Lack of enabling legislation on consumer credit constrains the emergenceÂ of a credit bureau culture in the banking industry, Babajide Komolafe writes.
The Central Bank of Nigeria (CBN) operational guidelines for credit bureau operations requires financial institutions to register with and use the services credit bureaus before granting any loan to customers. Section five, subsection three to four of the guidelines states that, â€œAll financial institutions must have data exchange agreement with at least two (2) credit bureaus.Â All banks must obtain credit report from at least two (2) credit bureaus before granting any facility to their customers.â€
Indications however emerged last week that banks are not complying with this requirement, and this contributed significantly to the problem of huge non-performing loans which crippled the five troubled banks.
The first indication came from the Managing Director/Chief Executive of the nationâ€™s first credit bureau, Credit Registry Services Limited, Mr. Taiwo Ayedun. He said that, â€œThe CBN has to enforce its guidelines that banks should use at least two credit bureaus. Part of what Governor Sanusi is doing is to enforce the guidelines that are in the books. That bank must start utilizing credit bureaus. That for every single loan they book they must do a credit check on itâ€
This was followed by the press statement issued Risk Managers Association of Nigeria (RIMAN) last week in which it called on the apex bankÂ called on the Central Bank of Nigeria (CBN) to compel banks to engage the services credit bureau to check the incidence of non-performing loans in the country.
In the statement, which was the Associationâ€™s first reaction to theÂ sack of the chief executives of Intercontinental Bank, Oceanic Bank, Afribank, Union Bank and Finbank, the Association among other things recommended that the apex bank should, â€œEnsure that banks comply with Central Bank of Nigeria guidelines on credit reporting and obtaining references from at last two credit bureaus.
The required financial infrastructure to support this process has been put in place by all the three recently licensed credit bureaus and banks have no more excuses not to use them to enhance risks assessment.
It is however not sufficient for financial institutions to patronize them, the information so obtained must be used as critical elements of the assessment criteria in decision making and credit reviews.â€
President of the Association, Mrs Jane Ogbona however told Vanguard, â€œIt is not that banksÂ are reluctant to using the services of credit bureaus as required by the CBN guidelines but the absence of appropriate legislation to complement the CBN guidelines constrain the use of credit reports in granting loan request. She said that some banks are already using credit report obtained from credit bureaus and have in fact declined some loan request on the basis of this reports.
But the banks cannot tell the customer that the loan request was denied due to information obtained from a credit bureau. This she said is because there is yet to be appropriate legislation that gives banks the power to deny loan request on the basis of credit report from a credit bureau. In the absence of such legislation, a customer can sue a bank if it says it turned down loan request on the basis of credit report.
She said these issues areÂ Â already been addressed by the CBNÂ via the proposed amendment to the Banks and Other Financial Institutions ActÂ (BOFIA)Â and the proposed addressed in the proposed Credit Information Exchange Bill, and the Credit Bureau Services bill.
Investigation reveals that countries with established credit bureau system have a separate legislation that regulate and empower credit bureaus. For example, in Ghana,Â there is theÂ Credit Reporting Act (CRA), which providesÂ a legal and regulatory framework for credit reporting in Ghana.
This Credit Reporting Act is designed to promote the orderly development of a credit reporting system for Ghana and to promote public trust in credit bureau operations. Specifically, the Act provides for the licensing of private credit bureaus (and gives the Bank of Ghana the authority to set up a public credit bureau), regulates the activities of credit bureaus, establishes guiding principles for the conduct of the credit reporting system, and provides for credit data submission, data management and protection, and dissemination. It seeks to strike a balance between the rights of borrowers on the one hand, and the need to share credit information effectively, on the other.
Similarly, in South Africa there is the recently enacted National Credit Act which regulate credit and aims amongst others at:Â Protecting consumers from becoming over-indebted;Â Preventing dubious lending practices;Â Making sure that credit is extended by lenders in a transparent and responsible manner; andÂ Ensuring that the rights of consumers are safeguarded.