Farayi Dyirakumunda Correspondent
Money and information are the critical components in lending. The very survival of any credit provider depends on the availability of both ingredients and full information allows for the accurate pricing of risk thereby allowing for the wider availability of credit and a greater volume of sales across industries.
The economy has evolved into a credit driven market and this has been a platform on which the economic revival is hinged upon. This has seen banks, building societies, clothing and furniture retailers, micro-finance institutions and asset finance institutions extending credit to a common pool of consumer and commercial borrowers.
This results in the immediate benefits of allowing consumers to enjoy the “extra spending dollar” and in addition, a well-functioning credit market will set the tone for an inward movement of financial capital and the development of other financial instruments and products.
On the other side of the coin, however, it is also evident that systematic credit risk in Zimbabwe is high especially in the financial lending market. This formed the basis for the establishment of a robust credit management solution by Expert Decision Systems (XDS) Credit Bureau providing information on overall credit exposures in the market. A comprehensive credit information database helps to fulfil this objective.
The credit data that goes into this process includes demographic data, positive and negative credit information, payment history and balances, consumer total debt levels among other data.
However, it will be expected that some banks may initially be reluctant to share their credit data fearing that it will harm their competitors with their vital information.
This is mainly due to the fear and perception that competitive advantage would be compromised even if only the worst performing account details are disclosed.
But this is a misplaced fear because it has been proven that the tangible benefits to sharing of credit information among banks far outweigh the perceived disadvantages.
It is also in line with IMF and World Bank recommendations to have the existence of strong credit information as a prerequisite of a well functioning credit market.
Going back in history, the initial sharing of credit data was recorded in 1803 when a group of tailors in England exchanged payment information on their customers.
This was in response to the customer behaviour they observed individually, that although most of their customers paid, some did not pay well or at all.
They quickly realised that these customers would obtain credit from one tailor and, having failed to make any payments, would then obtain credit from another.
The market therefore benefits much from our credit information system and the industry and national importance are clear.
For starters, a robust credit information system that facilitates information sharing amongst credit grantors allows large volume access to credit data without compromising data security.
This assists in fraud prevention and money laundering detection. Also of importance is that it helps protect consumers from inadvertently becoming over indebted and it protects lenders from financial loss arising from bad debts.
As mentioned above, a key question often raised by lending institutions embarking on the sharing of credit information, is whether submitting data to a credit bureau would be beneficial to their own portfolios. From an independent research conducted on the subject, the key benefits that are derived include the following points:
Past payment history is highly predictive of future payment performance — Knowledge of an applicant’s performance elsewhere enables a more informed decision, improving the credit assessor’s confidence of a lending decision.
Cross industry credit commitments (and therefore affordability) can be identified – By having all trade line data available, the total commitment of an individual may be assessed. As income or salary is also typically requested, credit assessors can reasonably determine whether the applicant can afford the new credit offering.
Additional information such as validated citizenship or matched contact details enables improved credit granting decisions and assists in the early detection of fraud.
Early identification of future delinquency — Typically, customers have a priority with respect to which debts are repaid. As an example, a customer may elect to first pay the mortgage loan, followed by vehicle finance debt, bank card accounts, retail credit before mail order accounts and finally micro-lenders. The priority in which individuals make payments is termed the “payment hierarchy” and for lenders higher up the hierarchy (such as banks), default on products at the lower end of the hierarchy indicate probable default on their product in the near future. As a result, precautionary measures may be taken, for example not increasing credit limits or curtailing marketing to these customers.
The ways in which the absence of credible credit reporting services is likely to affect the Zimbabwean credit industry are also numerous.
The asymmetric distribution of information between borrowers and lenders can prevent the efficient allocation of credit within the economy. Secondly, the market will be characterised by inefficient processes and long turnaround time for credit evaluations.
This increases the overall cost of credit. Credit grantors will rely more on references obtained from other banks which are often stale and/or incomplete.
An increase in the cost of credit will also arise as a higher risk profile has to be priced into products and services.
Also of importance is the unnecessarily high consumer debt stress levels since credit grantors have no reliable way to verify total exposures.
Increasingly, credit grantors are suffering losses as a result of non-, or under-disclosed contingent liabilities of individuals where they have guaranteed the obligations of another person or of a business entity.
Also, increasingly, the financial stability of many individuals is inexorably wrapped up with the financial health of their business undertakings.
Because of such factors it is likely that total credit extension is less than it would be if credit grantors had a more accurate picture of an applicant’s financial health.