Why are Credit Bureaus set up?
Credit Bureaus are set up to gather information about people’s loan performance. The information gathered include previous loans that has already been paid, new loans that have just been collected, how the loans have/are being serviced and if there are any outstanding balance(s). It also includes contact addresses of the borrower.
Credit Bureaus keep all these information on a borrower – both positive and negative, and it is from this database that lenders can access the credit history of a loan applicant. Individuals who would like to see their credit report can also apply to the Bureau to assist in viewing it.
The concept of having a credit bureau is not a new phenomenon. In developed countries, it is an established practice for individuals and organizations to carry out credit checks before engaging in any credit agreement.
The core functions of credit bureaus are:
- To maintain a database of borrowers from lending institutions: Data collected include contact address details of individuals and companies. It also includes a history of loans that has been received; if they were paid on time, how many days late they were paid, or if there were any bounced cheques submitted. It also includes information like bankruptcy and court judgments.
- To provide a central storage for all the information collected: Credit Bureaus have sophisticated and reliable technology that enables them store the large quantity of data collected over a long period of time without it getting lost, stolen, or altered. This gives lenders a long term access to information that they cannot store themselves.
- To provide credit information upon request: When credit information is provided by a Bureau, it comes in the form of a report, so it is called a Credit Information Report. This is the major product that the Bureau sells to its members, and it usually contains information spanning a period of 3 years.
- To eliminate/reduce information discrepancy in the lending industry: When countries establish credit bureaus, their main aim is to reduce and possibly eliminate the gaps in information shared between lenders and borrowers. For instance, without these bureaus, a borrower could use different identity information/addresses to obtain loans from different lenders. He can use loans from banks A and B to service that of Bank C, or simply accumulate loans from the three banks at different times without repaying them.
- To allow increased access to credit: Using Nigeria as a case study, a lot of factors affected lending before credit bureaus were established. For example, only borrowers with large collaterals, or those who know senior officers in the lending institutions were usually granted loans. There was also the fact that because someone is not well known at a bank for example, they can refuse your loan application. This is due to the fact that they have no way of knowing if you will pay back or not. With credit reports now, even someone that the bank has never seen before can now get a loan. They just need to check his report from the Bureau.