Credit Reporting: An Essential Component of the Credit Ecosystem
- A credit reporting agency (credit bureau) is an important part of a modern economy and its credit ecosystem as it enhances financial stability and improves access to credit.
- The key role of a credit bureau is to improve credit risk management, access to credit, financial inclusion and, ultimately, financial stability.
- The Eastern Caribbean Central Bank (ECCB) sees the operationalisation of a well‑regulated credit bureau in the Eastern Caribbean Currency Union (ECCU) as key in building financial resilience in the region.
- Stakeholders’ awareness and understanding of credit reporting is imperative for an accurate and efficient credit bureau in the ECCU financial space.
Credit Reporting and the ECCU Credit Ecosystem
Figure 1: ECCU Movement in Credit
A modern and robust economy thrives on financial inclusion and access to credit. For the private sector, driver of economic development and growth, this access is essential for its expansion.
Studies from the International Finance Corporation (IFC) and World Bank cite 70 per cent of small and medium-sized enterprises (SMEs) in developing countries as being unserved or underserved. In the ECCU, access to credit has been cited in various ECCB surveys as a challenge by the private sector, especially SMEs. For the five years prior to the pandemic, credit expansion in the region has been very anaemic (Figure 1), constrained by our banks’ conservative approach to lending due to the high stock of non-performing loans or NPLs (Figure 2). Without a doubt, non-performing loans constitute a drag on economic growth.
Figure 2: Trends in the Non-Performing Loans Ratio in the ECCU
Where credit bureau services have been introduced in financial systems, the general experience has been that the level of NPLs declined and access to credit increased.
A study by Branch et al. (2018)[i] from the Central Bank of The Bahamas, recommends the introduction of a credit bureau as a policy option to help in reducing NPLs. The authors note that such a credit bureau could narrow the information gap and improve risk management. They point out that the introduction of a credit bureau in Jamaica may have contributed to a more permanent decline in NPLs in that country.
It is instructive to note, at present, the ECCU currently has one of the highest levels of NPLs in the CARICOM area (Figure 3). This situation requires redress and resolve.
Figure 3: Non-Performing Loans Ratios across CARICOM
In recognition of the importance of a modern credit ecosystem to the ECCU financial sector, the ECCB has determined that the establishment of properly regulated credit reporting services in the ECCU is long overdue.
The operation of a credit rating agency, such as a credit bureau, is being pursued in an effort to complete the ECCU’s credit ecosystem. As part of the credit ecosystem, credit bureaus are committed to supporting individuals and SMEs.
Credit reporting can be defined as involving a credit rating agency’s collation of credit information on an individual/entity (data subject) from various sources such as banks, credit unions, other credit providers and government agencies. The information is verified, compiled and analysed, and presented in the form of credit reports and credit scores. These reports and scores become available to credit providers, with the consent of the data subject, to assist in the assessment of borrowers’ creditworthiness. Figure 4 identifies the factors that will impact the report and rating of the users.
Figure 4 - Credit Score Factors
In the ECCU, the lack of formal arrangements for lenders to access information on borrowers’ credit history has produced inefficient credit approval processes, resulting in the inability of lenders to accurately assess credit risk and, therefore, apply appropriate prices to loans. Consequently, the ECCB intensified its efforts to introduce a formal credit reporting system to address issues such as credit information asymmetry. The ECCU credit reporting environment will include a legal and regulatory framework, a licensed credit bureau, and various ECCU credit market stakeholders, such as credit information providers, data subjects and subscribers.
Credit Reporting Environment
In pursuance of its mandate to establish the requisite environment to facilitate the offering of credit reporting services in the ECCU and the build-out of the credit ecosystem, the ECCB has carried out the following:
- Coordinated the passage of the ECCU Credit Reporting Bill (passed in 6 of 8 member countries) and issuance of the ECCU Credit Reporting Regulations (issued in 4 of 8 member countries). The Credit Reporting Bill and Regulations represent the principal components of the ECCU credit reporting legal framework;
- Trained staff and developed tools in preparation for undertaking its legal responsibility for regulation of all credit reporting services in the ECCU;
- Licensed a credit bureau operator, based on a bidding and selection process; and
- Prepared a credit reporting communications strategy for full and timely implementation, prior to the official launch of operations by the licensed credit bureau, scheduled for December 2022.
The licensed credit bureau intends to provide services in all ECCU member countries and will utilise an ECCB-approved credit bureau solution in provision of its services. The Credit Reporting Bill mandates certain credit information providers to make available credit information on data subjects to licensed credit bureaus. Based on the current size and conditions of the ECCU credit market, only one credit bureau has been issued a license to date. Figure 5 provides a snapshot of a credit bureau solution.
Figure 5 - An Example of a Credit Bureau Solution
Assigned the legal responsibility for credit reporting in the ECCU, the ECCB will have specific obligation to:
- regulate and supervise the activities of credit bureaus, credit information providers, subscribers and their agents in the ECCU;
- issue standards and targets regarding the provision of credit reporting services;
- maintain proper standards of conduct and acceptable credit reporting practices;
- protect the integrity of the credit reporting system against abuses; and
- take measures to protect the rights and interests of borrowers.
Benefits to be Derived from Credit Reporting
A properly functioning credit bureau will likely have an expansionary impact on credit activity in the ECCU as credit providers will have access to more comprehensive and accurate information on borrowers and in a timelier and more efficient manner. The World Bank cited a study by Peria et al. (2014), in the Journal of Financial Intermediation, which uses firm level surveys from 63 economies covering more than 75,000 firms to find that the introduction of a credit bureau improves firms’ likelihood of access to finance with longer-term loans. All of this due to reduced information asymmetries, better credit risk monitoring and improved customer discipline.
The credit risk management of financial institutions will improve. Loans will be processed faster and prices that are more appropriate will be applied to credits. The sustainability of the credit market will be increased as more accurate information will protect borrowers from accumulating additional credit in instances where they are not able to service existing debt. Regulators will benefit from credit bureau reports such as portfolio monitoring reports in their supervision of regulated entities. Central banks have been utilising big data reports in the conduct of important research, and property owners and employers will benefit from credit bureau reports in their respective screening of prospective tenants and employees.
Awareness and Understanding of Credit Reporting
As with any financial service or product, the public’s awareness and understanding of credit reporting services is important to its success in the credit market. The ECCB is therefore in the process of rolling out its credit reporting communications strategy. The focus of the awareness campaign will be on individuals and SMEs alike. Animation videos, social media posts, soft and hard copy brochures, FAQs, and WhatsApp messages will be used in the credit reporting awareness campaign.
Credit information providers, the licensed credit bureau, the regulator and relevant government departments/agencies have benefited from credit reporting legislation workshops.
Call to Action
We call on stakeholders to: -
- Familiarise yourselves with the ECCU Credit Reporting Bill and Credit Reporting Regulations;
- Pass on the benefits (lower interest rates on lending, lower collateral value, less equity) to customers with good credit scores;
- Encourage customers, in the case of financial institutions, to start implementing measures towards improving their credit history;
- Assist with the credit reporting awareness and education campaign as required and deemed necessary;
Practice responsibility in accessing and repaying credit.
For more information on credit reporting in the ECCU, see the ECCB’s resource page.
The ECCB acknowledges the contribution of Mr Kennedy Byron, Senior Project Specialist; and Ms Karen P Williams, Unit Head and Senior Project Specialist, Governor’s Immediate Office, in the preparation of content for this blog.
About the Author
Timothy N.J. Antoine has been the Governor of the ECCB since February 2016. He is passionate about the socio-economic transformation of the Eastern Caribbean Currency Union (ECCU) and is a strong advocate for regional cooperation and collective action. Indeed, he regards them as critical enablers to shared prosperity for the people of the ECCU.
About the Eastern Caribbean Central Bank
The Eastern Caribbean Central Bank (ECCB) was established in October 1983. The ECCB is the Monetary Authority for: Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, Saint Christopher (St Kitts) and Nevis, Saint Lucia and Saint Vincent and the Grenadines.