| The south african credit information system |
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| Tuesday, 18 May 2010 02:00 |
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“Credit bureaux are essential elements of the financial infrastructure that facilitate access to credit. Today less than 25 percent of people living in developing countries have access to formal financial services, compared to up to 90 percent in developed markets. Financial sector development unleashes the productive power of enterprises and facilitates inclusion of the informal sector in the formal economy” (Credit Bureau Knowledge Guide: International Finance Corporation, (2006), page 1) Within a financial infrastructure, the viability of lending depends on the ability of lenders to collect and process credit information efficiently, particularly in screening credit applicants. At the screening stage, lenders need information about borrowers’ characteristics, including their riskiness, unfortunately most of the information needed to properly screen prospective borrowers is not freely and easily available to lenders. In addition high risk borrowers will be inclined to disguise their riskiness and low risk borrowers will be inclined to highlight their low level of risk, this asymmetric information between borrowers and lenders can cause adverse selection and moral hazard. Adverse selection means that lenders are unable to distinguish bad borrowers from good borrowers on account of insufficient and inaccurate information about the borrower, accordingly the interest rate which all borrowers will be charged will be determined by the “pooled” experience of the lenders, which will lead to good borrowers paying unfairly high interest rates and being penalized at the expense of bad borrowers. Moral hazard means that unless borrowers are aware that their repayment information will be shared with other lenders resulting in consequences to their default, the borrower may have an incentive to default. It is therefore of great importance that lenders supplement their information about borrowers with the information of other lenders, that is share information amongst each other. Credit bureaux who may be regarded as financial intermediaries within the financial infrastructure, facilitate the voluntary/statutory exchange of information between lenders/credit grantors, this allows lenders to supplement their own information with that from other lenders so that credit decisions are made with the best possible information. Credit bureaux make available comprehensive information on the credit status of borrowers by collating public records and credit account details to help lenders identify good borrowers, which improves risk management, enables lenders to increase the amount of lending, reduces default rates and enables borrowers to develop credit profiles. “Credit histories do not only provide necessary input for credit underwriting, but also allows borrowers to take their credit histories from one financial institution to another, thereby making lending markets more competitive” (Credit Bureau Knowledge Guide: International Finance Corporation, (2006), page 2) Credit Bureaux through their “information-sharing activity” may also prevent borrowers from obtaining credit from various credit grantors at the same time and becoming over-indebted, by ensuring that at the time of assessment of a credit application the credit grantor is aware of the applicant’s level of indebtedness. Further, Advanced scoring systems/statistical models for risk assessment developed using credit information, which categorizes credit applicants according to risk classes, prevents lenders from making bad lending decisions or turning away profitable business by assisting them in assessing the probability of repayment expeditiously. Score cards which indicate the probability of repayment allows the lender depending on the risk it is willing to accept to determine a “cut-off” level. A credit information system, of which credit bureaux are an important aspect, is therefore a necessity within a functioning credit market. South Africa has a mature, sophisticated comprehensive credit reporting systems with the following characteristics: • Widespread participation among all entities engaged in credit and credit related activities, who share extensive information on a voluntary basis with each other; • The application of the principle of reciprocity applies within the information sharing system, that is those who supply information can access information; • Competing private credit bureau; • The use of sophisticated scoring models developed from comprehensive high quality data; • Full-file credit reporting system, where both positive and negative data is shared across sectors, and where most lenders participate; • Fixed, reasonable data retention periods that correlate with the predictive power of the information; • Reporting on consumers and commercial entities; • An appropriate regulatory framework that does not act as an impediment to an efficient and effective credit reporting system. According to a publication issued by Visa International published in 2002 entitled “Credit Bureau – Get the Full Picture”, the following key stages can be identified in the development of a credit bureau, • shared negative data; • shared positive and negative data; • development and implementation of scoring models; • acquiring additional information In South Africa, both positive and negative information is shared through credit bureau; scoring models are developed and implemented; and additional information relating to utilities is collected, the system is therefore at an advanced stage of evolution. Prepared by Advocate Ashina Singh On behalf of the Credit Bureau Association |
| Last Updated on Tuesday, 18 May 2010 14:06 |