Making independent credit checks easier

CREDIT reporting systems are central to well-functioning credit markets around the world. Credit reporting data helps establish the repayment history of borrowers to make it easier for them to access loans by allowing creditors to assess the repayment capacities of their customers and support their credit-risk monitoring. The regulators use this data to monitor credit markets and lending/borrowing trends.

The World Bank's annual flagship publication, Doing Business, which presents quantitative measures of the regulations that enhance business activity and those that constrain it in 189 countries, also covers at least two aspects of the regulations that affect the availability of credit.

First, it looks into the depth of credit information - the coverage, scope and accessibility of information available to lenders through credit bureaus. Two, it measures the strength of the legal rights to evaluate the degree to which secured transactions or collateral and bankruptcy laws protect the rights of both borrowers and lenders to facilitate lending.

In recent years, there has been a growth in the trend towards the expansion of the scope and quality of credit reporting services around the world. Currently, more than 50 countries have established credit reporting systems, credit bureaus or registries to not only help creditors manage their risk but also as an effective tool to strengthen financial inclusion, particularly women, low-income groups, and micro and small businesses.

It is not the job of the SBP to run a credit information bureau; its job is to regulate the private bureaus and ensure that all creditors willingly contribute their data to existing bureaus.

In Pakistan, where only a fraction of population is connected with the nation's financial system, the dream of higher levels of financial inclusion allowing access to low-income individuals remains unrealised in spite of the efforts made in the last couple of decades. To promote financial inclusion, the parliament passed the Credit Information Bureau Act 2015 to pave the way for establishing private credit bureaus as part of the State Bank of Pakistan's (SBP) National Financial Inclusion Strategy (NFIS).

Under the Act, the central bank has so far issued licenses to two private credit bureaus, which have replaced several unlicensed registries operating in the country before. The role of the unlicensed credit bureaus or registries was nevertheless limited to data collection from financial institutions, which voluntarily shared data with them.

However, industry sources tell this correspondent, the licensed private bureaus are struggling to collect information from the creditors for developing reliable registries of credit data of both individuals and corporate entities because of gaps in the Act. Besides, the central bank's Electronic Credit Information Bureau also continues to operate, creating negative competition for the private credit bureaus.

"It is not the job of the SBP to run a credit information bureau; its job is to regulate the private bureaus, ensure that all creditors willingly contribute their data to these bureaus, and develop a competitive environment for them in the country," a senior microfinance banker from Karachi commenting on the condition of anonymity. He urged the SBP to develop a standard format for all creditors to follow for ensuring the availability of uniform credit history information of their clients to the bureaus.

Moreover, the Act makes it mandatory for the financial and credit institutions to become a member and share data with at least one of the licensed private credit bureaus.