The year 2023 has seen a number of developments in the credit space in Uganda including the introduction of Islamic banking as well as the entry of new players into the market. For the Credit Reference Bureaus, perhaps the most prominent development is the release of the 2022 financial institutions (Credit Reference Bureau) regulations by the Bank of Uganda.
The guidelines, which are a revision of the 2005 regulations, seek to transform Uganda’s borrowing terrain and create an efficient way through which lenders gather borrower’s credit information subsequently improving access to credit and loan repayment.
Under the regulations, other credit providers such as microfinance institutions, SACCO’s, trade credit providers and utility companies will start submitting data to the CRB and consequently carry out credit referencing. They will equally allow for all financial institutions, Bank of Uganda regulated micro deposit taking institutions and registered societies to carry out mandatory bureau checks on all their customers at the time of applying for credit. This will enable borrowers of low-ticket loans of UGX200,000 to have their credit profiles created at the bureau, in turn allowing them to build positive credit profiles thereby increasing their chances of accessing credit.
Speaking on the development, Richard Tumusiime, the General Manager of Metropol Uganda Limited asserts that, “for the CRB, the new regulations mean that the problem of unlicensed credit providers and other informal groups currently extending credit to borrowers will somewhat be addressed. The lack of regulation posed a challenge as financial institutions that were sharing their borrower’s data with the bureau lacked the visibility on what was happening on the other side of the market divide.”
Away from diversifying the pool of borrower data and information available in the bureau, the guidelines also offer a clear framework and principles under which Credit Reference Bureaus should exist and operate in the country. They offer guidance on what one needs to do to operate a CRB, how and from whom to collect credit data as well as how to disseminate credit information, data privacy and confidentiality, among others.
Notably, the regulations also phase out the Financial card system which was previously being used by lenders as the unique identifier and bring into play the National Identity Number as the primary identifier for individuals and the company registration number for non-individual borrowers.
For the credit industry in Uganda, the Bank of Uganda regulations are a much welcome development as they seek to address some of the major problems it currently faces. These include but are not limited to information asymmetry which points to limited information available on a borrower, moral hazard where a borrower accesses credit with an intention of not paying back and adverse selection where a lender makes inferences about a borrower based off of physical appearance and personal relations.
The lack of regulation posed a challenge as financial institutions that were sharing their borrower’s data with the bureau lacked the visibility on what was happening on the other side of the market divide.