Defaulting on loans hurts a business or individual’s creditworthiness, preventing them from accessing more bank finance in the future, or having to pay higher interest rates .
Creditworthiness is the willingness of a lender to trust their client to pay their debts.
But in order to be able to judge a customer’s creditworthiness, lenders look for evidence that the customer is paying their bills and that they have a history of handling and repaying past debts. Much of this information is stored in a credit conference bureau.
But how does a credit bureau work?
A credit reference bureau is a company authorized to collect and combine credit information about individuals and businesses from different sources and provide this information at the request of a bank or other credit provider.
In Rwanda, the institution is approved by the central banks. Banks can only request a report on a borrower who has applied for their loan.
Essentially, the CRB is mandated to reduce portfolios of non-performing loans (NPLs) and also increase access to credit by the private sector.
A non-performing loan is considered in default or close to default after a certain period depending on the nature of the loan.
Many people find it futile to get a copy of their credit report from the office, especially when they have never taken out a loan facility with a bank.
They assume their records are blank or contain nothing and are creditworthy. This is a misconception.
The credit risk associated with a loan to a customer who has never taken out a loan is indeterminate and should therefore be treated in the same way as the indeterminate risk.
Undetermined risk is equated with high risk and therefore any loan will require risk measures such as a high interest rate and an expensive asset as collateral.
Generally, a good credit history equates to a good reputation and can save you the stress of looking for collateral.
A bad credit report is a cost because a loan application will go through different departments to check if the bank can lend you.
How it works
In the context of Rwanda, the CRB works in such a way that a customer provides information when opening an account or applying for credit, the customer then signs “acknowledgments / consents” to enable the information. to be submitted to the credit bureau.
Credit information providers submit information to the credit bureau, which updates it regularly.
The credit bureau, also known as TransUnion Rwanda, collects, validates and merges information into its database for use in generating a credit report.
CRB services involve banks and others sharing data on how loans are paid with each other in a central ledger that can be accessed when new credit facilities are considered or when limit reviews are undertaken.
TransUnion Rwanda replaced the Centrale des Risques et des Impayés (CRI), a public credit bureau created in 1990.
The major role
Financial experts say the bureau is improving credit scoring by lenders who will now have access to bank customer information.
In the past, it was possible for a borrower to take out loans from different lenders using the same collateral.
In addition, the waiting period of clients for approval of applications will also be shortened.
With the office in operation, assessing individual credit will be much easier and more reliable compared to the current situation where it is.
Experts also argue that the existence of credit registries is associated with increased lending volume, growth in consumer lending, better access to finance, and a more stable banking sector.