Credit bureau to lower interest rates
May 21, 2008
SOUTH African-based CompuScan CRB won a tender to set up a Credit Reference Bureau (CRB) in Uganda. Paul Busharizi and Sylvia Juuko talked to the managing director, <b>Mike Malan</b> about their goal in Uganda.
SOUTH African-based CompuScan CRB won a tender to set up a Credit Reference Bureau (CRB) in Uganda. Paul Busharizi and Sylvia Juuko talked to the managing director, Mike Malan.
QUESTION: What is the progress regarding setting up of the Credit Reference Bureau?
ANSWER: We were awarded the tender in 2006. However, this is a project of a significant magnitude in terms of getting 25 banks, credit institutions and micro-deposit taking (MDIs) to make a fundamental change in the way they operate.
To achieve this, you need commitment from chief executives and boards of directors. We have had significant involvement from donors like funders of the Private Sector Competitiveness Project and KFW through Germany cooperation to Uganda and GTZ who are providing technical support. They are working with the Bank of Uganda (BoU). The donors had to do financial viabilities and feasibility studies before they committed funding. That took most of 2007.
Everybody acknowledges we have a monopoly, but it’s not intended to create a favourable situation for unfair trade. The monopoly allows all institutions who have never used the CRB before to work as one.
How long will your monopoly last?
We have an exclusive licence for three years, which will begin with commencement of the project within the next few months. At the end of the exclusivity period, BoU’s intention is to open up the market. Competition will bring the prices down and bring new products and innovative ideas.
In Uganda, the number of applications for loans is small compared to South Africa or Nigeria. It is 500,000 annually and below. In South Africa, there are 18 million active borrowers ranging from credit cards, mortgages, furniture, cell phone to clothes. There is depth in what you get on credit. In Uganda, we are limiting that by looking at only the financial sector. However, micro-finance institutions and savings and credit cooperatives are excluded because they aren’t regulated. Two or three years will allow the benefits to start showing and it will be easier to include others.
How will the CRB work for the bank and the borrower?
We collect information and load it onto a database which can be accessed by banks. The database is locked down to a specific terminal at a particular branch with a particular password.
One cannot go to an Internet café and use their password to do unauthorised activities. All this is important for security. We look at the capacity of an individual to pay judging from their history. We will collect negative and positive information because if you only have negative information like say Mike Malan didn’t pay his debt three years ago and that’s all you know about him, every time you look at that record, you will think poorly of them. But if you also know that since then, Malan has had four personal loans that he has paid, the poor record becomes irrelevant. The positive information helps balance the negative.
What you find in southern Africa, Holland, Germany and the UK is that over 80% of the people pay their debts well while 20% don’t pay well. Out of the 20%, 80% pay moderately badly and 20% don’t pay at all. We call those professional crooks and those are the ones banks need to watch out for. That’s what the CRB does to protect banks from loss.
So what is going to change?
Presently, not much is going to change. I need time to build up the database. If, for example, you apply for a loan on August 1, we may have launched so I may not have your name in the data base. The banks need to obtain consent before they send in the information. This may be done by putting up a notice in the bank or sending a letter. They need to inform customers so that in case a customer has any objection, they can raise it. But any customer who refuses to give consent will be questioned by the bank over what they are trying to hide.
I will collect 100% of everything with or without consent because I also act as an agent for BoU. In my licence, I have got three things to do.
One is, we are a CRB, which is supposed to provide an identification system in the financial sector. The other component is that we are responsible for reporting all information collected to BoU. Every institution gives us all the information. We then take note. Where consent was obtained, we shall display it in the CRB, where consent wasn’t obtained, we shall put it in the database and report only to Bank of Uganda.
What is the cost implication to the borrower?
Because this database cannot be a solid one, in the first 12 months, we won’t charge banks to look at it.
There are other charges for equipment for the biometrics but that’s where donors have come in to assist banks to subsidise the costs. The borrowers are not being penalised; they are picking up the cost of the card at $2 (sh3,260). Its equivalent is insignificant in terms of the total cost of the project.
There are higher costs for the banks, but they are subsidised. The borrower will get a financial card, which is biometric finger print-based. They don’t have to buy a new card every time. One card will work throughout the system.
What will be the benefits of introduction of the CRB?
Banks are starting to understand that there benefits from the data they hold. It is critical that the data is accurate because if we put incorrect data, someone can make a wrong decision. All institutions have to give us data in the same format. For example, if banks collected the cell phone numbers of borrowers, they could use them to launch an SMS campaign to offer a top-up loan. These are some of the benefits.
Once you have got the data in electronic format, it’s possible to get two systems to work cohesively. At the moment, many organisations’ credit policies are written on paper. This can be automated if you have information that can help the decision. Decision-making takes long but automating the process will make it quicker. To get a loan in Uganda, it takes between two days and two weeks.
In South Africa, it’s a minute to make the entire lending decision and put the money onto a bank account. That’s the vision for the future. Its not going to happen immediately.
Are there any benefits to a borrower?
Having access to money, which you don’t have. Borrowers have access to lending in form of loans or credit on goods and services. Its going to become easier. Out of a pool of 10 borrowers, one or two might get the credit because you have the depth of requirements for loans including collateral and introductory letters. In the first months of the credit bureau, it’s not going to change because banks wont trust us overnight.
Banks would be wrong to rely only on credit bureau information. They need to develop a level of confidence. That is the proven model of the credit bureau. There is a saying we used often that the future is like the past. If you are bad today, chances are that you will be bad tomorrow and vice versa.
Will we have cheaper loans?
It will be easier for banks to grant credit because they can identify good borrowers. Banks will charge more for bad borrowers because they are high risk. For 80% of the population that fall in the good category, banks will charge less, resulting into cheaper loans.
When is the roll-out commencing?
There are key stakeholders driving the dates, BoU and the donors. They are sorting out the physical live date. From our point of view, we are ready to roll out. We are waiting for final approvals from donors and BoU. We are now busy with data collection.
We have entered into an agreement with all financial institutions. There are 15 institutions that have supplied data with varying levels of consent. We shall pilot the financial card scanner in two weeks. We are moving into pilot now. Once it has been completed to the satisfaction of BoU and the donors, we shall implement the roll out.
QUESTION: What is the progress regarding setting up of the Credit Reference Bureau?
ANSWER: We were awarded the tender in 2006. However, this is a project of a significant magnitude in terms of getting 25 banks, credit institutions and micro-deposit taking (MDIs) to make a fundamental change in the way they operate.
To achieve this, you need commitment from chief executives and boards of directors. We have had significant involvement from donors like funders of the Private Sector Competitiveness Project and KFW through Germany cooperation to Uganda and GTZ who are providing technical support. They are working with the Bank of Uganda (BoU). The donors had to do financial viabilities and feasibility studies before they committed funding. That took most of 2007.
Everybody acknowledges we have a monopoly, but it’s not intended to create a favourable situation for unfair trade. The monopoly allows all institutions who have never used the CRB before to work as one.
How long will your monopoly last?
We have an exclusive licence for three years, which will begin with commencement of the project within the next few months. At the end of the exclusivity period, BoU’s intention is to open up the market. Competition will bring the prices down and bring new products and innovative ideas.
In Uganda, the number of applications for loans is small compared to South Africa or Nigeria. It is 500,000 annually and below. In South Africa, there are 18 million active borrowers ranging from credit cards, mortgages, furniture, cell phone to clothes. There is depth in what you get on credit. In Uganda, we are limiting that by looking at only the financial sector. However, micro-finance institutions and savings and credit cooperatives are excluded because they aren’t regulated. Two or three years will allow the benefits to start showing and it will be easier to include others.
How will the CRB work for the bank and the borrower?
We collect information and load it onto a database which can be accessed by banks. The database is locked down to a specific terminal at a particular branch with a particular password.
One cannot go to an Internet café and use their password to do unauthorised activities. All this is important for security. We look at the capacity of an individual to pay judging from their history. We will collect negative and positive information because if you only have negative information like say Mike Malan didn’t pay his debt three years ago and that’s all you know about him, every time you look at that record, you will think poorly of them. But if you also know that since then, Malan has had four personal loans that he has paid, the poor record becomes irrelevant. The positive information helps balance the negative.
What you find in southern Africa, Holland, Germany and the UK is that over 80% of the people pay their debts well while 20% don’t pay well. Out of the 20%, 80% pay moderately badly and 20% don’t pay at all. We call those professional crooks and those are the ones banks need to watch out for. That’s what the CRB does to protect banks from loss.
So what is going to change?
Presently, not much is going to change. I need time to build up the database. If, for example, you apply for a loan on August 1, we may have launched so I may not have your name in the data base. The banks need to obtain consent before they send in the information. This may be done by putting up a notice in the bank or sending a letter. They need to inform customers so that in case a customer has any objection, they can raise it. But any customer who refuses to give consent will be questioned by the bank over what they are trying to hide.
I will collect 100% of everything with or without consent because I also act as an agent for BoU. In my licence, I have got three things to do.
One is, we are a CRB, which is supposed to provide an identification system in the financial sector. The other component is that we are responsible for reporting all information collected to BoU. Every institution gives us all the information. We then take note. Where consent was obtained, we shall display it in the CRB, where consent wasn’t obtained, we shall put it in the database and report only to Bank of Uganda.
What is the cost implication to the borrower?
Because this database cannot be a solid one, in the first 12 months, we won’t charge banks to look at it.
There are other charges for equipment for the biometrics but that’s where donors have come in to assist banks to subsidise the costs. The borrowers are not being penalised; they are picking up the cost of the card at $2 (sh3,260). Its equivalent is insignificant in terms of the total cost of the project.
There are higher costs for the banks, but they are subsidised. The borrower will get a financial card, which is biometric finger print-based. They don’t have to buy a new card every time. One card will work throughout the system.
What will be the benefits of introduction of the CRB?
Banks are starting to understand that there benefits from the data they hold. It is critical that the data is accurate because if we put incorrect data, someone can make a wrong decision. All institutions have to give us data in the same format. For example, if banks collected the cell phone numbers of borrowers, they could use them to launch an SMS campaign to offer a top-up loan. These are some of the benefits.
Once you have got the data in electronic format, it’s possible to get two systems to work cohesively. At the moment, many organisations’ credit policies are written on paper. This can be automated if you have information that can help the decision. Decision-making takes long but automating the process will make it quicker. To get a loan in Uganda, it takes between two days and two weeks.
In South Africa, it’s a minute to make the entire lending decision and put the money onto a bank account. That’s the vision for the future. Its not going to happen immediately.
Are there any benefits to a borrower?
Having access to money, which you don’t have. Borrowers have access to lending in form of loans or credit on goods and services. Its going to become easier. Out of a pool of 10 borrowers, one or two might get the credit because you have the depth of requirements for loans including collateral and introductory letters. In the first months of the credit bureau, it’s not going to change because banks wont trust us overnight.
Banks would be wrong to rely only on credit bureau information. They need to develop a level of confidence. That is the proven model of the credit bureau. There is a saying we used often that the future is like the past. If you are bad today, chances are that you will be bad tomorrow and vice versa.
Will we have cheaper loans?
It will be easier for banks to grant credit because they can identify good borrowers. Banks will charge more for bad borrowers because they are high risk. For 80% of the population that fall in the good category, banks will charge less, resulting into cheaper loans.
When is the roll-out commencing?
There are key stakeholders driving the dates, BoU and the donors. They are sorting out the physical live date. From our point of view, we are ready to roll out. We are waiting for final approvals from donors and BoU. We are now busy with data collection.
We have entered into an agreement with all financial institutions. There are 15 institutions that have supplied data with varying levels of consent. We shall pilot the financial card scanner in two weeks. We are moving into pilot now. Once it has been completed to the satisfaction of BoU and the donors, we shall implement the roll out.