Alarmed by growing credit abuse, defaults and frauds from borrowers, the Central Bank of Tanzania (BOT) yesterday launched a credit bureau data base system, a single databank known as Credit Reference System (CRS).
CRS would monitor and store all details of borrowers, whereby it could also be used by lenders to conduct ‘due diligence’ to any new loan applicants before issuing credits.
Following the BOT move, all banks, financial institutions, including micro-lending agencies, will now have their customers’ credit records kept at a single databank system.
The CRS system is designed to collect and provide information on payment records of all borrowers, such as those from Savings and Credit schemes in the country and other entities engaged in regular issuance of loans.
The BOT Director of Banking Supervision, Agapiti Kobelo said during the launch that, “the establishment of CRS is a continuation of government’s efforts to reform the financial sector with the enactment of the Banking and Financial Institution’s Act which whose applicability started way back in 1991”.
According to one aspect within the Act, the Credit Reference System shall consist of a databank administered by the BOT and private credit bureau operating under the conditions prescribed by the Central Bank in the country.
The Act has further opened doors for private banks in the country to enter into the market and fair trade competition. The reforms were initiated in order to create an effective and efficient financial system.
Describing how the CSR will work, he said that basically there will be two different ways on how to coordinate the system; this is either by mandatory or voluntary sharing of information.
Under the mandatory scheme, the Central Bank will collect all relevant information from licensed banks and financial institutions and makes it available to licensed private micro finance institutions (credit bureaus).
This is done in countries where awareness of the benefits of credit bureaux is not very high, where lenders may be reluctant to share information, a model which Tanzania has adopted.
In other countries where consumer credit is developed and knowledge is well spread, a credit report is a good tool to get more customers at lower price, thus the sharing of information is generally voluntary and a lender gives the information on reciprocity basis.
He also noted that apart from borrowers’ information, the CSR will also source data from other entities such as utility providers, phone companies, debt collection agencies, public institutions such as Business Registration and Licensing Authority (BRELA) and the courts.
Detailing how this would be transacted, he said the bureaus will prepare credit reports that will then be sold on request to users. A typical user will be a lender who will be approached by a potential borrower for a loan and before the loan is granted, the lender will request for a credit report on the applicant from a private credit bureau to assist in analyzing and evaluating the loan request.
It is worth noting that credit information might be of useful interest to other users, including bank supervisors, other units with the bank, government agencies, employers, insurers and real estate agents. Borrowers will be allowed to have free access to their credit reports once per year upon request and shall have a right to challenge information contained in a report.
“The benefits of giving borrowers access is to build trust and ensure transparency and assessment of the accuracy of the information maintained in the system”, he said.
Describing the disadvantages of the absence of the CRS before its introduction, the Deputy Governor of the BOT, Juma Reli noted that the system in Tanzania has been one of the major factors limiting access to credit. Small firms and individuals borrow at high rates because of the high risks involved as lenders do not have information on their credit behaviors.
However, he noted that, in view of this there is usually disparity of knowledge (information asymmetry) between the lender and the borrowers about the past payment behavior and the current level of debt a result of which makes banks fail to make informed decisions on their lending operations.
Experience has shown that problems related to data accuracy are the subject of numerous complaints and litigation around the world and, as a result, have had significant impact on the development of credit reference systems.
In view of the need to have a State-of-the-Art credit reference system in Tanzania, the BOT has engaged M/s Creditinfo International to assist in setting up a credit reference databank, the vendor started work in October 2011. Pilot testing of the system began in June 2012 and so far about 26 banks have already joined the testing environment out of which 9 banks have successfully uploaded data into the system.