No Blank Slates Pt 1: Legal and Regulatory Challenges

The first post in the credit bureau series introduced the main (though tentative) finding, that credit bureau arrival can have a positive effect for businesses and their ability to access finance.  The next two posts introduced the main problem lenders face, information asymmetry, and the incentives that can lead to information sharing. These next few posts will explain the challenges in forming credit bureaus even if the incentives for sharing information are in place. These challenges will also have an impact on a bureau’s efficacy.

No Blank Slates

The creation of a credit bureau is a complex legal, regulatory, financial, and infrastructural undertaking, often taking 5-7 years to develop from inception to operation.[1] This process involves creating an environment in which the bureau can operate, acquire data, educate the public, implement IT mechanisms, ensure financial viability/economies of scale, and develop skills and human resources talent.[2] Organizational structure of the bureau, support from domestic or international organizations, demand, credit market size and structures, and social or political factors can all shape whether a credit bureau is created and how it forms.[3] These factors lead to the creation of different types of credit bureaus and different kinds of challenges. Some of these challenges apply to all countries that attempt to introduce bureaus, and some are unique to the environments in which they form. These issues can significantly influence the effectiveness of a credit bureau.

Legal and Regulatory Issues

Regulatory and legal structures influence both the creation of credit bureaus and the actions lenders take. Regulatory and legal issues are often significant obstacles to the creation of credit bureaus.[4] A private credit bureau in Uzbekistan launched in 2000, but could not operate because laws and regulations prevented it from sharing information.[5] Similarly, a Slovakian credit bureau delayed launch because laws in the country prevented the collection of historical data.[6] Often, governments have to initiate or actively participate in the creation of credit bureaus. In Nigeria, lenders and information providers recognized the demand for a credit bureau, and the government responded by developing a legal framework.[7] In Kenya, a credit bureau launched, but due to uninterested lenders and an insufficient legal framework, the bureau had trouble operating until a regulatory framework and registration process were in place.[8] The Central Bank later released specific regulations for the conduct and scope of credit bureaus through law in 2013 and made more reforms in 2016. Bureau operators in Ghana similarly existed, but waited until the government passed laws requiring financial institutions to share data with them.[9] Some countries have relevant laws established prior to a credit bureau forming, but even if such laws are not explicitly prohibitive, vague legal frameworks will often prevent bureaus from opening.[10]

Credit bureaus have faced legal and regulatory challenges since their beginning. Even though the Mercantile Agency (the first Credit Bureau founded in 1841) in the United States developed in a relatively permissive regulatory and legal environment, it faced many legal attacks and political battles regarding state regulation.[11] As it started to operate and expand as a business, it faced lawsuits regarding how it disseminated information, the accuracy of its information, and its liability for false reports.[12] Many newer credit bureaus in Africa are now facing these same challenges. As lenders go to court in Zambia and Kenya over privacy issues and incorrect information reporting, bureaus have to navigate legal challenges and negative public perception.

A country’s legal tradition, such as one of Civil or Common Law, can impact a country’s readiness for credit bureaus.[13] Either contracts (common law) or explicit law (civil) can restrict the information banks are allowed to share about their customers.[14] Lenders in these environments must often inform or gain permission from customers before sharing information. These challenges are not unique, and even continue today in the United States as exhibited by privacy, civil liberty, and credit reforms passed in 1996, 1998, and 2003.[15] Since bureaus in countries with deep credit markets and long formal information sharing histories are still navigating some of these issues, we can expect countries with relatively new bureaus to face growing pains in the legal and regulatory realm.

Legal structure can specify the scope of data collection (Microfinance Institutions, telecom, utility, retailers), establish a licensing process, set data accuracy and security standards, outline consumer or borrower rights, set permissible uses for data collection, establish oversight, establish audit checks, permit certain types of data (such as positive or negative data), and set data retention periods.[16] Additionally, laws can stipulate whether financial institutions have to participate in a bureau or credit registry. Or, countries can specify what types of institutions are able to benefit and can access information, such as a 2016 law in Kenya permitting Savings and Credit Cooperatives (SACCOs) to access information from bureaus.

When credit bureaus form or enter a specific credit market, they enter into an environment with established laws, regulations, and privacy expectations (or lack thereof). Often countries must make considerable legal changes, which often take 2-5 years to draft and implement.[17] Not only does this shape what bureaus can do, but it can also delay a bureau’s ability to serve lenders effectively. If a bureau enters an environment without unique identifiers, which most environments in Africa are, adjusting the law to create unique identifiers or creating its own system to identify borrowers will require time and also come with its own set of challenges. For that and a variety of other reasons, a bureau’s true effect on a credit market may require more time than just five years after its creation.

Even so, there are more factors that influence why credit bureaus vary significantly from each other, and also contribute to the growing pains and various levels of success each bureau has at improving access to finance. The next few posts will address the following issues, Depth of Information, Economies of Scale, and Existing Credit Markets.

[1] Nataliya Mylenko, “Developing Credit Reporting in Africa: Opportunities and Challenges,” (2010), 278.

[2] Ibid.; International Finance Corporation, Credit Reporting Knowledge Guide (Washington, DC: International Finance Corporation, 2012).

[3] Brown and Zehnder, 264; Triki and Gajigo, 5.

[4] IFC, Credit Bureau Knowledge Guide (Washington, DC: International Finance Corporation, 2006), 3.

[5] Ibid., 23.

[6] Ibid.

[7] Mylenko, 276.

[8] Ibid.

[9] Ibid.

[10] IFC, 55.

[11] Cull et al., 3032; Madison, 185.

[12] Madison, 177-180.

[13] Mylenko, 275.

[14] Ibid.

[15] Alison Cassady and Edmund Mierzwinski, Mistakes Do Happen: A Look at Errors in Consumer Credit Reports (Washington, DC: USPIRG, 2004), 4.

[16] IFC, Credit Reporting Knowledge Guide (2012), 37-40.

[17] Mylenko, 278.


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