With Nigerian Banks asked to lend more, experts say the focus has shifted to Credit Bureaus. In this interview, with BusinessDay journalist Segun Adams, Ahmed ‘Tunde Popoola, Managing Director/CEO of CRC Credit Bureau Limited explains how the presence of Credit Bureaus guarantees easy access to credit for individuals and businesses.
The Credit Bureau Industry started in 2008 perhaps reflective of the country’s financial literacy, not a lot of Nigerians know what Credit Bureaus are, can you shed more light on what you do?
Credit Bureaus are institutions or infrastructures put together by every country to encourage access to credible information for creditors or lenders to have good information about the performance of financial obligations of every borrower or anyone who buys on credit.
So where you have Credit Bureaus the source for information about loans that are being taken and try to develop products around credit history and credit scores including credit ratings for all individuals and entities in that economy.
The whole objective is to make such information available for creditors and lenders to be able to lend with some level of confidence and trust.
One of the main challenges that lenders face generally is to know the capacity of potential borrowers and their willingness to repay loans and Credit Bureaus believe if one has been behaving in a particular way or pattern, the tendency is for such person to behave the same way in the future.
Credit Bureaus put data from various sources including banks and public utilities like electricity, water, telecommunications and data companies, to generate credit report and credit scores which lenders then rely on to be able to determine the creditworthiness of every individual or entity in that particular economy.
When that is done, the major benefit is that lenders would no longer give credit in the dark; they would lend based on credible information about potential borrowers, hence minimizing the risk of their business.
The second advantage is that it allows for risk-based pricing means persons with credit score pay a lower rate of interest than those with higher risks.
The third one is that it helps lenders overcome the challenge of information asymmetry which occurs when creditors do not know about a borrower but only rely on the information made available by the person seeking credit; with Credit Bureaus, banks and other creditors can get information from an independent third-party thus minimizing haphazard selection.
For the borrowers, the existence of Credit Bureaus means those with good credit history would be opportune to have more access to loans and can buy on credit; more so, they would be able to negotiate the rate of interest they pay based on their credibility.
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Overall, the economy would benefit as the efficiency of getting access to credit improves and the process of becomes de-personalized by making sure that even with machine learning and automated processes, credit can be granted within seconds and the manual process of interviewing customers and getting written application would be done away with.
Also, credit analysts would no longer rely on emotions to run credit analysis so Credit Bureaus make access to credit easy by providing useful information, removes sentiments and reduces human-errors in the process leading to an increased volume of daily transactions in the economy and growth of national income.
Where you have Credit Bureaus, it reduces the financial constraints to Small and Medium Enterprises (SMEs) by at least, 22 percent. This means more businesses-especially SMEs which are the engine of growth for developing economies like Nigeria-would have access to credit.
On the consumer side access to credit stimulates demand; in any economy where you have Credit Bureaus, overtime the GDP grows.
The industry is a little more than a decade old, as an industry leader how has the journey been for Credit Bureaus in Nigeria?
It has been an interesting and a hard journey to where we are today but it is good to say the Credit Bureau industry in Nigeria today seems to be supply-leading and demand-following.
By supply-leading I mean those who started Credit Bureaus in the country believing that lenders would someday need their services while demand-following is a situation where the lenders themselves see the gap in the absence of Credit Bureaus and therefore co-operate to share information amongst their selves.
It is both ways in Nigeria because before the licensing regime in 2008 there had been a Credit Bureau trying to enter the market but the acceptability was very low because while the Credit Bureau saw the opportunity, the market operators did not see the need for their services until 2008 where the banks came together to form CRC Bureau and that is why the Credit Bureau is owned by a consortium of some of the biggest banks in Nigeria.
The Central Bank of Nigeria (CBN) through section 57 of its Act began licensing and regulating Credit Bureaus in 2008.
In 2009 we came live and three bureaus were licensed; we started with less than 12 banks and the percentage of data that was accepted in the bureau was just about 20 or 30 percent but today we have about 1,500 institutions on our platform, and those institutions cover all the commercial banks in Nigeria, all microfinance banks, we have the primary mortgage banks, the specialized banks like the Bank of Industry, Bank of Agriculture, Federal Mortgage Banks and so on, we have the leasing companies, the finance houses and the fin-tech companies.
We also have the pharmaceutical companies, the retailers, insurance companies and even players from segments outside the financial institutions which give credit or sell on credit.
Our repository today is over 30 million compared to under two million when we started; so we have grown in terms of volume of data in our repository as well as the number of institutions and sectors we cover. We have electricity distribution companies (DisCos) and telecommunications companies submitting data and using the bureau services.
The other thing that has happened is that we have had the opportunity to develop an array of products to support lenders and creditors in the market.
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When we started we had just the credit information report which covers credit history of obligors whether as individuals or as businesses but today we have about 13 products including credit scores, credit monitoring products, portfolio management products, products on training and capacity building and so on.
Beyond that, the Federal Government, the CBN and the International Finance Corporation (IFC) have done a lot to help the industry.
In 2013, the CBN reviewed the guideline issued in 2008 having seen the bureaus operate for five years and the inhibitions inherent in the former regulation.
Four years after, an Act of parliament was passed called 2017 National Reporting Act, a legislation that supports of Credit Bureaus and defines in clear terms the responsibility of each stakeholder in the market.
The Act makes it comfortable for us to operate and has given us legitimacy; it has also boosted our ranking on the ease of doing business in terms of access to credit which is the criteria Nigeria rank highest among parameters that are summed in the ease of doing business.
Credit Bureau Coverage in Nigeria is around 11 percent according to World Bank data and lower than coverage in African Peers like Ghana, South Africa, Kenya Egypt, and even similar economies across the world. Why is this so?
The analogy I can make is this: when a university student has mostly D grades in his or her first and second year and then scores A parallel, the cumulative average grade does not improve so much and the person would need some time to even reach a second class upper with subsequent excellent performance.
Nigerian banks used to lend only to big corporates and only a small segment of the consumer market before the advent of Credit Bureaus.
The volume of transactions of the typical Nigerian bank it was almost 97 to 3 percent. Loans to SMEs and consumers was under five percent generally in terms of volume and when you consider the value the situation was even worse.
Because bureau data is based on existing borrowers, it took time to build on that and since bureaus started, banks now have SMEs desk.
The 11 percent you mentioned as Nigeria’s coverage is calculated by dividing the data Credit Bureaus have by the number of the adult population of the country. If you divide 30 million data by almost 200 million people you would see that it is low but that is an improvement from under five percent coverage in 2008.
We are making strides and would soon meet up with a lot of the countries ahead of us.
Recently the CBN issued directives for lenders to give a minimum of 60 percent of consumer deposit as loan, how has it impacted on the Credit Bureaus?
Even before the pronouncement of the CBN governor, which I have to commend, there has been some upsurge in the volume and value of loans that were booked by financial institutions especially in the last 12 months and there are about two drivers for that.
The first driver is the coming of fin-techs who have very simple technology to make loans available to people who do not have bank accounts in few minutes and this has put a lot of pressure on commercial banks to think through how to compete in that space.
We saw some commercial banks partnered with fin-techs, some invested in fin-techs while the others came up with their applications to lend to a lot of people within 24 hours and also lend small amounts of money to consumers.
The second thing that started before the CBN governor made the announcement was the fact that most banks had SMEs desk in an attempt to leverage Credit Bureaus data in lending to the businesses. Today most banks now have SMEs desks as well as special loan packages for SMEs.
In the last two or three years also virtually all banks have introduced credit cards with was not available before that time and that speaks to the fact that with the bureaus the lenders now have credible information to work with as well as a reliable institution to submit data to on every customer that borrows.
Customers now know that if they default, banks can check against the database, discover their compromise and decline their loan request; not just lenders even utility companies can access the database.
With the lending policy announced two months ago, it is too early to start seeing the impact.
The directive is to lending at least 60 percent or the gap is sterilized by the CBN. No bank wants that but at the same time they do not want to just give loans out without due diligence so we are beginning to see a lot of engagement with the banks who are asking questions about what products we can give to them to do more.
We are also beginning to see a lot of banks change the model of their lending; before quite a number of them have an array of staff who access our system through the website but today most of them are opting for electronic linkage that is Application Processing Interface (API) which is faster and more efficient method.
The other thing that has come to play is that we have introduced our credit scores as a way of looking at the totality of information in the credit report and reduce it to three digits that show the level of risk associated with each borrower. The score ranges from 300 to 850 with a lower score indicative of higher risk, and vice versa.
With that, the banks have a scientific way of profiling their customers although the minimum acceptable score varies with individual banks and reflects their risk appetite.
Latest data show that the economy slowed for a third straight quarter and some key sectors where loans have to be disbursed and underperforming, what are the broad ways to ensure that bank’s loan do not go bad?
Sadly, we have not been able to grow the GDP more than our population since we exited the 2016 recession. Nigeria is the only country in the world apart from worn-torn nations where the number of people living in poverty is increasing; the global trend shows a decline.
The service industry has been the driver of growth in recent times while agriculture and manufacturing, core drivers of the economy, have not been impressive.
To address the issues we must focus on three main drags; the first of which is power.
For SMEs, the cost of production is astronomical and this kills the country’s competitiveness and drives businesses out of the country.
In the last 10 to 15 years power production has been hovering around the same range and below the capacity needed for domestic production.
The second one which is transportation; Nigeria needs a good transportation system to enhance the mobility of goods and services.
The Lagos-Ibadan expressway in the last decade has not improved and I only ply that road when it is necessary. The state of our road infrastructure needs to be addressed because of the impact it has on commerce.
Road and electricity infrastructure is vital as they can propel or mar the growth of any economy.
The third issue is already being addressed and it is the ease of doing business in Nigeria. While that is so, addressing the issue of insecurity in the country is paramount.
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Mobile phone network companies are in the lending space now and they have firsthand information of their customers while some banks are building algorithms to help in the process of loan issuance. Do these trends threaten the Credit Bureau industry?
No, it doesn’t. Instead, data mining by Telcos, fin-techs and other lenders strengthens the Credit Bureaus given that more information would be available for bureaus as lending improves in the economy.
We are also trying to work with the Telcos, some of which have joined us, on how they can do more from what we call transactions data or mobile phone data to develop scores that can be available for all Nigerians.
This means it is not just when people approach banks for a loan that they can have credit scores, based on data on telephone usage, bill payment or ATM card usage, we can create scores Nigerians can use to obtain credit.
Why the partnership with FICO on your credit score product?
FICO is Fair Isaac Corporation, a US company and the first in the world to have developed and perfected the art of credit scoring; it is also the biggest and dominant credit bureau and we believe what is worth doing at all is worth doing well.
We want the best for Nigerians and do not have to reinvent the wheel; just as we brought Dun and Bradstreet as technical providers for the credit report, we have also brought FICO to provide credit scoring solutions for us which we customize to suit local need.
Also asides the fact that FICO is widespread and used by banks across the globe, the partnership confers legitimacy and trust.
We have about 13 other products that service lenders, creditors and also borrowers.
The CRC Score costs N400 and there is a shortcode for accessing the service which makes it affordable and easy for Nigerians everywhere to use. You won an innovation award in for this in 2018 and also another 2019 award as best Credit Bureau in Nigeria. What innovations are in the pipeline?
We have always been driven by the need to empower Nigerians and Nigerian businesses with credible information and every day we think of new ways to achieve this.
We have always had products for institutions but are seeking ways for individuals and SMEs to have the same access so we are working on platforms to make it easy for many Nigerians which would drive down price further as more people subscribe.
Currently, we are working on a product that allows Nigerians who emigrate to settle easily into wherever they are going by making sure their credit report and credit score is available at their destination.
We have an international partnership with a particular Credit Bureau outside Nigeria so that when people go to US and Canada, for instance, as we see is the trend, the emigrants do not have to wait six months to nine months before they can enjoy credit there.
The fact that those economies are run on credit puts Nigerians at a disadvantage in the first few months of arrival and we want to assist them in that regard.
