Role of banks, leasing companies stressed

To have a higher degree of financial development, access to credible financial information is essential. Lenders, banks and leasing companies have to make informed decisions while lending.

The lender must know a borrower's ability to pay back the loan on time. For this, the lender needs proof of income, liabilities and history of loans and defaults. The borrower can take loans from multiple banks and hide this information while applying for a new loan.

The borrower may also be someone new who has never taken a loan before. In this case, the lender has no idea if the borrower will be a good or bad customer. This is where credit informationsharing institutions come in. These institutions keep a record of all loans and the history of repayment and defaults of a borrower. These institutions typically take one of the two forms: they are either a public credit registry or a private credit bureau.

Both types of institutions serve the same purpose. They collect information on the credit history of the borrowers (individuals and/or small firms), including information on credit repayments, bankruptcies and court judgments, from various sources and sell it to the creditors.

The only difference between the two types of institutions is that a credit registry is usually maintained by the government - typically by the central bank. The private sector manages a credit bureau. In principle, they should be perfect substitutes. It shouldn't matter whether a public or private entity supplies the information.

Setting up collateral registries to keep a record of asset ownership will allow borrowers to prove their creditworthiness

Despite the obvious benefits of credit bureaus, the proportion of the public covered by credit registries or bureaus is dismal. Only 9.9 per cent of the total adults were covered by the credit registry in Pakistan, according to the World Bank in 2017. Whereas, the coverage by private credit bureaus is only 6.7pc of the total adult population. India has 43.5pc of the adult population covered by credit bureaus. The share of the adult population covered by credit bureaus is 14.1pc in South Asia and 30.8pc in the entire world - well above that in Pakistan.

The State Bank of Pakistan ( SBP) made efforts to gather information about the credit history of the public.