Wynter willing to deal on credit-bureau permits
Published:Friday | November 19, 2010 | 12:00 AM
Bank of Jamaica (BOJ) Governor Brian Wynter is prepared to offer conditional approvals to investors in credit bureaus to kick-start the market, as long as they satisfy his fit-and-proper tests of their character and business background.
Wynter said Tuesday that he is prepared to consider applications as a two-phase process, and that he would give final approval once the other criteria, including adequate IT systems for secure data capture and storage, are met.
The concession is meant to keep to a minimum the time horizon for the setting up of businesses, which the central bank chief says should take about a year.
Legislation allowing for the creation of credit bureaus hit a snag in the Senate last Friday and got shunted back to the Lower House for clarification.
But the law's broad intent remains the creation of a system in which private-sector players would operate, with oversight from the Bank of Jamaica.
Not everyone agrees that this is the right approach.
Zedayne Simister, research analyst with Guardian Life Limited, argues that since credit bureaux are essentially a tool for more efficient assessment of risk, a centralised structure would be the better option to the commercial framework being created.
"The central bank has the responsibility to ensure the stability of the financial system, of which the pricing of loans and growth of non-performing loans are critical components. Secondly, they can develop models that can utilise the information gathered to compute efficient pricing of loans," said Simister.
Credit-bureau model
The BOJ should not only regulate the system, but the credit bureau should be housed at Nethersole Place, and monitored from inside the bank, he said. "They have the technical expertise to do so."
Simister contends that with a central bureau the pricing of loans would be at its most efficient, compared to a market of rivals whose data collection and analysis may vary based on financial and IT capacity, and consequently, their level of service delivery.
"From a system standpoint, there is no way of verifying whether the information received is the cleanest and most appropriate. This may cause mispricing of loans, as companies that are willing to invest more to get the cleanest data are the ones that are able to price loans appropriately, and gain competitive edge," the analyst said.
"The only major differences in the loans rates then would be the administrative fees and spread charge."
But the scenario laid out by Simister would create an environment where not only would the BOJ be the arbiter of risk taking by commercial banks, it would now have a hand in determining - even if, indirectly - which loan targets are worthy credit risks.
The unintended consequence is that the BOJ would, overnight, deepen its regulatory power over financial institutions.
Not surprisingly, the Jamaica Bankers Association (JBA) was chilly to the idea of a central bureau.
"As we operate in a competitive environment, we maintain that competition is always desirable to ensure that institutions and customers have a choice in the options that are available," the JBA said in response to Financial Gleaner queries.
The JBA said its "more important" recommendations have been addressed in the bill, without specifying them; and again endorsed the credit bureau plan whose establishment it has backed for years.
"We have dedicated significant time and resources to ensure that our member institutions are in a 'state of readiness' to participate in a consumer credit bureau, as soon as services become available," said the JBA in an email from spokeswoman Karis Flowers.
"Once the Bank of Jamaica approves the licensing arrangements for the service provider(s) we will continue to support the process, albeit not in a leadership role."
The idea for a credit bureau system was first raised publicly back in 2001 by former central banker and Finsac chairman, economist Dr Gladstone Bonnick. Back then, with the fallout from the financial sector meltdown still very raw after five years, Bonnick said the need for such a databank to weed out risky bets was demonstrated by the high level of loan defaults and high incidence of persons indebted to multiple institutions.
Nine years later, as the contentious debate in the Senate demonstrated last Friday, Jamaicans face a culture change and are grappling with how much of their private information should be passed into third-party hands, and whether those data-collector companies can be trusted to secure those records from snooping hackers, and others with ill-intent.
Simister was more concerned about the quality of the data obtained from the bureaus, whose job would include analysing transactional and borrowing activity in order to derive credit reports and scores for individuals.
Msme position
Small business expert Professor Rosalea Hamilton was even more sceptical.
"There is much concern about the process and quality of the information that will actually be collected and, in turn, the accuracy of credit reports and the possible negative impact on MSMEs," said Hamilton, president of The MSME Alliance and Scotiabank Chair of Entrepreneurship and Development at the University of Technology.
The MSME's position is outlined in a document prepared as a response to the Credit Reporting Bill.
Hamilton points to the North for two important lessons.
First, quoting from a 2004 United States Federal Reserve bulletin, "a minor error in a credit record is likely to have little or no effect on access to credit for an individual with many reported account histories, but the same error may have a significant effect on access to credit for someone with only a few reported account histories."
Second, "assessments of the effects of data limitations require detailed knowledge of the model used to evaluate an individual's credit history and of the credit-risk factors that compose the model. Because information about credit-scoring models and their factors is ordinarily proprietary, it is difficult to obtain."
These two issues are important especially for MSMEs, said Hamilton, and so require adequate monitoring of credit information providers — which would be the commercial banks and other financial institutions — to minimise any possible negative impact of inaccurate records.
The EXIM Bank, a lender to exporters, which does business with small and mediumenterprises, said Tuesday that it is on board with the idea of the credit bureau.
"The process for loan approval and disbursement would be significantly shortened, as the appropriate due diligence would be done much quicker," said EXIM managing director Lisa Bell.
EXIM, whose loans are priced at 10-11.5 per cent for JMD credit and 7.5 per cent on USD borrowings, said the credit bureau is complementary to its own efforts to help Jamaican producers improve their competitiveness, through access to capital to finance retooling efforts and acquisition of equipment.
"We think that these processes would only be enhanced if we had a credit bureau," Bell said.
While noting the downside of what is expected to be a lengthy set-up period, the EXIM boss said that positive movements towards the goal of improving access to credit for business growth "is welcomed".
Central bank chief Wynter told company bosses at a Jamaica Employers' Federation breakfast forum on Tuesday that he was anticipating passage of the credit reporting legislation to happen soon.
Private companies applying for licence to set up credit bureaux will have to satisfy fit-and-proper requirements set for managers, directors and owners; show that they have adequate capital resources; provide business plans and feasibility studies; and proper information technology infrastructure.
Additionally, the institution will have to ensure that proper security of credit information is in place and integrity of the system is guaranteed.
Laying groundwork
Just two entities have been reported as showing interest, at least one of which has been laying its groundwork since last year.
"We have been discussing with other jurisdictions which have a similar regime and those discussions indicate that, from a practical standpoint, the establishment of operations can take over a year, given the setting up of the structure and information technology infrastructure and the database that needs to be built," said Wynter at the breakfast forum in Kingston.
"That may seem like a long time ... hence the push to start soon," he said.
A credit bureau system, said Wynter, is essentially an initiative to ease access to credit, and, in Jamaica's case he hopes, will help to improve the country's 'credit access' ranking in the World Bank-IFC Doing Business survey.
Jamaica's latest ranking, a mid-point but unimpressive 89 of 181 countries in the standings for access to credit, was attributed to it not having a credit bureau.
"The credit bureau is aimed at addressing problems that banks and other creditors face in not having sufficient information on their borrowers - that is, readily available and reliable data," said the BOJ governor.
"In other words, it addresses the problem of assessing the risk of the borrowers," he said.
If the system works as intended, it should also give consumers ammunition to negotiate better terms and cost of loans.