Key highlights
- Although total number of enquiries grew by 7 percent in 2019 to reach 2,820,946, trend analysis from 2016 shows a deceleration in growth, from 34 percent y-o-y growth in 2017, to 18 percent y-o-y growth in 2018, and now 7 percent in 2019.
- The Savings and Loans sector continues to lead in terms of platform usage, whilst the Microfinance sector still trails with a paltry 4.71% 2019.
- About 4 out of every 10 enquiries made (39 percent) produced no credit data on borrowers (“No Hits”), reinforcing the concerns that a lot of users have regarding value for money.
- Attributing non-compliance to high labor turnover, not only belies a weak institutional governance structure, but makes nonsense of the mandatory clause in Section 24 of the Credit Reporting Act 2007 (Act 726).
There is no question that a credible credit reference infrastructure yields tremendous benefits to the economy by reducing moral hazard risk associated with lending. Any system or platform that helps to re-balance information asymmetry between borrowers and lenders means that financial institutions are better able to estimate counterparty default probabilities associated with a broad range of assets across several maturities, and can also price such risks more intelligently. Since its introduction in 2008, Ghana’s credit reference infrastructure has sought to deliver this outcome for users. Suffice to say that remarkable progress has been made over the years in terms of adoption and usage. That notwithstanding, there are still major concerns about overall compliance, data quality and consistent data submission, particularly in the Microfinance sector where it is needed the most.
In this article, I hope to shed some light on a key observations and what the implications could be in terms of addressing the problem areas identified, to with; compliance, data quality and consistent submission.
First thing any keen observer will note is that various tiers within the financial sector are predisposed to using one particular credit bureau, or the other. In terms of share of enquiries, XDSData Ghana limited is most popular with the banks (51 percent), followed by Dun & Bradstreet (49 percent). The Savings and Loans sector also uses XDS mostly (51.4 percent), but to a lesser degree, Dun & Bradstreet (11.2 percent), compared to 37.4 percent for Hudson Price Limited. The MFI sector seem to gravitate towards Dun & Bradstreet more than the others, the data shows. What drives these preferences is really not the focus of this article and so no commentary is warranted. What is of utmost importance here is what the broad implications are for compliance, adoption and usage rate.
So first, you need understand how the system works. Per Section 26 of the Credit Reporting Act 2007 (Act 726), a data provider must conduct credit checks on a prospective borrower before concluding any credit agreement. In order to do that, a data provider, or financial institution in this case, must have a contractual relationship with a credit bureau to use their platform. Almost invariably, every financial institution is signed up with one of the three credit bureaus, for purposes of utilizing their database. On the other hand, Section 24 of the same Act (Act 726) mandates every data provider to submit credit data on a borrower within 72 hours of concluding the credit transaction. The requirement is to submit to all three credit bureaus, using their respective data upload portals. So essentially, reports generated through system query relies on the data submitted by a data provider. Garbage in, garbage out. Quality in, quality, out. No data in, no data out. You get what you sow. It’s that simple. This is where the risk is located, and it is indeed an operational risk element. Except where controls exist to ensure that the data clerk actually submits to all three bureaus, the temptation exists to submit to only your service provider, and then maybe to the others, absent any hindrance like system downtime, or just sheer negligence. The result would be a situation where, say XDS Limited may have the credit data for Asomasi Company Limited, but same data may be missing from Hudson Price’s database, because an employee failed to do his or her work diligently. This is common. In fact, there is plenty of anecdotal evidence to support the claim that this is indeed the practice. This results in what I call the “Silo Effect”. A review of the Credit Reference Activity report 2019, and indeed pervious reports, shockingly falls to finger this phenomenon as part the factors that may account for the high “No Hits” record. It is reasonable to conclude, in my view, that the situation of unacceptably high “No Hits” recorded over the period (39 percent: 2019; 34 percent: 2018) may just be a disguised case of weak corporate governance and poor internal controls. This is why I think the claim that “high staff turnover in the [MFI] sub sector partly accounted for the poor level of compliance”, is a travesty of an excuse and therefore not tenable. (See Credit Reference Activity Report 2019, para. 3.2, page 10).
With 39 percent of total enquiries drawing blank, the value for money question is a fair and legitimate one for Bank of Ghana to address. What this means is that, a data provider receives no benefit for 4 out every 10 enquiries (approximated) made on a credit bureau’s database, even though facility user fees (cost) has been paid. This runs counter to the cost-benefit argument that justifies the use of the system in the first place. Unfortunately (and this is anecdotal), some non-compliant clients I have worked with in the MFI space spew this very excuse to justify why they don’t use credit reference agencies. In fact, some prefer to share client data via peer-based industry WhatsApp groups for purposes of obtaining informal feedback on borrower activity. The emergence of such parallel mechanisms has its own problems in terms of data privacy. Clearly, there is need for urgent action by all stakeholders, particularly Bank of Ghana, to focus interventions on MFI sector in order to increase usage rage to at least 10% in the next 2 years.
So what can Bank of Ghana do?
- Harmonize the platform in a way that integrates the database of all three credit bureaus to allow for a single query across board. This means that a data provider will submit credit data to a single depository which is accessible to all the three credit bureaus.
- Engage sector associations to develop a sensitization program for MFIs with the goal of increasing usage rates going forward.
- When the law says “shall”, it means “shall. Section 24. (1) “A data provider which is a financial institution shall submit information to a licensed credit bureau that relates to a person who enters into a credit agreement with the financial institution.” Enforce the law. Utilize random checks as part of onsite monitoring strategy to assess compliance, and levy pecuniary sanctions for non-compliance.
- Introduce mandatory monthly reporting for data providers using a template which clarifies name of data clerk, supervisor sign-off and attestation that data submitted meets standards and requirements provided under Section 24(1) of the Credit Reporting Act. This will help establish accountability.
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