How Credit Bureaus Enhance Access to Consumer Credit
CHIGOZIE AMADI
There is no denying the fact that access to credit for individuals and small businesses is crucial and central to economic prosperity of a nation and its inhabitants. A credit-driven economy that addresses the concern of access to finance for these segments of economic sector has many benefits. The most important of this is the fact that it enables and eases access to credit for consumers and businesses and emboldens economic transactions to take place efficiently. For producers in the economy especially firms, credit allows them access to equipment, tools and resources they require to produce the items that are demanded. For the consumers, access to credit activates effective demand which could lead to better living and livelihood conditions. Consumers in a credit economy that works for them can get mortgage to own a house, borrow to use an automobile, obtain loan for education for themselves and their children, acquire domestic utensils such as washing machine, television, telephone, air conditioner, etc to live a life with some degree of comfort, convenience, ease, and dignity. A credit driven economy confers prosperity on the citizens simply because it enhances the ability of individuals and businesses to access products and services they desire to a reasonable degree, even at a time they may not have the full amount of the cost of such a service or product. There is no doubt that if credit is accessed and used responsibly by households, the economy and its agents benefit. Responsible credit gives purchasing power to people to grow and develop.
It is a known fact that large enterprises do not normally have trouble in accessing funds whether for working capital, to meet short term operational requirements or long-term funding for big projects. The money and capital markets are at the service of large enterprises. Financial institutions and capital market operators flock around them to meet their funding and financing needs in short term accommodation facilities, medium term in loans, leases and bonds and long term through debenture and equity. Large enterprises borrow against their balance sheet and all-assets collateralisation. The same cannot be said of individual persons and small businesses. However, to engender broad prosperity, personal consumers and small businesses also need to have access to the right amount and type of finance at the lowest possible cost to them.
Despite the best efforts, access to credit in Nigeria for individuals and small businesses remain abysmally poor and low. Mortgage loans barely exist. Credit cards are for a priviledge few. Large retail stores sell most of their items on a cash basis. In strictly conceptual terms, credit penetration, represented by the proportion of credit to the private sector to the nation’s GDP was at abysmal 14 per cent in 2023. Curiously, the average for the sub-Saharan Africa was 35 per cent. Countries we like to compare ourselves with have better performance and stories to tell. For the same period of the year 2023, credit penetration for Kenya was 32 per cent, Rwanda was 23 per cent, Senegal scored 32 per cent, Egypt was 31 per cent and India attained 50 per cent. Though these are also low, but they represent better access to credit than the situation in Nigeria.
Notwithstanding the unsatisfactory position of Nigeria, it is a significant improvement from where we used to be at credit penetration of barely 4 per cent ten years ago. Nigeria has done so much by introducing initiatives and infrastructure that are meant to spur growth in access to credit for consumers and small businesses. Nigeria realised the strategic importance of a unique identifier for access to consumer credit and embarked upon the provision of unique identifiers. The Bank Verification Number (BVN) was introduced in 2014 and the mandatory use of National Identity Number (NIN) came into force in 2015. Nigeria licensed three private credit bureaus in 2009 and launched the National Collateral Registry in 2016. Private credit bureaus and the collateral registry are two credit infrastructure positioned to make financial institutions comfortable to lend to consumers and small businesses. While the credit bureau helps to provide credible information to creditors to profile loan applicants, monitor disbursed loans and help in management and collection of delinquent loans, collateral registry improves the comfort of lenders in having alternative, and more liberal security and collateral through the acceptance of movable assets, hitherto unacceptable by financial institutions.
All over the world, credit bureaus facilitate access to credit for consumers and small businesses. A credit bureau collects data from various sources, especially credit-related data from lenders and credit-granting institutions and process them to produce credible information that can be used by creditors to profile potential borrowers and manage credits granted. The two most important products of a credit bureau that are widely used are credit reports and credit scores. A credit bureau operates under a credit reporting system and primarily facilitates access to credit for those with credible credit history and credit scores. It helps lenders to significantly reduce the incidence of adverse selection of borrowers, promote responsible lending and risk-based pricing of loans. Research on the impact of credit bureau showed that in countries with a credit bureau, consumers and small businesses experience better access to credit. In such economies, 27 per cent of small firms report high financing constraints compared with 49 per cent in economies without credit bureaus. Similarly, the probability of obtaining a bank loan for a small firm is about 40 per cent in economies with functional credit bureaus, whereas it is lower at mere 28 per cent in economies without credit bureaus.
Nigeria and Nigerians have benefitted immensely from the operations of credit bureaus. As a country, it has assisted in raising access to credit thereby moving Nigeria’s credit penetration from 4 per cent in 2009 when the credit bureaus were licensed to 14 per cent in 2022. In addition, the rate of nonperforming loans has dropped significantly from over 30 per cent in 2009 to less than 5 per cent presently, below the threshold established by the Central Bank of Nigeria. This is because lenders now have credible information about prospective borrowers that help them in determining the character of borrowers regarding the capacity and willingness to repay loans. Much more, the fact that those in default are not likely to obtain new credit facilities or other contractual obligations sends a serious message of the need to respect contractual terms and obligations. Credit reporting systems serve to discipline debtor behaviour by motivating borrowers make payments on time so as to continue to have access to credit.
Furthermore, deposit money banks are now able to open up to doing retail loans, nano loans, loans to micro and small businesses, etc because they now have access to reliable data from credit bureaus on the credit worthiness of Nigerians. Some of them have even got into digital loans, using Application Programming Interfaces (APIs) which enable them to process large quantities of applications, process and take decisions on applications in seconds and automate decision making thereby removing subjectivism and human errors from credit decisioning. It is assisting the banks to adopt risk-based pricing of loans with lenders charging interest rates based on the riskiness of the borrowers. Much more, there are now many new non-bank operators such as fintechs and microlenders who are new entrants into the microlending and retail loans space. Their entrance, lending models and loan products they deploy to the market rely on the availability of credible information about the creditworthiness of their potential borrowers made available by credit bureaus.
The new initiatives of government in introducing consumer credit and student loans can really be a big boost to improving prosperity and reduce the much talked-about poverty situation. With access to student loans to acquire tertiary education and vocational skills, this has the tendency to give opportunity to access higher education and vocational skills to all classes of young people irrespective of their economic background. No doubt, access to student loan would promote inclusiveness and remove financial barrier to higher education in Nigeria. It is capable of preparing beneficiaries from poor background for an enhanced quality of life and in the process leads to increased productivity and enhanced human development index in Nigeria. Likewise, consumer loans, promoted by government, would improve access to loans for the disadvantaged segment of the population. It should liberate a lot from loan sharks and shadow banks who charge prohibitive and usurious interest rates and other charges.
However, for these benefits to be realized, both the student loans and consumer credit schemes need to adopt the use of credit bureau services. Using the credit bureau requires that the lending partners conduct creditworthiness search on consumer credit and student loan applicants to determine those who are eligible to access the loans. The required information is selected from credit reports and credit scores. It is highly probable that some of the loan applicants are enjoying credit facilities in the financial services industry. It is helpful to know the status of such individuals, including the level of their existing indebtedness and status of performance of their existing credit facilities. The credit bureau services could also be used to monitor the performance of the loans after they have been granted. Of course, where some of them go into default, credit bureaus can and would also assist in collections management.
The adoption of credit bureau usage would facilitate access to the credit market for the beneficiaries of consumer and student loans. Every borrower would get credit score. Good credit scores would open opportunities for those with good credit history and score. Bad credit scores shut people out of the credit system Every consumer and student would be interested in, and jealously guide their credit score. Credit bureau system encourages citizens to build their reputation and honour obligations. It performs as a social tool to shape behaviour. In fact, it prepares the beneficiaries of student loans for the life of work, after schooling, especially on responsible financial behaviour.
No consumer or student loan should be granted without checking the creditworthiness of the beneficiaries. All loans granted should be reported to the credit bureaus and updated as frequently as possible. It is important that we ring-fence the amount now set aside by the federal government to commence the consumer and student loan initiatives so that future generations would continue to benefit from the schemes. Beneficiaries should not see it as their own share of the national cake.
.Dr. ‘Tunde Popoola is the Group Managing Director/CEO, CRC Credit Bureau
