In 2012, Joyce received a $3,000 loan to start her business selling kitchen tiles in Lusaka, Zambia. This was no small feat in a country where 27.4% of small business owners recognize access to finance as a major or severe obstacle to business operations. While Joyce lacked the collateral she would have needed for a loan only a few years earlier, Zambia’s newly established credit bureau had a documented record of her overall creditworthiness. When she applied for the loan, the bank verified her reputation and provided the loan within just a few days.
Northeast of Zambia in Kenya, thousands of borrowers found themselves denied loans because they defaulted on as little as Sh100 in mobile money debt, or roughly the equivalent to one US dollar. In fact, TransUnion Credit Reference Bureau found 316,455 people were listed negatively because of overdue balances less than Sh100 from mobile money. Yet nearly one third of these borrowers were actively repaying car loans, credit card debt, and mortgages while showing a negative listing by the credit bureau. This negative listing, even for such a tiny amount, was enough for banks to reject credit applications for many of these potential borrowers. Incidents of lenders providing incorrect or outdated data to credit bureaus compounded borrower frustration.
Is Joyce’s experience in Zambia, or the rejected loan applicants’ experience in Kenya more typical of the recent emergence of credit bureaus on the continent in the last fifteen years? Do credit bureaus in Sub-Saharan African countries create a better business environment by increasing the ability for firms and individuals to access finance, or do they create more problems? My research analyzing World Bank Enterprise Survey data tentatively suggests that credit bureaus have a positive influence on access to finance in the credit markets they enter.
Credit bureaus are private information-sharing institutions that collect financial information from banks, retailers, utility companies, credit card companies, and microfinance institutions. They then sell credit reports to lenders evaluating a specific firm or individual. This process helps lenders reduce their risk by gaining credit information on potential borrowers, therefore making it easier for financially reliable firms and individuals to access finance. However, when a credit bureau arrives or opens in a country, it enters into a country’s specific legal, regulatory, business, economic, and social climates. This means that the effectiveness of a credit bureau could vary from country to country based on the environment it enters. Merely having a credit bureau in your country is no guarantee that it will positively effect lending for banks or borrowers.
I used World Bank’s Enterprise Survey data to shed light on the effect of credit bureau arrival in Sub-Saharan Africa by examining three components that reflect a firm’s ability to access finance, (1) a firm’s perception of access to finance as an obstacle, (2) whether the business currently has a line of credit or loan, and (3) the percentage of Working Capital a firm borrowed from a bank.
I compared a group of countries that do not have a credit bureau with a group of countries where a credit bureau opened between survey years. The perception of access to finance as an obstacle decreased by 9.82% for firms in countries that received a credit bureau between survey years, and was 22.36% lower compared to firms in countries without a credit bureau. I ran multiple models that included a stripped down model, one that included firm-specific characteristics, and then another that included country-level characteristics in order to make the comparisons as close as possible and test for consistency. While the numbers varied slightly, the results were consistent from model to model. However, there were no relationships for the other two variables regarding an active loan or percentage of working capital from a bank. The survey data shows that firms view access to finance as less of an obstacle, but there are no objective measures to confirm this perception.
There are two important qualifications or concerns regarding these results. First, the method I chose lives and dies based on the similarities between the groups. While I attempted to make the groups as similar as possible based on the data available and considered macroeconomic variables such as GDP Per Capita, GDP Per Capita growth, overall lending in a country, and Banks per 100,000 adults in the statistical analysis, the credit markets and business environments in both groups may still influence the results. Credit bureaus may have opened in those countries because there was a better business environment for them to succeed. In that case, tracing causation is more difficult.
Second, the two variables addressing a firm’s % of Working Capital and whether they had an active loan may prove irrelevant to a firm’s perception of their ability to access finance. A firm may not view access to finance as an obstacle and maintain a consistent level of borrowing between the survey years. A business that successfully borrows 5% of working capital from a bank may see no need to increase that percentage to 10%. In a case like that, the firm’s view of access to finance may not influence their borrowing habits.
Even considering those qualifications, I tentatively claim that credit bureaus improve access to finance for businesses in the countries where they arrive. However, this summary of the research findings is incomplete as the situation on the ground is way more complex. While business environments may improve in countries with credit bureaus, there are substantial challenges in countries where they have opened for business. The situation mentioned in Kenya is worth exploring with more depth and actually sheds more light on the opportunities and challenges credit bureaus present. In the following series I will expand on these findings by showing the mixed picture when we examine news reports and other studies.
Figure 1: Control and Treatment Groups
Figure 2: The Effect of Credit Bureau Arrival
Notes: On Figure 2, 0=No Obstacle and 4=Severe Obstacle. I rounded the numbers on Figure 2 for the purposes of presentation, and as a result the percentages differ slightly from what I reported. For detailed descriptions of each model, please see the Methods and Results sections.
Data Source: Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank.