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Selective credit institution building useful but inadequate

30th September 2012
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Editorial Cartoon

Credit referencing is expected to receive a major boost when the Bank of Tanzania puts up a data base to link financial institutions of all kinds, from savings and loan groups to commercial banks, upon which the credit rating of any borrower or applicant for loan in any financial institution can be done.

The point is to track if such person or company has outstanding loans with banks and if there are any instances of defaulting. Chances however are that the data to be available there may concern instances of default, or current facility being enjoyed by a company or individual, while plenty of confidential bank information is not likely to be seeped into the databank, since, as the pundits would point out, ‘banks will be banks.’

Those who follow tax evasion and money laundering issues in specific instances would know the trouble that governments or any other agencies have in seeking to extract information from banks concerning their most important clients – and that is not necessarily to mean ten or 20 clients.

Often these are the same individuals and companies with the most to hide from the public, and it cannot be expected that banks will offload into a databank the more sensitive information concerning clients; even with regard to loans, they may place just summaries. A bank could provide data to the effect of 20 new loans in the past month, but it is not easy to expect they would place the sizes and names of their loan beneficiaries.

Part of the problem with creation of a credit reference bureau in the sense of combining all available data into a single source point is to find out whose problem is being solved.

Were it that it is the loan applicant who needs such a reference source in order to clear his name or that of an institution which may be seeking a loan, that would be one thing. It would then follow that the banks cooperate to give the right information so as to be on the safe side with their clients, and indeed they may do so for a breadth of their clients, perhaps those with whom they don’t have the most important ties. When it comes to clients with whom the banks have privileged relationships, it is unlikely the data will be offloaded, as that would be the same thing as aiding the competition against a bank’s own interests.

At the same time there is doubt is the core problem that many pundits believe is being resolved by the setting up of a credit reference bureau is valid as an issue, that banks decide or not decide to offer loans on account of poor information on an individual or a company.

The point is that information on any specific individual is not crucial to the decision of a bank but comparable information between two or more individuals, to decide where a specific loan amount should be directed.

Assuming that the bank can ask for tax returns or check with the revenue authority if it has problems, or investigate by its own security agencies if it is keen enough to find out on an individual, it is clear a credit reference is of limited interest to making decisions. It is meant to create a public impression that loans will be there.

As a matter of fact, the reason that most people or at least a breadth of them (until recently when banks started to accept salaries passing through banks as collateral) fail to obtain credit is twofold, first the lack of property systems where banks can easily reclaim collateral, and second, poor business prospects in commercial loans.

Both these limitations are tied up with the preponderant role the public sector plays in the economy, making too many people seek to set up businesses not due to business opportunity but just to earn an income. Banks see through such applicants and weed them out quickly.

SOURCE: GUARDIAN ON SUNDAY
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