Muhammad Akmal is currently serving as Director Banking Conduct & Consumer Protection Department at State Bank of Pakistan – a position he has held since 2014. He has been with the central bank since 1991, working in a wide range of areas from banking inspection to exchange policy. Currently, he is steering the enhanced conduct regulation and supervision regime of State Bank of Pakistan, and also leading the Consumer Protection and Financial Literacy sub-committee under National Financial Inclusion Strategy. Mr. Akmal is a seasoned central banker trainer and has been serving as a resource person on various forums like NAB, FIA, Foreign Office, NIBAF, TDAP, Foreign Delegates, bankers, Trade bodies, etc.
In this interview with BR Research, he talks about the importance of credit bureaus for an economy; the history and prospects of credit information market in Pakistan; and how credit bureaus can help towards financial inclusion; and help improve Pakistan’s score in World Bank’s Ease of Doing business rankings.
BR Research: Can you briefly walk us through the history of credit registry and bureaus in Pakistan?
Mohammad Akmal: In 1992, we started a credit registry called Credit Information Bureau (CIB) at State Bank of Pakistan (SBP) under the Banking Companies Ordinance (BCO),1962 (Section 25-A) requiring banks to share credit information with the SBP.
In the beginning, we used to have credit information including defaults and overdue with a threshold of rupees half a million and above. When the banks actively engaged in consumer finance business, they felt the need to have credit data of consumers below rupees half million also. Thus, some private credit bureaus also came into being that offered credit information services. These credit bureaus in private sector were registered with the SECP.
Later, 2006 onwards, we removed the threshold of half a million rupees, and all information became immediately available at the CIB. The data on CIB is updated on monthly basis and anyone who takes a loan becomes part of the database, and the information becomes available to every institution that has access to the CIB information. Some of the private credit bureaus have also ventured into other areas such as employee screening, business information, credit decision support service, debt collection etc. However, in order to regulate and develop credit bureaus in the private sector, a new law namely Credit Bureaus Act was promulgated by the government in 2015.
BRR: If the SBP’s CIB now collects all the information, what was the need for passing the Credit Bureau Act in 2015 under which private sector can open bureaus?
MA: Most of the countries have a vibrant credit bureau industry in the private sector. They provide various value added services, whereas services of credit registry are limited. In view of growing credit information needs and allied services required by the banking and financial sector, it is appropriate to give such business in private sector, though, of course, with proper monitoring and regulation.
We, as the central bank, are not in the business of providing value added services or scorecards; because then, it becomes a responsibility on the part of the central bank, which otherwise is outside our domain. We have put in place a separate regulatory framework to allow private credit bureaus to provide value added services to their customers.
BRR: What kind of new credit-related products can be offered by the credit bureaus?
MA: Under the Credit Bureaus Act, 2015, credit bureaus can collect and disseminate the credit data from both financial and non-financial institutions including retailers, insurance companies, utility providers and landlords, as notified by the federal government. They can undertake credit scoring, consolidate credit data for analysis and research purposes, etc. This would also increase the coverage, scope and accessibility of credit information for better credit decisions.
All such types of credit-related data are also maintained and offered by the credit bureaus across the globe. Credit coverage in a country is increased when credit data pertaining to individuals and companies are maintained not only for financial but also for non-financial database including even post-paid cell phones bills, credit reputation, debt servicing, etc. They can also keep litigation, or criminal, or bankruptcy, or guarantees data.
BRR: How many credit bureaus have opened after the passage of the law? What has been the fate of those credit organizations that had earlier opened under section 93-C?
MA: Let me clarify that the private sector credit bureaus operating in the country prior to the Credit Bureaus Act, 2015, were not established or opened under section 93-C of the BCO, 1962. They were registered with the SECP as private limited companies. SBP neither licensed nor regulated them. Section 93-C of the BCO, 1962 just allowed the banks to exchange information on confidential basis through a person, providing credit information services. However, under the Credit Bureaus Act, 2015 there is a clause that says that existing credit bureaus should seek license from the SBP within 12 months of the commencement of the law; otherwise they would cease operations as credit bureau. None of the existing bureaus have gotten the license so far under this new law.
However, one new company has approached the central bank to seek license. We cannot name the company at this stage, but we have issued them the NOC and they are in the process of formation. Hopefully, they will commence operations soon.
BRR: But will both the CIB and the new private sector players operate in the same market?
MA: We are not in the business of competition with the private sector; we want to develop this market to meet the enhanced and value added needs of the stakeholders. We may, however, continue to collect data because of our own regulatory requirements.
According to the 2015 Act, there is a legal requirement that every bank is bound to become member of at least one credit bureau. This means that as soon as the first one comes into the market; it will have an edge to attract the market. Private credit bureaus may compete on the basis of quality and variety of products and services, terms and conditions, etc.
BRR: It’s been nearly two years since the law has been passed and as yet no private firm has commenced operations. What explains such lack of response from the market? And how many credit bureaus are you targeting?
MA: We have put in place an elaborate legal and regulatory framework for private bureaus. However, it is a time taking exercise for putting in place a robust and fully equipped credit bureau to cater the market needs under a proper regulatory regime. As for the number of credit bureaus we can’t indicate the number at this stage. However, depending on the size and complexity of the financial market and its depth, the number varies across countries. We have observed in the region, that there are 3-4 players with high capital requirements.
Besides, when an institution is set up for the first time, it always takes time because of finding the right resources and the right skills, IT framework etc.; they will have to develop liaison with banks; they will take the data from the banks, and so on and so forth. The new company that has been issued NOC this year may soon commence operations, and after that some other applicant may also apply.
BRR: Are you planning to attract FDI in the sector?
MA: It is admissible under the licensing criteria to have foreign shareholding in the credit bureaus. It’s up to the private sector; if someone wants to bring in FDI in this sector, it will be encouraged. We understand that some local investors plan to approach foreign partners to seek collaboration, but it’s too early to confirm anything.
BRR: As far as non-financial credit data is concerned, now that the law is passed, could there be firms in Pakistan that offer credit history of property tenants?
MA: It is subject to the issuance of notification by the federal government. However, I understand that it requires deliberation on related issues, modalities and coordination amongst the relevant authorities. The overall level of preparedness of the society is equally important. For instance, in Turkey, it is binding that both the landlord and the tenant get the address changed in the national citizenship/resident-ship database as soon as they move their residence or offices.
But yes, elsewhere in the world, in some countries, landlord can purchase the credit history of the prospective tenants as admissible before signing the contract. In some countries, you don’t even have to purchase it from a credit bureau; you can get such information from the national database by entering your citizenship number and pin code.
So these boutique business areas will take time to open in this country, but credit related shops will likely open soon.
BRR: If, for instance, we want to promote manufacturer or distributor-led consumer financing model, for which the manufacturer or distributor would want to see the credit history of the applicant, would they be allowed access to credit scores of the applicant?
MA: Under the Credit Bureaus Act, 2015, concerned individual or his authorized attorney may obtain a copy of his credit information from a credit bureau. I understand such arrangement may help buyer and the seller. However, other suitable arrangements or modalities may be worked out as admissible.
BRR: Will credit bureaus’ databases be able to talk to each other or otherwise exchange information?
MA: Yes! As per section 29 of the Credit Bureaus Act, 2015, the licensed credit bureaus may exchange credit information amongst themselves on confidential basis.
BRR: What is the current coverage of individuals/firms in bureaus and registries? What are your targets and timelines? What is said to be a good coverage, enough to give confidence to local and international investors in the financial market space?
MA: The current coverage of individuals / firms in credit registry / CIB at SBP is 9.4 percent. Efforts are being made in line with the National Financial Inclusion Strategy (NFIS) and the SBP’s Vision 2020 to enhance financial access/coverage up to 50 percent of the adult population. I understand that credit bureaus can play a pivotal role in promoting credit culture and discipline.
In light of that, microfinance institutions, which offer a wide range of services and products to attract small borrowers, have also approached the SBP for membership of CIB. It is expected that the coverage would increase to give enough confidence to local and international investors.
Since no credit bureau has commenced the business under the current regulatory framework, we are not in a position to comment on coverage of individuals/firms by credit bureaus. However, we understand that with enhanced scope of activities and our support, the position will be improved.
BRR: Under the e-CIB, what is the minimum amount of financial facility (loan/guarantee) on which a credit information report (CIR) becomes mandatory for a financial institution?
MA: As per the SBP’s regulatory framework, it is mandatory for financial institutions to access borrowers’ credit reports irrespective of loan amount.
BRR: How will credit information sharing evolve in the era of microfinance, branchless banking, etc? How has been the experience of bringing microfinance banks and institutions under the CIB ambit?
MA: The banks offering branchless banking facility and microfinance banks are already members of the e-CIB. The recently-granted permission by the SBP for membership to microfinance institutions (MFIs) would further strengthen credit information, coverage, and credit allocation.
Moreover, now that credit bureaus can collect and disseminate credit data from non-financial institutions as well, subject to notification by the federal government, this would also increase the coverage, scope and accessibility of credit information for better credit decisions.
BRR: What steps are being taken for consumer awareness? We remember that defaulting consumers were caught in for a surprise in the mid 2000s.
MA: State Bank is aware of the concerns of banks and customers for recovery of defaulted loans. It issued Fair Debt Collection guidelines in 2008, which amongst other things, provide a complete procedure and bind the banks to ensure that they provide their consumers all the information relating to payments falling due. Even in case of a default; a proper notice is required to be served before taking recovery action. As per our requirements; banks have been required to serve notice to the concerned consumer before reporting his default to the eCIB.
Similarly, a proper Consumer Grievances Handling Mechanism (CGHM) has been put in place at banks to redress consumer complaints. If he/she is not satisfied, he/she may approach the Banking Mohtasib for the violation of SBP instructions by the banks. Some consumers make complaints to SBP, which are timely processed and addressed by SBP.
BRR: That sounds good. But those are all post-default steps. First-time consumers, especially in the poor or micro segment, can’t read font-8 English-language disclosures that describe the consequences of default, and the concept of credit history and its importance. For that segment, consumer awareness has to be ensured before the loan application is submitted.
MA: That’s a good suggestion; and we will try to incorporate it in our ensuing awareness campaign. However, after establishment of credit bureaus, every person will be able to get his credit report and thus will be able to check his defaults etc. and get the issues resolved. If someone has a complaint against a credit bureau, he/she may approach State Bank of Pakistan.
BRR: World Bank’s doing business report also tracks whether or not data on both firms and individuals is/are by the credit bureaus. Does this mean that until such time there is a credit bureau that comes online and starts offering such products, Pakistan will not be getting scores on this aspect by the World Bank?
MA: SBP collects data both on firms and individuals. However, where the role and functions of private credit bureaus are evaluated, the related score is impacted, which will be resolved after establishment of credit bureaus.
BRR: The World Bank Doing Business ranking also measures whether or not data from retailers or utility companies - in addition to data from banks and financial institutions – are distributed by either bureaus or the registry. Does this mean that until such time there is a credit bureau that starts offering such products, Pakistan will not be getting scores on this aspect by the World Bank as well?
MA: The SBP-CIB / credit registry does not collect the data from retailers or utility companies, as it is inadmissible under BCO, 1962. However, under the Credit Bureaus Act, 2015, private bureaus can collect and disseminate such data subject to notification by the government. So until such time the government issues its notification and credit bureaus start collecting that information, we may not get scores for that particular aspect.
BRR: By law, borrowers do not have the right to access their data in the credit registry. But will they have the right to get it from the credit bureau?
MA: The information collected, collated and distributed by the SBP e-CIB under Section 25A of the BCO, 1962 is confidential in nature and is not accessible by the borrowers.
Nevertheless, Credit Bureaus Act, 2015, governing the operations of private credit bureaus, has the provision that empowers borrowers to seek their credit information/report from private bureaus.
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