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Boosting access to credit: The role of the credit bureaus

The Micro, Small and Medium Enterprises (MSMEs) sector in Nigeria accounts for about 90 million jobs in the economy. However, less than 15 percent of MSMEs have access to finance. Lack of access to financing, most notably working-capital financing, has led to the crimping of the sector growth and a loss in latent innovation, creativity and productivity.

The Nigerian government has demonstrated its commitment to improving the ease of doing business and access to credit to consumers and small businesses through various policies and initiatives. These include the promotion of credit reporting infrastructure and collateral registry, enacting enabling laws – including the Credit Reporting Act 2017 and the Secured Transaction in Moveable Assets Act (Collateral Registry Act) 2017, promoting financial inclusion, and advancing various forms of direct and indirect interventions in loans and grants to strategic economic agents. The commitment resulted in Nigeria making the greatest stride in improving access to getting credit in the World Bank’s ease of doing business rankings. The country moved from 32nd position in 2017, to 6th position in 2018.

The interventions and initiatives by the government provided a necessary enabling environment and a strong regulatory framework that behoved credit granting institutions to do more, though access to credit by MSMEs and consumers in Nigeria still remains very low. Despite the country’s huge population of over 190 million people, less than 15 million persons/entities have enjoyed at least one form of credit from formal banking institutions. In addition, according to a communiqué given by the Central Bank on Nigeria in January 2020, credit to the private sector grew from 12.82 percent in November 2019 to 13.1 percent in December 2019.

Access to capital is a major ingredient in growing businesses and economies. Lack of access to finance is a key constraint on the growth of small and medium enterprises in Sub-Saharan Africa, and an important limitation on employment, economic growth and shared prosperity. The problem of access to credit is a recurring complaint from manufacturers and businessmen. Aside the facts that interest charges are high; many small businesses cannot access credit.

Figures released in 2019 by the Enhancing Financial Innovation and Access (EFInA) revealed that about 36.6 million Nigerian adults, which represents about 36.8 percent of the Nigerian adult population, do not have access to credit, which compares poorly with the higher rates recorded in a number of other developing countries. Nigerian Banks generally seek to lend money and earn the resultant incomes. However, they have become extremely careful due in part to the level of defaults being experienced. While most banks today will advance credit to blue chip companies and their employees, the willingness to lend to small businesses is hampered by lack of credible information.

Also, research indicates that lending is higher and credit risk is lower in countries where lenders share information, regardless of the private or public nature of the information-sharing mechanism. It is common knowledge in Nigeria that the Small Medium Enterprises (SMEs) have challenges in obtaining substantial loans from some financial institutions mostly as a result of the high interest rates imposed by the banks as well as the collateral required that most SMEs do not own.

In most developed countries, they use credit histories to determine unique interest rates to suit each customer/potential borrower. Credit histories are accrued based on information on the person’s financial responsibility in handling previous debts, bill payments and public information. Credit bureaus in these countries can generate what is known as a Credit Score, a numerical value calculated to ascertain the creditworthiness of potential borrowers. Credit histories equip banks with information they need to determine a customer’s creditworthiness and charge interest rates based on the individual’s risk profile.

Credit growth drives the economic growth of the country. Credit promotes investment which has propelled many economic booms and strengthens entrepreneurship. As SMEs cover over 75 percent of Nigerian jobs, their ability to raise capital to expand is crucial for economic growth and development in Nigeria. According to Statista, a leading provider of market and consumer data in Hamburg, Germany, the value of domestic credit granted to private sector in Nigeria was about 10.9 percent of Nigeria’s GDP in 2018.

A more robust solution to this prevalent challenge would be the utilisation of credit bureaus. A credit bureau is an institution that aggregates the information used to build credit histories; hence they are in fact the most important players in bridging the information gap and solving the asymmetric information challenge in the Nigerian credit market. Currently, there are three credit bureaus in the country – FirstCentral Credit Bureau (Formerly XDS Credit Bureau), CRC Credit Bureau and CreditRegistry.

Each of the three licensed credit bureaus today has an average repository of about 25 million records of credit data from institutions across various sectors of the economy including but not limited to commercial banks, microfinance banks, mortgage banks, retailers, cooperatives, finance companies, leasing companies etc. In view of this phenomenon, credit bureau coverage remains low in Nigeria at 8 percent compared with 64 percent in South Africa, 25 percent in Egypt and 17 percent in Ghana. We need to urgently change the narrative of credit concentration and increase access to credit.

The products and services provided by credit bureaus improve the ability of lenders to evaluate risk and of consumers to obtain credit and other products with speed and at competitive terms. Credit reporting expands access to finance, especially for consumers and MSMEs and plays a key role in improving the competitiveness and efficiency of credit granting institutions by reducing credit processing costs and time. The availability of credit information therefore implies a more efficient allocation of credit at lower interest rates accompanied by higher economic growth and a more diversified credit distribution.

The credit bureau infrastructure is also designed to provide support for the introduction of new products in the financial system such as credit cards, mortgage loans, personal loans, auto loans, working capital for small businesses, etc. This should result in exponential growth in retail lending and significantly improve production and consumption, thereby stimulating the growth of the economy. The infrastructure is also meant to facilitate credits and post-paid services by non-financial institutions such as instalment rental payment, increase post-paid services by telecommunications and electricity distribution companies rather than the current largely pre-paid model, expand credit sales by retailers with confidence, encourage instalment payment of school fees and insurance premiums.

Credit reporting systems are essential to creating sound financial infrastructures that facilitate lending and help expand access to credit to a significant share of individuals, microfinance, and small and medium enterprises. Also, they help satisfy lenders’ need for accurate, credible information that reduces the risk of lending and the cost of loan losses.

Credit reporting is beneficial to all parties in the credit cycle. It helps lenders to make informed credit granting decisions such that default rates can reduce, helps individuals/borrowers without collateral to secure credit, leads to better payment behaviour on the part of borrowers for fear of being denied credit and help borrowers with positive information to get favourable loan conditions. With these in place, the enhancement of financial inclusion which would in turn promote the sustenance and growth of MSMEs would be guaranteed.

Peters is the Acting MD/CEO, FirstCentral Credit Bureau and Chairman, Credit Bureau Association of Nigeria (CBAN)

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