Improving access to Finance through Credit Reference Bureaus

Access to and the availability of finance or credit has arguably been one of the main constraints to growth and development in most developing countries. Broadly speaking, access to finance can be defined as the ability of an individual to obtain and use sustainably, financial services that are reasonably priced and appropriate to their financial needs. In Zambia, however, as in many other developing countries, access to finance is a major challenge. The 2009 FinScope study by Bank of Zambia shows that only 37.3% of the Zambia population has access to some form of credit, with only a meager 13.9% of these being served by a banking institution.

One of the key factors behind the persistent limited access to credit is the presence of a phenomenon known as Information Asymmetry. Information Asymmetry refers to a situation where there is neither reliable nor complete information on either the availability of credit or the inability of lenders to know the right individual or organisations to give credit to, i.e, the ability to assess the creditworthiness of borrowers. Existence of information asymmetry leads to financial institutions either denying credit to credit worthy individuals or offering it to credit unworthy individuals (a situation referred to as adverse selection).

To address this information asymmetry problem, credit reference bureaus have been established around the world to serve as sources of information for banks on the credit eligibility of borrowers. In Zambia, this is a new phenomenon which has recently been introduced with the aim of bridging the information gap to lenders. It is envisaged that the reduction of information asymmetry that credit reference bureaus will yield positive results by relaxing credit constraints with increased and accurate information, thereby increasing competition in the credit market and thus lead to the efficient allocation of capital for growth and development.

Credit Reference Bureaus (CRBs) are commercial entities which compile information on the credit history of individuals with the aim of providing this information to financial institutions in assessing the credit worthiness of would-be borrowers. This information is compiled mostly from financial institution records. At the request of either banks or would be borrowers, this information is made available in the form of individual or corporate credit reports which help them to decide whether to grant an application for a loan, overdraft, credit card, or provide other financial products.


It must be noted that ideally, no one has a natural right to credit. Individual lenders such as commercial banks (CB) and Microfinance Institutions (MFI) have their own inhouse criteria used to determine the creditworthiness of would-be borrowers. However, it is impossible to know each individual's credit history, and this is where Credit Reference Bureaus (CRBs) come in: to supply accurate and updated credit histories of would-be borrowers. The CRBs would in effect act as first line credit screening facilities which the financial institutions would rely on to make credit decisions.

Given the nature of their role, CRBs allow for credit information sharing among the financial institutions.Credit information sharing undoubtedly plays a pivotal role in reducing the information asymmetry that exists between banks and borrowers. Banks, on one hand, are therefore able to get hold of credit information on prospective borrowers that will facilitate assessment of credit requests to mitigate risks of bad debts. For the borrower, on the other hand, a good credit record acts as an incentive for competitive pricing of loan facilities, i.e, borrower who has a good credit history is more likely to get a loan and at a reasonable interest rate. For SMEs who are one of the key growth sectors in the Zambian economy, and who have a financial track record and good performance can use this to access credit as collateral..

When an applicant approaches a bank for credit facilities, the bank submits the identification number of the customer and their name to a CRB. The CRB then confirms if the applicant has been listed on their data base for any reason. A credit report is then given to the bank. If one is found to have a bad credit history, credit may be denied (thereby reducing adverse selection). The information asymmetry problem is therefore effectively dealt with by the CRBs.

Therefore, credit information sharing as made possible by CRBs rewards and promotes good credit track record. Furthermore, credit sharing leads to a reduction in the cost of credit. Previously, lack of credit information has led to banks factoring a high risk premium in the pricing of credit. It is envisaged that with CRBs, risk premiums will be appropriately applied taking into account the true credit history of borrowers CRBs usually have personal information taken from previous credit applications such as loans, overdrafts, credit cards, etc. This information, presented in form of a Credit Report (CR) usually includes name, date of birth, current and recent addresses. The important part of the CR is the credit history. This lists your credit accounts, the date they were opened, the credit limit or loan amount, and whether you have missed any payments. CR also records the name of your current account provider, i.e, the financial institution you have a credit facility with. It is this that is of important interests to would-be lenders in determining your credit worthiness.

Given the risks associated with credit, it is expected that banks will give a listing of all their bad debtors' information to the relevant credit reference bureaus in Zambia. This will help reduce further bad debts being issued which have limited banks' abilities to lend out to credit worthy individuals.

Noting the above, it is important that individuals consult the relevant CRBs to check their credit worthiness and correct for any errors that may exist. Likewise, all financial institutions are expected to share their clients' credit records with the CRBs to ensure complete and adequate flow of information in the financial services sector. This will help reduce the challenges of credit access in the country.