When does one hear about the State Bank of Pakistan in the news? Typically, it is when there is some news about the interest rate. In fact, just this week, the monetary policy committee is set to announce a new rate. But outside of that function, and the usual news rush regarding it, there are few who hear what the central bank is up to, let alone read its multiple annual reports.
And yet buried away in the third quarterly report of the board of directors for the year 2020-2021, which was then submitted to parliament, is a section that Profit, at least, deemed somewhat curious. The report covered the usual areas of interest: real sector, monetary policy, inflation, public debt (one can almost hear the reader nodding off at this point).
But there was a special section attached titled “Private Credit Bureaus in Pakistan: Enhancing credit penetration by addressing information asymmetries.” The title may be a mouthful, but the gist is that Pakistanis don’t have credit histories, and that there are significant hurdles in the way of trying to create an actual credit profile. Still, there could be potential solutions to be gleaned from other developing countries with the same problem, an SBP report argues.
So, first, what is the scale of the problem? In a nutshell, pretty bad. According to Jamali, Mobeen and Zafar, formal credit to the private sector is among the lowest among emerging and developing markets. Private sector credit to GDP ratio stood at 17.4 over the last decade – lower than Sri Lanka at 40; Bangladesh, at 44.1; Nepal, at 59.4; and India, at 97. Even as banks profitability has improved, ‘information asymmetries’ aka a lack of information means that they have been reluctant to lend to agriculture, small and medium enterprises. If formal lending is entirely geared towards the well-off and people who have documented credit history, exactly how will credit penetration improve?
Enter the concept of a credit bureau. These are privately operated businesses that gather credit related financial and non-financial data from various data providers. These are separate from credit registries, which are usually governed by the public sector, and help supervise ‘financial soundness’ in a system. Crucially, the latter focuses on information gathered from banks and financial institutions; while the former also collects information from non-financial sources, like retail outlets and utility and telecom sources, and court decisions, or property records. These bureaus can then sell their services to banks or businesses who are looking to assess the creditworthiness of a potential borrower.
These sound simple, but the impact is oversize. For instance, the report mentioned that countries with such bureaus saw their bank lending to GDP ratio almost 20 percentage points higher than other countries, and that nonperforming loans typically fell by one percentage point. The more credit bureaus it seemed, the greater the proportion of adults borrowing from a financial institution in any economy.
The Pakistani landscape
Ok, perfect. Surely Pakistan must have implemented this? Yes: The Credit Information Bureau (CIB) was formed in 1992, with the stated objective of utilizing information for better lending. This credit registry served as a database for all loans greater than Rs500,000. This was brought online in 2003 (now referred to as eCIB), and has been updated five times over the last 30 years to keep it up to date.
Since the late 1990s, a few private sector bureaus have also popped up, including DataCheck and Credit Chex. Their presence prompted parliament to pass the Credit Bureaus Act in 2015, after which the SBP could give licenses to private credit bureaus. To date, there are only two licensed bureaus in Pakistan: Tasdeeq, in 2018, and DataCheck, in 2019. The two can provide credit reports, portfolio scrubee microfinance credit reports, and are also working in credit scoring services (limited to consumer banks).
But the overall information on hand is paltry. eCib, for instance, has data on 14.9 million people, or around 12% of the population, while private bureaus have information on 8.6 million individuals, or 6.7% of the overall adult population. This is only marginally better than the minimum threshold of 5% as defined by the World Bank.
If the act was passed in 2015, what has happened – or not happened – in the last six years? There are a few overarching problems that the bureaus face, which has limited their growth. First, the act says that every credit institution has to become a member of ‘at least’ one private sector bureau. There are 32 banks in the country, but 20 are members of both, and 11 are members of only one. The authors are at a loss as to why the banks haven’t bothered becoming members of both, considering it is a nominal cost and the bureaus do not charge fees (hint: it’s because they don’t take lending, and extension, credit information seriously).
Second, beureas in Pakistan only cover consumer loans, and not corporate loans. Some of this has to do with the historical reasons: credit bureaus rose out of the need for credit information on riskier consumer loans bank in the 2000s, and secondly, most institutions end up using eCIBs resources, as they are legally bound to get an eCIB report of any broorwer before giving out a loan. Essentially, why bother using a credit information bureau, if eCIB suffices? Then banks essentially collect very little information which they pass on to credit bureaus: such as age literacy, education, sector wise, or crop size lending, or family structure. This limits the usefulness of credit bureaus
Finally, the aspect that makes credit bureaus so attractive – their ability to collect non-financial data – is essentially non-existent. There is no data on telephone bulls, utility payments rental information which could be used as a proxy for income and expenditure. This is despite the notifications issued by the government itself. For instance in April 2020, the government told all electricity and gas transmission companies to become members of cr. But only K-electric joined up. Then in 2019, the government instructed telecom companies and mobile operators to become members of the credit bureaus. But instead, telecom operators maintain that they were restricted to do so under another government mandate: the PTAS’s telecommunication consumer protection regulations, 2009. In 2016, the ministry of finance said that all court documents related to debtors should be included in public record for the credit bureaus. But the court documents are not available in an essay, online format.
Then there are basic procedural problems: eCIB can fine members for delaying the sharing of data, but credit bureaus cannot. DO you think commercial banks will be sharing such information on time?
So, what can be done? A few things: first, forcing all commercial banks to become members of bath, meaning that competition sfts focus from pure goes from pure data acuclmuton to actual value-added services. Then, notifying a sunset clause on eCIB, so that there is new market space created for private sector credit bureaus. Then cretaign a huge emphasis on alternate data on a national scale.
The benefits have potential: the small country of Guyana saw its financial inclusion rise from 2.4% in 2015 to 16.4% just one year later once they fixed the regulations to obligate utility providers to share information with credit bureaus. Some of these fixes are quite simple: for instance Sindh has a tenancy registration system, which includes a photo signature and rental agreement, but does not record whether or not monthly payments were made.
A simple ad would benefit not just credit bureaus, but also the FBR and tenancy litigations. A fund could be established to help pilot and use credit scoring models – which do not exist in Pakistan – which could also help with financial literacy in general. Essentially, the message needs to be gotten across that paying on time will be rewarded, and not paying on time will be penalized.