Ratio Magazine :: The Inside Track to East Africa’s Economies - Uganda: Banks Embrace Credit Reference Bureau

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Uganda: Banks Embrace Credit Reference Bureau

Wednesday, 28 April 2010

Borrower registration at Uganda’s new credit reference bureau has progressed faster than anticipated, and financial institutions see first tangible benefits from improved client data

Many Borrowers
Uganda’s first credit reference bureau, operated by CompuScan, was finally launched at the end of 2008. In their business planning, CompuScan had anticipated creating 250,000 records in the first phase of the implementation, when the financial cards for borrower identification were being created and borrower data being collected and entered into the bureau’s data base. However, to date, CompuScan have already issued 275,000 financial cards to borrowers and anticipate that there are easily another 250,000 borrowers that still might get cards. Estimates of the overall borrower market vary: Bank of Uganda (BoU) assume that there are around 500,000 borrowers, whereas banks work with a considerably higher figure of 700,000.

Partly, this rapid accumulation of borrower data – no new loan can be granted to anyone without an entry into the credit reference bureau, and banks’ participation is compulsory - is a reflection of growing credit demand in an increasingly competitive financial sector: After a long moratorium, Bank of Uganda (BoU) has licensed several new banks in recent years, and with falling interest rates on government securities, banks look to private-sector borrowers to maintain their revenue levels.

Financial cards are based on biometric technology to create a unique identity for each borrower, a solution that was necessary because Uganda does not have a national ID (see). But in addition to fingerprinting, individuals are taken through a very rigorous process that captures data such as the borrower’s marital status, residence, income (as a band) and work place. In the past, such data had often been difficult to update or just obtain for banks, and after some initial reluctance, they have begun to embrace the process.

Responding to Banks
CompuScan have deliberately pursued a close co-operation with the banks in building the system, improving data, and responding to banks’ specific requests: CompuScan have set up a presence in all individual bank branches and there are now 500 enrolment centres across the country. In some cases, where banks looked for a closer integration of processes, CompuScan have been allocated desk space in the banks’ IT departments in their headquarters. ‘Internet downloads for software are not always the most suitable method’, argues Mike Malan, CompuScan’s MD, referring not just to the inevitable restrictions in connectivity across Uganda. ‘In addition to helping banks with systems updates, we are also ready to respond to specific requests. Some have, for example, asked for an integration of our system with their customer interface.’ With a team of 60 programmers in South Africa, CompuScan have the capacity to provide customisations so that banks can, for example, use the raw data for credit scoring.

The start up phase has not always been unproblematic: CompuScan found that the number of people reapplying for a financial card exceeded 30,000. It is not entirely clear why this happened: Where customers too forgetful to pick up their card? Or were they trying to create a new identity? Or were bank staff unclear in communicating the process and the fact that a financial card has to establish a unique identity and therefore customers cannot obtain multiple cards? Combined with the overall enthusiastic response, this hiccup meant that CompuScan quickly had to beef up resources, both technical and staffing, to deal with the higher-than-anticipated number of transactions.

Perspectives: Tangible Improvements
The data provided by the banks are still not quite of the quality that Mike Malan would like to see, but that, he says, is typical of a developing economy. Improved borrower assessment should, in the medium term, help to lower the risk premium, but even at this early stage, the mere fact that data are being collected systematically and with a keen eye on quality, is yielding tangible results:

So far, the system has captured 250,000 bounced cheques. Such information is not always included in credit reference data in every market, but has already been useful for credit checks.
Debt is being recovered faster, not the least because banks can use a deterioration of a borrower’s track record in the credit reference bureau as a threat.
Having more reliable information on their borrowers has helped banks to improve their sales and overall communication with clients.
And the comprehensive availability of data will also yield insights that not only benefit banks, but will improve consumer protection: Whereas banks used to rely on collateral to lend against, capturing income data enables the first affordability studies: In Uganda’s rapidly growing, increasingly competitive banking sector, banks may be pushing more retail credit – but the borrower information should now warn them whether the borrower already has other loans outstanding, and if his or her income actually allows for repayments on the amount sought. Affordability must drive the credit decision, and if this is taken into consideration, then consumer protection takes a step forward.

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