South Africa’s Compuscan has set up the first national credit reference bureau in Uganda’s rapidly expanding financial sector. One of the main obstacles in developing such a service was the lack of a national ID to clearly identify borrowers. Andrea Bohnstedt speaks to Compuscan Uganda’s Managing Director, Mike Malan, about the technology introduced to address this problem.
Uganda has pursued plans for the establishment of a credit reference bureau for a great many years, but one of the reasons that led to the lengthy delays was the fact that the country does not have a national ID – a project that, in itself, has also been long overdue, with renewed delays recently. As a consequence, South Africa’s Compuscan had been tasked with providing not just the back office and infrastructure of a credit reference bureau, but also a safe means of identifying customers. Biometric technology offered a solution: Borrowers are fingerprinted and, on the basis of their fingerprints, assigned a borrower number. This information is then included on a smart card. The system had been custom designed for Uganda.
The introduction of this technology, however, means that the set up costs for the credit reference bureau are much higher than what would usually be the case, and this had to be taken into account in the financing of the venture. Donors, i.e. the World Bank and German Kreditanstalt fuer Wiederaufbau (KfW), provided matching grants for the operations in the banks, and KfW also provided a grant for the set up of the credit reference bureau. Compuscan Uganda’s Managing Director Mike Malan argues that even though the credit reference bureau was in the immediate commercial interest of the banks, donor and grant support can be justified: The ID system had been the largest cost component in setting up the credit reference bureau, and banks should not have to assume the costs resulting from the lack of a national ID, as this is the responsibility of the national government. Banks had understandably resisted paying for the identification system, but once donors had stepped in to take on this component and finance the technology set up costs, banks have become very supportive of the venture. In the past three months, Compuscan have concluded all contract with the commercial banks – fully transparent, conditions are the same for all banks.
Compuscan have an exclusivity agreement for three years. One of the key agreements reached with the funding partners who negotiated the contracts with CompuScan on behalf of Bank of Uganda and the stakeholders is that CompuScan will introduce price reductions for the entire market based on market growth of one or more institutions in predetermined volume bands. This mechanism protects the generous, but finite donor funding pool and with the sharp rise in banks that have been licensed in Uganda – and more are expected it is foreseen that banks will enjoy lower than expected billing for credit enquiries without the funding pool drying up in the three year period. The combination of this price adjustment mechanism and its review and monitoring through Bank of Uganda helps keep CompuScan's billing charges in check in a market where they could otherwise be tempted to exploit the albeit temporary monopoly that they enjoy.
Compuscan are currently in the middle of setting up the system in the banks. By mid September, it had been installed in more than 160 out of Uganda’s 350 bank branches. Banks are responsible for the fingerprinting, and once this information is transmitted to Compuscan, the company then issues the smart card and sends it back to the banks. For banks, the participation in the credit reference bureau is not, however, just about the fingerprinting: they had to make significant changes in their data collection, which is not a simple process in itself. Information needs to be supplied retrospectively to 1 November 2007. So far, Compuscan have collected around 700,000 loan agreements in a market that is estimated to have 700,000 borrowers – sound progress, as Malan notes. From 1 February 2009, banks will be required by law to create an ID for anyone who requests a loan, and by August 2009, all borrowers must be enrolled in the ID system. Beyond setting up this system, however, Compuscan has also committed to assist the central bank, Bank of Uganda (BoU) in off-site supervision, and data collected from the banks are handed over to BoU for their analysis.
Outlook: Bad Debt Going Down Market?
Uganda’s banking sector has attracted a lot of interest recently, with new entrants from neighbouring Kenya, but also from West Africa and the Middle East. Malan expects an ‘explosion of services’ in the near future as competition increases. Joining this growing competition is Kenya’s Equity Bank, who have recently bought Uganda Microfinance Union (UMU) Ltd, have been one of the key drivers in the expansion of Kenya’s retail market. The credit reference bureau had been a long overdue part of the financial sector infrastructure and its establishment will help to improve lending and, many people hope, bring down loan charges. However, a credit reference bureau cannot entirely eliminate bad debt – and it can be argued that bad lenders will shift to those institutions that mainly focus on low-income clients, i.e. microfinance institutions (MFIs):
‘Microfinance’ is a term that describes small retail financial operations targeted at the ‘working poor’, often in the informal sector and with alternative collateral instruments. Bank of Uganda requires microfinance institutions that want to accept and intermediate deposits to obtain a licences as a micro-deposit-taking institution (MDI). As such, MDIs are regulated and supervised by BoU and are also required to participate in the use of the credit bureau. However, MFIs that are not regulated by BoU are excluded from the credit reference bureau. At best, with the borrower’s consent, an MFI may pass on their data to the credit bureau, but it will not able to view those and additional borrower data once shared. This, of course, also reduced incentives to pass on client data. Malan argues that a movement of bad debtors to those institutions can be anticipated, and warns that this could seriously affect the financial stability of the smaller MFIs. Since these are not allowed to take deposits from their clients, this does not pose a threat to savings, but can undermine the financial stability of these institutions and therefore affect the availability of loans to poorer clients. The credit reference bureau will be useful for larger and commercial institutions that handle the bulk of financial transactions in terms of volume. For Uganda’s many smaller microfinance institutions, it is unclear whether this will ultimately trigger a consolidation process with a strengthening of quality, or whether it simply reduces loans available to small borrowers.
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