2014

By:

Nesar Ahmad Yosufzai

2014-09-25

Credit Information Sharing Regime in Afghanistan

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Credit Information Sharing

Regime in Afghanistan

Access to finance is a barrier to growth for many

businesses worldwide, financial institutions

acting as lenders need reliable information to

make lending decisions. Individuals and

businesses should provide evidence to the

lenders to prove their creditworthiness;

meanwhile regulators need to be able to

supervise systematic risk.

"Often, firms’ access to finance is constrained by

the availability of information on their credit

worthiness. Public and private credit registries

exist to improve the information available on

borrowing firms and individuals to ease

financing constraints. The information they

make available from a borrower’s total number

of current loans, repayment history, previous

bankruptcies, etc. can allow lenders to extend

greater credit at more favorable interest rates."1

"Credit Information Bureau is an agency that

collects credit information and provides it to

lenders so they can make sound decisions when

granting advances. Information sharing

institutions typically take one of two forms i.e. a

public credit registry or a private credit bureau.

A Public Credit Registry is maintained by the

public sector, generally the central bank, while a

private bureau is managed by the private

sector."2

Credit bureaus get the data from banks,

microfinance institutions, credit card issuers,

loan agencies, telecommunication companies,

public court records, utility companies,

insurance companies, rental agreements, leasing

companies and directly from consumers, then

1 OECD, Discussion Paper on Credit Information Sharing 2 OECD, Study by Love and Mylenko (2003)

analyze the data electronically and disseminate

the standard credit reports which don’t only

include the credit history but also credit scores.

The main benefits of a credit bureau are:

Create greater opportunity for economic growth

Promote stable financial market development

Improve economic stability

Create greater productivity

Increase repayment rates, less defaults

Reduce interest rates

Promote responsible lending

Increasing access to finance

Reducing cost of credit and risk

A modern credit-based economy requires access

to complete, accurate, and reliable information

concerning borrowers’ payment histories. Key

features of a credit information system should

address the legal framework, permissible

purposes, privacy, integrity, consumer rights and

supervision.

Afghanistan had never experienced credit

information sharing system as centralized

database in electronic platform prior to the

establishment of the credit registry in December

2013. A traditional process of credit information

sharing was in place through a manual system

using paperwork which did not fulfill the

requirements of a standard credit report.

Financial Institutions

were making lending

decisions without

analyzing credit history

of borrowers as there

were no credit reports.

Considering the need to have an electronic

platform of credit information sharing system in

Afghanistan; World Bank, International Finance

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Corporation, Central Bank of Afghanistan (Da

Afghanistan Bank), and HARAKAT have come

together for the establishment of the first Credit

Information Bureau called "Public Credit

Registry" in Afghanistan.

Da Afghanistan Bank (DAB) launched a full

electronic Credit Information Sharing System

known as Public Credit Registry (PCR) on

December 16, 2013 for the first time in

Afghanistan. The system is fully automated

based on international best practices. PCR will

enable potential borrowers to have access to

finance and increase credit penetration in

Afghanistan. The system is helping financial

institutions to have enough online information

about the customers and their guarantors to

make better-informed decisions. On April 1,

2014, Public Credit Registry department of DAB

introduced its first online Credit Report, which is

considered a historic success for the financial

sector in Afghanistan. PCR online reports will

help lending sector to reduce fraudulent

applications for credit, provide a consumer with

the ability to assemble a positive lending history,

reduce their cost of borrowing, and increase

access to credit that enable banks to better

control credit risks.

The registry is governed by Credit Reporting

Regulation and currently the database is

populated with more than 30,000 credit

contracts which includes conventional and

Islamic Finance advances. The existing

subscribers of the registry comprise of all 16

commercial banks in Afghanistan and the

registry office is working closely with other

stakeholders and potential users to begin

utilizing the registry. The registry is operating

24/7 and has reduced time for credit

information sharing from days to seconds which

is available online.

Although establishment of the first credit

bureau which is designed based on international

best practices is considered a historical success

and fundamental step for the financial sector of

Afghanistan, but there are some challenges

which may slow down the development process

of credit information sharing regime in the

country. Challenges are;

1. Lack of unique and centralized database for National IDs

2. Lack of Credit Reporting Law 3. Low Capacity of Stakeholders 4. Public awareness on Credit Reports 5. Existence of Manual procedures in

Financial Institutions and relevant subscribers

6. Data Quality 7. Supervision 8. Audit of the Registry Office.

Aforesaid challenges are really important to be

considered systematically as it can't be handled

by the registry office entirely. I have outlined the

following observations and recommendations to

tackle the challenges;

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1. Lack of computerized and centralized database for issuance of National ID is an electronic governance challenge in Afghanistan. Government has promised publicly to tackle this challenge very soon which will improve credit information sharing regime in the country and will reduce the number of errors on credit reports.

2. The current Credit Reporting Regulation needs to be improved and converted to Credit Reporting Law in order to provide strong legal environment not only for Financial Institutions but also for other stakeholders.

3. Credit Bureau subscribers listed in this paper should be enabled to use the system. The registry office has established a Research and Development unit and started capacity building events to relevant stakeholders in Kabul as well as major cities of Afghanistan. This program will enable the minimum agencies to understand the functions and benefits of the registry. It is also recommended that high level officials should be encouraged and informed on ways that this regime can increase access to finance in the country and how their contribution can facilitate this process.

4. Market observations illustrates that consumers have very limited knowledge on banking practices in Afghanistan. As Public Credit Registry is recently established and online credit reports are available for the first time in Afghanistan, this needs an organized public awareness program to continue at least for two years. Publications, advertisements and events are considered the main drivers which may increase public awareness.

5. Most of the registry subscribers in Afghanistan are following manual procedures/paper records which do not fulfill the requirements of electronic platform. This challenge is very important as automation may take several years. It is expected that electronic governance will facilitate and speed up this preparation.

6. The Constitution has opened a new window for private sector businesses in Afghanistan. The country’s banking sector is very young, therefore quality of data provided to the registry is a critical challenge. Although this challenge exists with all credit bureaus worldwide, especially in developing countries but the registry office itself and regulatory bodies should introduce procedures and build capacity in order to assist in improving the quality of data.

7. Establishment of the electronic registry is the starting point and there should be supervisory mechanism to restrict misuse of the system. Supervisory bodies should supervise the privacy, consumer rights, compliance of credit reporting regulations and use of the credit reports during the on-site examinations.

8. As the registry is newly established, the group of people working there; are the only people who have relevant knowledge of the system and there is no internal audit in the registry office to regularly audit the operations. Internal or external audit should be there to evaluate the operations technically on regular basis.

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Conclusion:

Credit reports are not only important for

corporations but also for individuals who plan to

apply for credit facilities, credit cards, seek

employment, purchase a house or procure and

install public utilities. From a macroeconomic

point of view, Public Credit Registry can bring

higher growth rates for businesses and

individuals, and the economy in Afghanistan,

through increased Access to Finance.

The Public Credit Registry established in the

organizational structure of the Central Bank of

Afghanistan is a non-profit organization which

will further reduce the cost of credit by

providing credit reports with low cost. In order

to adopt consumer rights, the Credit Reporting

Regulation in Afghanistan allows consumers to

obtain their credit report free of charges. This

regime will promote business and help financial

institutions increase their profitability.

References:

1 OECD, Discussion Paper on Credit Information Sharing 2 OECD, Study by Love and Mylenko (2003)

Reviewers: Oscar Madeddu Credit Bureau and Risk Management advisor International Finance Corporation (IFC) World Bank Group Email: omadeddu@ifc.org

Isimkah Ibuakah Operations Officer International Finance Corporation (IFC) World Bank Group E-mail: iibuakah@ifc.org

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