A woman picks money from a bank. When it comes to credit assessment, the more information the lender has on a borrower, the more the chances of making a sound credit decision.  PHOTO/Edgar R. Batte


CRB reforms blacklist loan defaulters

What you need to know:

With the new Financial Institutions (Credit Reference Bureau) Regulations, credit providers in the country have an opportunity to minimise default rates. In an interview, Mr Richard Tumusiime, the general manager, Metropol Uganda, told Prosper Magazine’s Ismail Musa Ladu why it is important for a borrower to maintain a positive credit profile at the Bureau.

What does the Financial Institutions (Credit Reference Bureau) Regulations, 2022 seek to cure?
The regulations as cited above seek to align a very core credit risk management gap: to include other credit providers not regulated by Bank of Uganda in the Credit Information Sharing (CIS) mechanism by allowing them to share credit data with the Credit Reference Bureaus (CRBs). For long, the exclusion of other credit providers had created a narrow space from which CRBs could collect credit data to enable them sufficiently support all the players in the credit business.

What do you like about the regulations? 
The regulations have now opened up the credit information sharing space to all credit providers in the country. These include, among others: commercial banks, credit institutions and Microfinance Deposit taking Institutions (regulated by Bank of Uganda), Non -deposit taking Microfinance Institutions, SACCOs and money lenders (regulated by the Uganda Microfinance Regulatory Authority (UMRA), trade credit providers, car dealers, landlords, insurance companies, utility companies and every entity involved in providing goods and services on credit.

Secondly, the regulations provide for mandatory bureau checks by all financial institutions, Microfinance deposit taking institutions and registered societies on all their customers at the time of applying for credit. This will enable borrowing citizens of low- ticket loans of say Shs200,000 to have their credit profiles created at the bureau and in turn be able to build positive credit profiles overtime to increase their chances of accessing finance from lenders. With a   credit history at the Credit Reference Bureau (CRB), a borrower’s profile is visible to a number of lenders and this simplifies the credit assessment process and improves turnaround time. 
Therefore, I appeal to all credit providers to strictly adhere to this requirement and ensure that they conduct bureau checks on borrowers of whatever loan amounts and submit their credit data to the bureaus.

Are the regulations comprehensive enough?
In terms of CRB operations in particular and the credit information sharing mechanism in general, I believe the regulations are comprehensive. For example, they give detailed guidance on what one needs to do to operate a credit reference business in Uganda, how and from whom to collect credit data, how to disseminate credit information, data privacy and confidentiality, how credit providers interested in sharing credit data with the Credit Reference Bureaus can be accredited for that purpose, anti-competitive practices that attract sanctions, dispute resolution and mediation mechanisms as well as other provisions that are aimed at streamlining the relationship between the regulator, the CRBs and Accredited Credit Providers (ACPs). But most importantly, the regulations introduce the National Identity Number (NIN) and the company registration number as primary identifiers for individual and non-individual borrowers, respectively.

As is the case with any laws or regulations, when new market developments and dynamics emerge that make the current provisions inadequate, amendments can be made.

These regulations seem to have the interest of players like yourself at the expense of other stakeholders, including your customers. What is your thought on this claim?
That is a false claim and misleading analogy. Information asymmetry is the leading excuse for the high cost of credit in Uganda. One of the most important impediments to a sustained flow of capital to developing countries relates to information asymmetry among lenders and borrowers in both local and international capital markets. 
Combined with substantive risks associated with factors which lie beyond the immediate control of the directly involved suppliers and receivers of capital, information asymmetry may inhibit external financing.

Furthermore, the evolution of existing financial relations relies heavily on the availability of information relevant to the potential outcomes of such relations.

In the case of Uganda, we are all participants in the credit information sharing mechanism, playing different roles to ensure this credit information gap is closed to specifically address the problem of high interest rates attached to risk. For example, when the CRBs have access to a wide range of credit data providers, it will help them enrich their databases and therefore the credit reports generated by these CRBs will carry more information value as they will have comprehensive data about each borrower. 

When it comes to credit assessment, the more information the lender has on a borrower, the more the chances of making a sound credit decision and thus minimising probability of default. When borrowers are paying back in time, it will enable the lender to have more funds available for lending to new credit applicants and this cycle promotes access to finance and contributes to robust economic development of the country. 

Do these regulations solve the industry problems in terms of mainstreaming operations? Briefly explain how.
Anyone involved in the credit business faces three major challenges. These are: information asymmetry, moral hazard and adverse selection. 
Information asymmetry simply refers to a situation where a lender is desirous of obtaining as much information as possible about a borrower and the borrower is eager to provide as less information as possible to the lender in order not to jeopardise his chances of obtaining credit. 

Moral hazard is where the borrower applies for a credit facility with the intention of not paying back. Therefore, he enters into a credit contract in bad faith.  

Adverse selection is a situation where the lender makes inferences about the borrower in respect of physical appearance and personal relations, among others.

Therefore, high-risk borrowers end up getting credit facilities at the expense of low risk ones. So, the new regulations are a good tool of addressing the aforementioned challenges in many ways.

By enabling a wide range of credit providers to share credit data with the CRBs, it will ensure that millions of borrowers’ credit profiles are created and thus reducing the risk of information asymmetry and many other related challenges.

Loan defaulters from the Bank of Uganda regulated financial institutions have been running to other credit providers for more credit facilities well knowing that their credit histories won’t be known by these other lenders. 
However, that loophole will now be closed and the loan defaulters will have no option but to pay up or fail to access more credit from any other lender.

The identification issue has been resolved as earlier mentioned that is the introduction of the National ID Number (NIN) as the unique identifier for individual borrowers. Ugandans who wanted to borrow from formal financial institutions were required to register for the financial card at a cost of up to $10, consequently making the cost of borrowing expensive.

Credit profiles of non-individual borrowers will now be created using company registration numbers at no cost.