Credit bureau makes progress

Lemohang Rakotsoane

MASERU – LESOTHO’s credit bureau now has records of more than 100 000 individuals which local commercial banks are already using to assess risk and decide on who to give loans.

The bureau managed by Compuscan, a South African firm, was established by the Central Bank of Lesotho (CBL) two years ago.

A credit bureau is a company or institution that collects and maintains individual credit information to sell or distribute to lenders, creditors and consumers.

Compuscan’s country manager ’Mannete Khotle told thepost that although they are not moving as fast as they would like there has been significant progress in capturing credit records.

Khotle said what contributed immensely in slowing down of the information gathering is that some creditors are still dealing with their clients manually, which makes it difficult to feed the records into a central system.

Gathering the information has also been slow because it’s contained in manual records.

“Some of the institutions that we should get information from especially in the micro finance industry do not have equipment.  Most are still using the manual way of capturing data,” Khotle said.

She added that there are processes underway to help the micro finance industry move from manual and to digital records.

“This will enable them have accurate records and ensure that they do their work in the most effective way”.

Khotle further indicated that another challenge is with sensitizing the nation about the credit bureau.

“There is still a misconception as to what the bureau does. People still think that we influence credit institutions as to who should get credit and who shouldn’t”.

“In reality that is not the case, all we do is to gather information from credit institutions, afterwards the credit institutions look at the information we have gathered and make decisions based on the client’s credit history.”

She added that the Private Sector Competitiveness and Economic Diversification and the CBL are helping the bureau with a national campaign to educate people about the bureau.

“The Credit Act only talks about credit and does not extend to policies like life cover hence our focus is solely on credit,” Khotle said.

She said consumers should not a view the credit bureau as something hostile because it is there to help them.

“What is wrong is over indulging yourself, but if you have a good relationship with your money you will know your boundaries, you will not be tempted to use your money for things that you do not need”.

“You will be able to pay off your debts on the time agreed upon and will not be over-indebted.”

She added that it is hard for people who have no credit history to get loans from banks.

“They do not have any idea of your performance so it becomes difficult for them to give credit to such individuals, while with those who have credit history it is easier to grant them credit because their credit history is known,” Khotle said.

The chairperson of the Association of Microfinance Institutions, ’Mamakamane Makamane, said it is important for them to digitalize their systems so they comply with the CBL’s regulations.

“As the association right now we are trying to consolidate the industry and ensure that we abide by law and even stop possessing people’s properties because that is illegal,” Makamane said.

She added that they have already established a special fund to put in place systems that will help them comply with regulations and computerise their systems.

She said they are currently working on offering training especially to the small institutions that are based in the rural areas.

“Some of them do not even know how to use a computer so we are working on training them so that when the systems are in place and they have computers they can be able to do their job without any obstacles,” Makamanes said.

“These people play a huge part in ensuring that people in rural areas have access to finance and should therefore be assisted to do their work smoothly as they operate even in areas where banks are not available,” she said. 

Why credit bureaus matter?

Transparent credit information is a prerequisite for sound risk management and financial stability. Credit reporting institutions, such as credit bureaus, support financial stability and credit market efficiency and stability in two important ways.

• Banks and nonbank financial institutions draw on credit reporting systems to screen borrowers and monitor the risk profile of existing loan portfolios.

• Regulators rely on credit information to understand the interconnected credit risks faced by systemically important borrowers and financial institutions and to conduct essential oversight functions. Such efforts reduce default risk and improve the efficiency of financial intermediation. In a competitive credit market, these efforts ultimately benefit consumers through lower interest rates.

• Effective credit reporting systems can mitigate a number of market failures that are common in financial markets around the world, and most severely apparent in less developed economies. The availability of high-quality credit information, for example, reduces problems of adverse selection and asymmetric information between borrowers and lenders. This reduces default risk and improves the allocation of new credit. Information sharing can also promote a responsible “credit culture” by discouraging excessive debt and rewarding responsible borrowing and repayment.

• Credit reporting allows borrowers to build a credit history and to use this “reputational collateral” to access formal credit outside established lending relationships. This is especially beneficial for small enterprises and new borrowers with limited access to physical collateral. Evidence from the recent financial crisis also suggests that positive credit information helped to safeguard the financial access of creditworthy borrowers that would have otherwise been cut off from institutional credit. – World Bank

5 things to know about credit bureaus

Types of Information the Credit Bureaus Collect

Credit bureaus maintain a number of details related to you and credit history, starting from the time you open your first credit account. For instance, the credit bureau collects information about your repayment history, the amount of credit you have available, the amount of credit you are using and outstanding debt collections.

Credit bureaus also maintain non-credit information about you including your address, current and previous employers, and salary information. While this information is not used to calculate your credit score, businesses may consider it when they’re evaluating whether to do business with you.

Where Do Credit Bureaus Get Information?

Credit bureaus depend on banks and other businesses to provide them with consumer information. Many of the companies you do business with send regular updates on your open accounts. Credit bureaus also get information about you from public court records.

Who Uses Credit Bureau Data?

Banks and credit card issuers are the most obvious users of the information provided by credit bureaus. A host of other companies turn to credit bureaus to make decisions about you. Employers, insurance companies, landlords, and debt collectors all request information from the credit bureaus.

Credit Bureaus Only Provide Information

While credit bureaus provide some or all the credit information that creditors and lenders use to deny or approve your applications, the bureau itself does not make a credit decision. — Credit.about.com

How your credit worthiness is measured

Payment History

The most important factors considered in credit evaluation are those that relate to an individual’s history of repaying loans and any evidence of noncredit-related collections or money-related public actions. Credit evaluators consider whether an individual has a history of repaying balances on credit accounts in a timely fashion. The analysis takes into account not only the frequency of any repayment problems but also their severity (lateness), date of occurrence (newness), and dollar magnitude. Evaluators assess repayment performance on the full range of accounts that an individual holds, distinguishing accounts by type (such as revolving, installment, or mortgage) and by source (such as banking institution, finance company, or retailer). In general, an individual with serious deficiencies in repayment performance, such as a credit account that is currently delinquent, will find qualifying for new credit difficult, may face higher interest rates for the credit received, or may be limited in further borrowing on existing revolving accounts.

Consumer Indebtedness

When evaluating credit, creditors consider the type and amount of debt an individual has and the rate of credit utilization. For revolving accounts, the rate of credit utilization is measured as the proportion of available credit in use (outstanding balance divided by the maximum amount the individual is authorized to borrow, referred to as the credit limit). For installment and mortgage accounts, credit utilization is generally measured as the proportion of the original loan amount that is unpaid. High rates of credit utilization are generally viewed as an additional risk factor in credit evaluations, as they may indicate that an individual has tapped all available credit to deal with a financial setback, such as a loss of income.

Length of Credit History

Credit evaluators consider the length of a person’s credit history because it provides information about how long the individual has been involved in credit markets and about whether he or she has obtained credit recently. The age of the account is relevant to an evaluation of credit quality because the longer the account has been open, the more information it conveys about an individual’s willingness and ability to make payments as scheduled. New accounts may convey little information other than that a consumer has had a recent need for additional credit and has been approved for credit.

Acquisition of New Credit

Whether a person is seeking new credit provides information about the credit risk posed by the individual. The number of new accounts the individual has recently established and the number of attempts to obtain additional loans, as conveyed by records of recent creditor inquiries (requests for credit reports), all provide a picture of the individual’s recent credit profile. Attempts to open a relatively large number of new accounts may signal that a person risks becoming overextended.

Calculating a Credit History Score

Statistical modelers working with data from credit reporting agencies construct credit history scores using selected factors of the types described above. Modelers divide each factor into ranges and assign each range a point count. The score for an individual is the sum of these points over all factors considered in the model. Typically, the points and the factors used in the model are derived from a statistical analysis of the relationship between the factors at an initial date and the credit performance over a subsequent period.— Federal Reserve Bank