution in Uganda.

After enrolment onto the system, each borrower will receive one's financial card.

The financial card will accurately identify borrowers and will be able to be used across all institutions to positively identify someone who presents it, when it is confirmed with the owners' fingerprint.

CompuScan will be responsible for collecting data on all loan information from all the participating institutions to build the credit bureau, and to assist BoU with banking supervision information reports to measure the extent of credit in the country and how well that credit is being repaid.

Borrowers in the formal financial sector are expected to grow in numbers as more people from the informal borrowing sector and the formally banked sector that have relied on cash realise that with a good credit record there are benefits of improved access to finance at lower rates that can be accessed quickly for a range of purposes.

In an economy that has a fully operational CRB, if a borrower is looking for more cash in form of a loan, and the participating institutions can identify that the borrower has been paying well there is a chance that they can benefit more.

Banks will be in position to select clients that are less likely to become poor performing and can offer better lending products as a result.

The information at the CRB will also significantly reduce the costs to institutions of screening loan applications by enabling the lender to quickly separate the good borrowers from the potentially poor payers.

By being able to reduce turnaround times, customers can experience fewer queues at branches, get responses faster and ultimately can receive payments quicker to enable them change their lives not only for the better but also sooner.

In the long term, foreign lenders will jump into Uganda's under-served credit market and offer competition to existing players.