CREDIT reporting systems are central to well-functioning credit markets around the world. Credit reporting data helps establish the repayment history of borrowers to make it easier for them to access loans by allowing creditors to assess the repayment capacities of their customers and support their credit-risk monitoring. The regulators use this data to monitor credit markets and lending/borrowing trends.

The World Bank’s annual flagship publication, Doing Business, which presents quantitative measures of the regulations that enhance business activity and those that constrain it in 189 countries, also covers at least two aspects of the regulations that affect the availability of credit.

First, it looks into the depth of credit information — the coverage, scope and accessibility of information available to lenders through credit bureaus. Two, it measures the strength of the legal rights to evaluate the degree to which secured transactions or collateral and bankruptcy laws protect the rights of both borrowers and lenders to facilitate lending.

In recent years, there has been a growth in the trend towards the expansion of the scope and quality of credit reporting services around the world. Currently, more than 50 countries have established credit reporting systems, credit bureaus or registries to not only help creditors manage their risk but also as an effective tool to strengthen financial inclusion, particularly women, low-income groups, and micro and small businesses.

‘It is not the job of the SBP to run a credit information bureau; its job is to regulate the private bureaus and ensure that all creditors willingly contribute their data to existing bureaus’

In Pakistan, where only a fraction of population is connected with the nation’s financial system, the dream of higher levels of financial inclusion allowing access to low-income individuals remains unrealised in spite of the efforts made in the last couple of decades. To promote financial inclusion, the parliament passed the Credit Information Bureau Act 2015 to pave the way for establishing private credit bureaus as part of the State Bank of Pakistan’s (SBP) National Financial Inclusion Strategy (NFIS).

Under the Act, the central bank has so far issued licenses to two private credit bureaus, which have replaced several unlicensed registries operating in the country before. The role of the unlicensed credit bureaus or registries was nevertheless limited to data collection from financial institutions, which voluntarily shared data with them.

However, industry sources tell this correspondent, the licensed private bureaus are struggling to collect information from the creditors for developing reliable registries of credit data of both individuals and corporate entities because of gaps in the Act. Besides, the central bank’s Electronic Credit Information Bureau also continues to operate, creating negative competition for the private credit bureaus.

“It is not the job of the SBP to run a credit information bureau; its job is to regulate the private bureaus, ensure that all creditors willingly contribute their data to these bureaus, and develop a competitive environment for them in the country,” a senior microfinance banker from Karachi commenting on the condition of anonymity. He urged the SBP to develop a standard format for all creditors to follow for ensuring the availability of uniform credit history information of their clients to the bureaus.

Moreover, the Act makes it mandatory for the financial and credit institutions to become a member and share data with at least one of the licensed private credit bureaus. Citing this clause, the creditors often refuse to share their data with both the bureaus.

Thus, the Act itself discourages healthy and fair competition between existing bureaus and is a disincentive for them to improve their services and reduce their user fees. The Act, according to the banker, needs to be amended to make it compulsory for all creditors to share credit information of their clients to all the licensed bureaus, which will result in improvement in services provided by them and ensure availability of uniform, complete credit histories of individual and corporate borrowers to those who need it.

Another issue being faced by the bureaus is resistance from creditors on sharing information on their clients to all bureaus operating in the market. According to Mumtaz Hussain Syed, the CEO of Aequitas Information Services, the first bureau operating under the brand name of Tasdeeq, the rules and regulations of the business applicable to non-banking financial institutions, telecommunication companies and utilities also need to be updated to bring them in line with the Credit Information Bureau Act.

Since the Act also mandates private credit bureaus to gather data from such unconventional sources as utilities, telecommunication firms and retailers, a few bottlenecks need to be removed. “The coverage of the scope of the Act to these sources of credit history information of their clients is a significant step towards enhancing financial inclusion,” he argues. “But greater cooperation and collaboration is required among different players to implement this.”

Mumtaz Hussain Syed points out that the key issue in gathering data from the utility companies is related to the ownership of the utility connections as the tenants and new owners don’t usually transfer the ownership of the existing connections in their names because it is a cumbersome process. “Consequently, the payment behaviour of the consumers is not captured even if the companies share their data with the credit bureaus. There is an urgent need for reforms to relax these procedures of utilities for improving the quality of data provided by the utility companies,” he stresses.

He is of the view that many issues could be solved by improving cooperation between different regulators. “We have conflicting regulations for some sectors and firms, which bar them from sharing data of their customers with any the bureaus. For example, telecom companies can be a great source of data sharing as they have nearly 130 million subscribers. But the regulations don’t permit them from sharing their customer information.”

The collection of data from these sources will allow the banks, utility firms, retailers and other creditors offer much better information on their clients’ (over) indebtedness, discipline credit market and manage their risk. In addition, their customers with a good credit history will be able to get better deals like lower interest rates from the creditors. More important, it will help the government and the SBP achieve the elusive financial inclusion targets of the NFIS.

Published in Dawn, The Business and Finance Weekly, July 13th, 2020