Embracing Credit Culture in New Political Dispensation

Pursuant to challenges in the banking sector, Government has set up policies and institutions to improve credit risk management in the country’s financial sector.

In a country where the courts are flooded with issues related to debt settlement, the move was a positive step towards proactive risk mitigation. In worst case scenarios, debtors disappear and cannot be located, leaving creditors with a court order and no party to enforce it against.

This had been necessitated by the challenges in lending affecting Zimbabwe due to an ever-changing economic landscape, lengthy legal process, insufficient debtor background research and the weakened ability to enforce contracts. In some instances, a single debtor would be owing several financial institutions, a situation which can be avoided in a country with a proper functioning credit reference system.

By investing on a central credit reference registry, the Reserve Bank of Zimbabwe took a major step towards building a credit culture. The existence of a credit registry instils confidence in credit agreements. Further by the incorporation of sections 31B and 31C of the Banking Amendment Act, 2015, which requires credit reference bureaux to be licensed by the registrar also signified the importance of a strong credit culture in the economy and the need to improve credit risk management systems and practices in the country.

The Credit Reference Registry set up by the Reserve Bank of Zimbabwe will contain credit history reports of prospective borrowers before granting credit. The system, hosted by a Czech Republic credit checker (Creditinfo), will compile information about individuals and corporates on credit repayment records, court judgments, and bankruptcies before creating comprehensive credit reports that can be availed to lenders or creditors.

The absence of a comprehensive credit reference environment in Zimbabwe has been a major bottleneck to the expansion of the volume of private sector credit. Indeed, Zimbabwean firms have consistently cited limited access to credit as one of the greatest barriers to their operations and economic development. Banking institutions have continuously been exposed to high credit risk because of inadequate information on borrowers’ creditworthiness.

This has inevitably resulted in increased cost of borrowing, thereby making credit more expensive than it would otherwise have been. This move will potentially reduce the cost of borrowing, boost access to credit, which has been a hindrance to economic development due to lack of trust between lenders and borrowers and constant emphasis on collateral security, which very few people can provide.

On a positive note, borrowers will now be able to use their positive credit history as collateral to access loans at better rates and seek more competitive terms from different lending institutions.

The leading private credit bureau, Financial Clearing Bureau (FCB), traditionally associated with keeping a register of defaulters and judgments, has developed and adapted to suit the changes and demands of the market, signifying the importance of general customer information – whether positive or negative – in influencing lenders’ decision making.

And the initiative to introduce regulatory framework for the registration and licensing of credit bureaux is a necessary milestone for the establishment of control mechanisms safeguarding the sensitive nature of information credit bureaus will be handling.

With the global village increasingly moving towards a system of transparency based on credit worthiness, banking sector information, which would otherwise have been protected in terms of the Banking Act, might now be accessible to private credit bureaus.

This shall be after accreditation by the reserve bank, enabling private credit reference bureaus to also collect and/or obtain credit information from financial institutions.

Considering the registry relies on confidential information to create comprehensive credit reports, financial institutions would require client consent to disclose and make inquiries seeking information from any bank, or approved credit reference bureau in Zimbabwe when making an assessment.

It would thus be important for the general populace to be aware and appreciate the salient terms, which will be incorporated into business transactions in response to the establishment of the central Credit Reference Registry. These terms would waive the customers’ right to confidentiality, allowing credit bureaus to share client credit history.

Research indicates that the availability of credit bureaus improves credit repayment rates by reducing moral hazard problems and assisting financial institutions improve risk management practices on the other.

To achieve this, it is important to note that the quality of debtor assessment depends on the quantity of available data, hence the need to allow information sharing between different stakeholders, subject to the registrar’s oversight. This calls for participation by the retail industry to boost the quality of information available to lenders.

Honest borrowers can now boost their creditworthiness in their daily activities. The high one’s creditworthiness, the more likely it is that a bank or other financial institution will extend credit. Creditworthiness can be achieved by repaying loans and other bills on time and generally demonstrating financially responsible behaviour.

A person paying bills on time, for example, will be able to demonstrate the ability to pay even in the absence of income. This can be a good initiative for a country with a booming informal sector built on plastic transactions.

Hence the next time one decides to skip on that monthly bill, be mindful of the negative impact on the individual credit score or credit rating for organisations and its overall effect on an individual’s access to credit.

In addition to making credit accessible to more people and enabling lenders and businesses to reduce risk and fraud, properly run credit bureaus are reliable sources of information in the skip trace process. Skip tracing may be employed by credit providers, debt collectors, attorneys and plaintiffs in civil suits and credit bureaus may be the reliable first port of call to determine the location of fraudulent defendants.

It can also be a major boost for small-to-medium enterprises, whose combined efforts can improve the national economy. Access to credit, however, has always been hindered by the risks attaching to the lender, coupled with the difficulty in predicting the influence of external factors to debt repayment.

With the high unemployment rate and the rise of the informal sector, the risks of doing business in Zimbabwe have become a major force to reckon with and to operate profitably, risk management has become a top business priority. The introduction of the registry will inevitably impact financial institutions attitude to lending.

With the rising need to compete in the international markets and break into new markets, other risk minimising solutions that are already in place to mitigate credit risks associated with international trade include taking up insurance with the Export Credit Guarantee Corporation of Zimbabwe(ECGC).

ECGC (Private) Ltd is an export credit agency wholly owned subsidiary of the Reserve Bank of Zimbabwe, whose mandate is to help in the promotion and facilitation of Zimbabwe’s domestic and international trade through the provision of export and domestic credit insurance products.

It offers two different policies, namely export credit insurance, which is cover offered to exporters to protect them against the risk of non-payment by foreign buyers on the export markets, and domestic credit insurance, which offers protection to companies selling their products or services on credit against non-payment on the local market.

Apart from the policy indemnifying the exporter in the event of a loss, ECGC vets the creditworthiness of potential foreign buyers so that the exporter deals with genuine, financially stable buyers only, thereby serving the same purpose as the credit bureau just at international level. This protection can also enhance local business’ capacity to compete in the international markets profitably.

The success or failure of implementing a credit reporting system remains subjective and should never be a replication of another country’s experience, but a process of designing the most suitable solution for the country’s economic environment.

In Zimbabwe, factoring in major payment solutions like Ecocash in establishing personal transaction activities can go a long way in proving individual cash consistency and cashflow contributing to the quality of information available to the credit bureaus.

The EcoCash Savings Club and recently U-Gain also help bring the traditional informal group savings into the mix, which can be critical in establishing the borrower’s credit behaviour history.

Davies Chipinda is a lawyer writing in personal capacity.

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