The process of understanding what a credit reference bureau is

28Nov 2018
Mtapa Wilson
Financial Times
The process of understanding what a credit reference bureau is

It has now been five years since Creditinfo was licensed by the central Bank of Tanzania (BoT) to operate as the first credit reference bureau in the country.  In this interview with the Financial Times staff writer MTAPA WILSON, Creditinfo’s  regional director for Africa, SETH MARKS (pictured),-

offers insights into how mobile money and other fintech companies are  making use of credit reference bureau services in Tanzania.

QUESTION:  What major services does Creditinfo Tanzania offer as the first credit reference bureau to be licensed by the central bank to operate in the country?

ANSWER: At the most basic level we run a credit bureau.  In Tanzania, this means that all regulated financial institutions submit all credit data on a monthly basis to BoT, who then upload all of that data to us.

We then essentially have a full view of a given borrower’s credit footprint across the Tanzanian financial sector.

And on top of this, we build a whole suite of data-centric products, services, and intelligence that we promote back to the financial institutions.

The most basic of these services are credit reports on consumers and businesses which are ‘snapshots’ of a given person’s or business’s entire credit history.

What we do very well in Africa (and certainly across all of our other markets as well) is build intelligence and analytical models to help guide decision making in financial institutions.

  We use the data to make predictions on the likelihood of a consumer to pay back a loan or not.   We provide these analytical and information intelligence tools back to the financial institutions to help them make better decisions in lending.

We have a range of so-called statistical and ‘expert’ scoring models, from a Credit Bureau Behavioral Scoring Model, to Mobile Loan Scoring Models, to SME Scoring Models, to Propensity Scoring Models which help financial institutions focus on customer retention and empirically predict the likelihood of a customer taking another loan from them.

This helps financial institutions get the best ROI from their marketing and customer relationship initiatives, rather than simply working ‘blindly’ and offering customers a ‘blanket’ approach when we know that customers are different.

Moreover, we have proprietary software solutions and platforms that help banks to automate and objectify the whole lending process, so as to move the credit evaluation and lending process from a very manual and subjective type of process to something that is automated based on objective risk management best practices.

We have a range of similar value-add solutions, so this is just a small highlight.

Q:  It has now been five years since Creditinfo got its license to start operating in Tanzania. What’s your experience thus far of the Tanzanian market?

A:  I think the market as a whole has come a long way in these five years.  I think now we are also really starting to see things take off, to a large extent also driven by the prevalence of mobile phones.  Now mobile phones are playing a central and important role in financial services as a whole in East Africa, Tanzania certainly being one of these markets.

There have been challenges in Tanzania, as in any maturing frontier market. The main challenge here is the absence of unique identifiers, as in Tanzania there are five or six forms of identification. 

This is unlike in the USA, as an example, where each individual has a single, unique social security number.

This makes it easier for lenders to make decisions, because they know who they are dealing with.  Whereas in Tanzania, you might use one ID at one bank last year and you might use another ID in other banks this year.

Which makes it difficult for lenders to be 100 percent sure if the person they are dealing with is really the person they say they are.

This becomes exponentially more difficult when lending moves purely onto the mobile phone, or through other digital-only channels.

Here at Creditinfo, we have some solutions and we work with the quality of data to try as best as possible to address this challenge. 

Q:  Who are your main customers in Tanzania?

A:  Our main customers are all the regulated banks in Tanzania.  I stand to be corrected because there have been some changes here and there recently, but I think there are about 56 regulated financial institutions in Tanzania, and about 90 percent of these banks are our customers. 

We also work with some microfinance institutions that are not yet regulated by BoT.  Generally, anyone working within financial services is or can be our customer.

Q:  What is the outlook for your business in Tanzania this year, in 2019, and beyond?

A:  We have been working on some initiatives this year, some recently launched and some to be launched. These are mainly value added services to help financial institutions institute best practice risk management standards into their lending processes.  For example, providing automation services, portfolio management, software solutions and consultancy for the banks on how better they can automate and optimize existing customer portfolios.

Q:  What major challenges do you face in your business?

A:  Actually, the greatest challenge is all about the quality of data.  That stands from the fact that there is no unique identifier in Tanzania.  You know, the quality of decisions that a lender makes largely depend on the quality of data coming in.

If ‘bad’ data comes in, it is likely to be a ‘bad’ decision made.  So we are trying to work with quality data coming into the process, so we can then best help our customers make the most optimal lending decisions using data analytics and automated decisioning platforms.

Q:  What is your assessment of the competition in Tanzania after the licensing of a second credit reference bureau?

A:  Yes, we have competition in Tanzania in that there is one other licensed credit bureau in the country.  But I think competition is always healthy in business.

Also, I think our competition takes a little bit different approach in terms of the customer segment they target. So competition is very healthy and, more often than not, good for all stakeholders in the financial ecosystem.

Q:  Banks and other lenders in Tanzania have been suffering from a sharp increase in non-performing loans (NPLs) over the past two years. What has caused this situation?

A:  First of all, lending is growing generally in Tanzania and East Africa as a whole, and it’s still a nascent market where the whole concept of credit as still so young.  It is natural to see some level of NPLs in these early days of credit.

Many   lenders have not yet fully implemented risk management best practices which are implemented in other parts of the globe.  This is expected and nothing out of the norm. On the other hand, there is a big opportunity as well for lenders generally, all across the credit lifecycle, to for example really do more and extract more value from their existing relationships with ‘good’ customers and those that empirically show good potential. 

Yes, we can look at the negative side, but on the other side there is great potential for lenders to use data and other risk management tools to attract good customers who are new to formal financial services, as it were, and maximize relationships with existing customers in their portfolio who show good potential or have already shown that they can pay back.

Q:  Were financial institutions in Tanzania reluctant in the past to use the services of credit reference bureaus?

A:  I think to use the word ‘reluctant’ is perhaps a bit harsh. Okay, in some cases the word ‘reluctant’ applies.  But I think more generally it is the process of understanding what a credit bureau is.  What crucial role does it play in the financial services ecosystem?  And what benefits does it bring to each stakeholder in this financial services ecosystem? 

So in any growing market where the concept of credit is still very young, it is natural that one of the initial key steps in this entire credit movement is that of consumer education around credit awareness, and the role it can play in the financial lives of consumers and SMEs alike.

Q:  What is the current situation after the BoT made it compulsory for banks to use the services of credit reference bureaus?

A:  The usage of the credit reference bureau at the most basic level has, of course, grown.  But I would not say that it was a huge, exponential jump overnight.  We see a consistent upward trend.  It was a good decision for BoT to start regulating lenders to perform some type of objective evaluation before lending. But wearing my credit bureau hat, of course I would say that – right?!

Q:  How is Creditinfo Tanzania assisting banks to lower the risk of bad loans (NPLs)?

A:  We help financial institutions to make ‘accept’ or ‘reject’ decisions based on a wide array of data points and using statistical scoring models and risk management best practice credit policies and rules.

We also advise banks to use practices like risk-based pricing and risk-based limit allocations – meaning when an ‘accept’ decision is made, the lender bases loan amounts on the credit bonity of each borrower, which is based on statistical scoring models that we provide to the lender. Rather than a ‘blanket’ approach where same or similar loan sizes are granted, regardless of the bonity of the borrower.

Q:  How are mobile money and other fintech companies making use of the services of credit reference bureaus in Tanzania?

A:  In a nutshell, it is more or less the same as with the regulated banks.  The major difference is that the importance of identifying and being confident of who the customer is, is of greater importance when it comes to mobile money as the borrower physically is not present in front of the lender.

So there are some identification recognition and verification tools that we provide, including analytical tools and software tools to help those mobile phone lenders to make good, informed decisions in their mobile credit services.