• Sun. Jan 29th, 2023

UGANDA, Kampala | Real Muloodi News | More borrowers who fail to pay back their loans will have a tougher time finding credit, thanks to the tightening of the credit reference bureau guidelines announced on November 22nd.

Under the new regulations, a much broader array of creditors including SACCOs, money lenders, utility providers, and even landlords, will have access to the credit history of all their borrowers or customers and will be able to evaluate and contribute to their credit scores.

Many may not be conversant with what a credit score is. By the end of this article, you will understand terms like ‘credit score’ and ‘credit history’, and their significance to both the borrower and the creditor. Let’s dig deeper.

A credit score is a statistic that shows a borrower’s likelihood of repaying a debt.

Credit Reference Bureaus (CRBs) use your credit history to produce your credit score, which indicates the amount of risk associated with lending to you. The higher your credit score, the more likely you are to be accepted for credit because it indicates that you have been assessed to be a lower risk and more likely to repay your debt.

Previously, the only entities that checked your credit history and reported on your usage of credit were monitored financial institutions, such as commercial banks. However, since the tighter CRBs criteria were introduced, this has expanded to also include trade credit. That means that anyone who is extending you credit can report on how well you adhere to your repayment obligations, including landlords, utility providers and all money lenders.

Therefore, any entity that extends you credit, whether it be financial credit or a service in advance of payment for that service, can use your credit score to make creditworthiness determinations.

According to Twinemanzi Tumubweinee, the Executive Director of Supervision of the Bank of Uganda (BoU), trade credit has become more prevalent than financial lending. 

Tumubweinee says, ” If you had a bank account and have never borrowed money there, it simply means there is no record on you, yet you might have borrowed money from a SACCO, a money lender or another institution not registered by BoU.”

Utility providers, vehicle dealers, landlords, and anybody else who offers credit services will now be able to record a borrower’s utilisation of credit and compliance with those conditions. This is a chance for a person’s good character and reputation with these traders to influence the interest rate they may be offered on a loan.

The advantage to small borrowers with no collateral is that they can use their reputation as good and dependable borrowers with strong historical credit utilisation as collateral. Lenders are more likely to extend financial or trade credit based on your excellent credit history.

Meanwhile, the Ugandan Parliament also passed the amended Microfinance Deposit-Taking Institutions Act, which will bring large SACCOs with operating capital of USh500 million and saving in excess of USh1.5 billion under the central bank’s supervision.

Under the 2016 Tier 4 and Money Lenders Act, the Central Bank has the authority and mission to regulate big SACCOs and deposit-taking institutions. Unlike in the past, management and monitoring of these institutions could not be carried out successfully due to a lack of regulations and guidelines.

However, with the implementation of the 2022 guidelines, the central bank now has the authority and terms to define what they can and cannot do with major SACCOs.

Everything about Credit Scores, Histories, Reports, CRBs and CRSs

Many people are unaware of the credit scoring system, let alone their credit score until they try to buy a house, apply for a business loan, or make a significant purchase.

A credit score is a three-digit figure for individuals, and a two-digit figure for companies, that lenders use to establish your eligibility for a mortgage or other type of credit, as well as the interest rate you will be charged.

How Your Credit Score Affects You

Your credit score paints an image of your creditworthiness to the lender at the time of your application.

In Uganda, credit scores range between 200 and 900 for individuals, and 20-90 for companies. The lower your credit score, the less likely the lender will be to accept you for credit, or they will charge you higher interest if they do. In other words, a bad credit score will cost you more to borrow money.

Whereas a higher score gets you a lower interest rate, and better conditions surrounding the credit, such as a higher loan amount.

SCORE BAND FOR INDIVIDUALS  SCORE BAND FOR NON-INDIVIDUALS CREDIT QUALITY
700 – 900 70-90 Excellent
600 – 700 60-70 Good
500 – 600 50-60 Moderate
400 – 500 40-50 Marginal
200 – 400 20-40 Poor

Let us say you wish to take out a fixed-rate, 25-year mortgage for USh2.5 billion from Standard Chartered Bank. The bank can charge you 13.539 per cent interest for the loan if your credit score falls in the top range, 760–850.  This corresponds to around USh28.207 million monthly payout.

However, if your credit score is in a lesser category, say 620-639, lenders may charge you 15.139 per cent, which would be a monthly payment of around USh31.539 million. The lower credit score would increase your monthly mortgage payment by slightly over USh3.333 million.

You would pay USh1 billion more than you would if you had the best credit score during the course of the loan. Consider what you might accomplish with an additional USh3.333 million every month.

How Your Credit Score is Determined

Each component described below determines what helps or hurts your credit score:

Payment History

This describes your history of timely debt repayment. Your payments on mortgages, finance company accounts, and instalment loans (such as a vehicle or student loan) are included in this component.

Your ability to pay back instalment loans on time is viewed favourably. For instance, even if you still owe a sizeable sum on the initial loan, if you borrowed USh100 million to buy a car and paid back USh25 million of it on time, your payment history to date displays prudent debt management, which positively benefits your credit score.

Also taken into account are open documents and reports describing things like bankruptcies, foreclosures, lawsuits, liens, judgements, and wage garnishments. Your score is impacted by a history of timely payments of at least the minimum amount required. Missed or late payments lower your rating.

Amount Owed

The amount of debt you already have is an indicator of your capacity to manage even more debt. Your credit score will suffer if you have a lot of outstanding debt, or are almost “maxed out” compared to your income. Whereas your score will be higher if the amount you owe is low enough to leave room to take on and successfully manage more debt.

Length of Credit History

How long have you had and utilised credit? The longer you have demonstrated appropriate credit management, the better your score will be. If you have consistently made payments on time, you will seem very excellent in this regard.

However, if you are new to managing credit, there is less historical data available to show you are a dependable borrower. Therefore, newer borrowers start off with a lower credit score, which builds over time with responsible credit behaviour.

Type of Credit

This refers to the “mix” of credit you have access to, which includes instalment loans, finance company accounts, and home loans. This component takes into account the many forms of credit you have, and how you use that credit.

New Credit (Inquiries)

This indicates that you have or are soon to incur further debt. Opening a large number of credit accounts in a short period of time can indicate to lenders you are a risky investment, especially for persons who do not have a long credit history.

When you apply for a new line of credit, it qualifies as an inquiry or a “hard” hit. There may be many enquiries while shopping for a mortgage or a vehicle loan.

However, because you only seek one loan, such enquiries in each 14-day period count as a single hard hit.

Repeated hard hits will harm your credit score. In contrast, “Soft” hits, such as requests for your credit report from you personally, or requests for lenders to extend your “pre-approved” credit offers will not impact your credit score.

How to Improve Your Credit Score
  • Avoid defaulted and delinquent accounts, and make sure to make your instalment payments on time.
  • Only take out loans that you can afford. Negative information decreases your credit score and can linger on your credit record for up to five years.
  • Set a cap on credit applications. Lenders may believe you are a high-risk borrower if you submit several credit requests in a short period of time. Your credit score will rise if you have a lot of loans that are all paid back on time and in full. If not, they will show a low credit score.
  • Monitor your credit report carefully. Watch out for any indications of fraud or inaccurate information on your report and file a complaint. Each year, any CRB is required to provide free credit reports to borrowers.
Why it is Important to Pay Your Loans on Time

If you have a solid credit history and consistently make your repayments on time, loan providers will be more inclined to extend you more credit.

Lower Interest Rates

If a lender believes you pose less risk, they could provide you with better interest rates, which would lower the cost of your borrowing.

Higher Credit Limits

You may have a greater chance of being approved for larger loans to assist you to reach your objectives more quickly if you have a solid repayment record.

Access More Products

A solid payback record increases your chances of being accepted and makes it possible for you to use a variety of credit products.

Conversely, lenders could demand higher interest rates or even reject your application if you have a bad credit history.

As it stands, the single biggest factor in maintaining a decent credit score is timely loan repayments.

Credit Information Security

According to the Financial Institutions (Credit Reference Bureaus) Regulations, 2005, CRBs must adhere to strict security and database management guidelines for the transfer and storage of any information under their control.

How Safe is Your Information?

  • The Bank of Uganda regulates the licenced CRBs to make sure they adhere to the established security criteria.
  • CRBs give information on borrowers’ credit to organisations that are subject to Bank of Uganda regulation under the Financial Institutions Act of 2004 and the Microfinance Deposit-Taking Institutions Act of 2003, as well as to organisations that BOU will accredit as Accredited Credit Providers.
  • Your information can only be accessed by authorised individuals from the Participating Institutions.
  • No CRB database ever has information on you without your permission.
  • Every piece of data is encrypted.

You always have access to the data the agencies have about your credit behaviour. Customers have a right to see what information a Participating Institution has given to the CRBs on their accounts in accordance with the Financial Institutions (Credit Reference Bureaus) Regulations, 2005.

Customers can obtain more credit reports at any time and are entitled to one free credit report per year, but they must pay the applicable fees as set by the CRBs.

In Case of an Error in Your Information

You can legally file a dispute to resolve any errors in your credit report. As a record of the complaint made, you will need to fill out a dispute form and send it to a Participating Institution or CRB. From there, it will be escalated to the relevant people within the Participating Institution or sent to the relevant Participating Institutions for action.

A consumer has the opportunity to formally complain about any information inaccuracy with the Participating Institutions or the CRBs.

Complaints must be handled right away and, in any event, within 20 business days, under the Guidelines to Participating Institutions on Credit Data Standardization and the Implementation of the Credit Reference Services.

Your report will have a flag indicating that the material is disputed during the investigation period. The CRB will look into the contested information by getting in touch with the Participating Institution (s) that provided it.

A modification instruction will be sent to the CRBs by the Participating Institution(s). Depending on the directions for revision from the Participating Institution, the CRBs will update or not update your record (s).

A corrected credit report will be produced when the concerned customer and the participating institutions have been notified of the revision.

What are Credit Reference Services?

A Credit Reference Bureau (CRB) offers Credit Reference Services (CRSs) to help lenders understand how debtors handle loan repayment. To help them make wise judgments, commercial banks, credit institutions, and microfinance deposit-taking institutions communicate credit information with one another.

By providing fast and reliable information on borrowers’ debt profiles and repayment histories, CRSs help the development of Uganda’s financial sector by enhancing participating institutions’ capacity to anticipate default.

What is a Credit Reference Bureau (CRB)?

A Credit Reference Bureau (CRB) is a corporation regulated by the Bank of Uganda to collect credit information on persons and businesses from various sources and distribute that information to approved users in the form of a credit report.

CRBs in Uganda

There are three licensed CRBs in Uganda;

  • Compuscan CRB Limited
  • Metropol CRB Uganda Limited
  • Gnugrid Limited

The list of licensed CRBs can be accessed on the Bank of Uganda website.

Gnugrid Ltd is one of the most recent CRBs to be certified by the Bank of Uganda.

The Bank of Uganda issued Metropol CRB Uganda Ltd a licence in 2015, and it has been in business ever since. Metropol CRB is part of Metropol Corporation Limited, a Nairobi, Kenya-based business information and risk management firm that has been in business for 25 years.

The “Metro Score” is a credit scoring system that Metropol has developed as part of its creative solutions for the Ugandan market. It is based on the credit information found on the borrower’s profile with the Bureau and considers several pertinent factors.

The Metro Score may be used for credit evaluation and other situations where identifying the risk associated with the borrower is important in making credit decisions since it forecasts the likelihood of default for a borrower over 5 years.

All Participating Institutions with access permissions to the Metropol Core CRB system have access to the Metro Score.

What CRBs Do

CRBs:

  • Make it easier to analyse a customer’s loan application because credit reports provide information about a customer’s prior loan repayments.
  • Gather information about the client’s borrowing and repayment habits.
  • Reduce information asymmetry between borrowers and lenders by allowing Participating Institutions to share information. Borrowers frequently have more information than lenders.
  • Reduce over-indebtedness and unsafe repeated borrowing, which frequently leads to loan default.
  • Expand credit availability as more people become eligible for financial services.
What Information Does CRB Have?

The CRB maintains data on both consumer and commercial credit, including:

  • Personal information about the borrower (name, contacts, FCS number, NIN, address);
  • The amount owed and who it is owed to;
  • Repayment history ( credit history and credit account status)
  • Unredeemed Cheques
  • Cases of fraud and forgery that have been proven to have occurred;
  • Loan defaults and late payments on all types of credit facilities;
  • Court rulings regarding receivership, bankruptcy, and liquidation

The above data is combined by CRBs to create thorough credit profiles that describe your past and present credit repayment behaviour.

Without your permission, no consumer credit reference bureau database ever receives your credit information.

Negative information pertaining to non-performing loans and clients engaged in financial malpractices, such as bouncing checks owing to insufficient cash and fraud should be submitted right away to the CRBs as permitted under Sections 78(2)(a) and (b) of the Financial Act, 2004.

What is a Credit Report?

A credit report is a summary of a person’s or organization’s history of borrowing and repayment that a credit bureau creates. Lenders judge a loan applicant’s creditworthiness based on the credit report, which details how an individual or business has handled credit in the past.

The following details are included in the report:

  • The time and date the report was released by the CRB
  • Particularly personal information (name, address, contacts, ID number, FCS number)
  • Company information (Company Name, registration number, TIN, FCS Number, address, contacts, agents)
  • A list of the borrowings and their current status for a client. This applies to loans that are currently being repaid successfully as well as those that have already been repaid but have any late or missing payments or are in default.
How to Access Your Credit Report?

A financial card is required for access to a borrower’s credit report from any CRB. Registration for this card may be completed at any participating institution branch nationwide or you can get it at the offices of Compuscan CRB Limited.

Before the National Identification System was implemented, this card was presented as a stopgap solution to give credit reference services a distinctive identity.

However, the National ID (NIN) Tax Identification Number (TIN) or Registration Certificate Number for Non-Individuals will soon be used by Credit Reference Bureaus (CRBs) as the only identity for people, whether they are citizens or foreigners.

CRBs rely on unique identification to make it possible to match borrowers’ data. The major source of credit information is traditional lenders like commercial banks, credit institutions, and microfinance institutions.

Others could include utility companies, company registries, land registries, trade licensing authorities, tax authorities, court registries for information on judgements on debt, insolvency or bankruptcy, registrar of persons and other relevant public bodies like NIRA, URA etc.

CRBs must maintain a history database for a period of five years to provide complete credit information and must preserve that database for a minimum of 10 years, as stated in Section 21 of the Credit Reference Bureau Regulations, 2005.

To supplement the information kept by the CRBs and help prevent criminal activity, dispute resolution, and identity fraud, additional forms of identification may be gathered.

Therefore, while borrowing money, borrowers will always need a National Identity Card. This is in accordance with Section 66 (2) (d), (h), and (j) of the Registration of Persons Act, 2015, which states that any institution offering the following services, including the opening of bank accounts, consumer credit, and financial services, must demand a person to present a national identification number or national identity card, as well as an identification number for foreigners or foreign identification card.

The national identity card or alien identification card is a machine-readable, biometrically upgraded card with digitally integrated information about the owner. Each borrower’s card has a unique number.

Benefits of Having Credit Reports

The existence of CRS in Uganda benefits both borrowers and cooperating institutions.

Here are the benefits:

  • Because of their solid payback history, borrowers may more easily bargain for better lending conditions. Credit reports provide proof of excellent behaviour, which may translate to more favourable conditions like flexible repayment schedules, cheaper interest rates, and less reliance on tangible collateral like real estate and structures.
  • Borrowers will receive loans faster if they have timely access to loan records.
  • Lenders advise borrowers to take out loans that they can afford to repay.
  • Due to the availability of data on client risk, participating institutions are able to provide new and improved products like credit cards.
  • Lenders are also able to evaluate credit risk.
  • Lenders may maintain their rates low since they no longer have to boost costs to compensate for a few borrowers’ bad payment behaviours.
  • Credit guarantors have the authority to exclude non-performing customers from the procedure.
  • Reduces loan processing turnaround time.

For a borrower, when you maintain timely repayments and a healthy credit record, the CRB is able to develop a favourable credit profile for you. Your credit report becomes your collateral (reputation collateral) as lenders begin to lend to you based on how well you have repaid others in the past.

The CRS ensures that your healthy credit habits are rewarded. If this information is not shared, other lenders will not know that you are a good client.

Signing as a guarantor to a loan may affect your creditworthiness. Co-signing on a loan means you are accepting full responsibility for the debt if the other person does not pay as agreed.

Also, if you belong to a group with which they took a loan, it affects creditworthiness positively or negatively. You will appear in the CRB with links to all the group members. If the group performs well, your credit profile will display this positive information. If it does not perform well, this too will be reflected.

Summing up

Good credit management leads to higher credit scores, which in turn lowers your cost to borrow. Living within your means, using debt wisely and paying all loans or bills on time, every time, is a smart financial move that reduces the amount you pay for the money you borrow, and puts more money in your pocket to save and invest.

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