The financial sector regulating arm of the Ethiopian government, National Bank of Ethiopia (NBE), is set to commence an online client credit history at a cost of four million dollars in one month. The real time approach of sharing information with the central data system is expected to significantly reduce the information gap between lender and borrower. It also enables the regulator to assess and prevent systemic risks in the financial sector.
The system provides information about a borrowers behavior. Does the borrower have a positive credit history or a negative one? Such information helps one to make a decision of whether or not to lend much more easier, explained Uli Zeisluft, Principal Financial Specialist at International Financial Corporation Advisory Services.
The system includes in its database borrowers addresses, the partners information, previous credit performance, current levels of indebtedness, the amount of time credit has been in use, collateral information and court related issues.
Since there are no unique identifiers such as an address on a national level, the regulator is forced to make use of the Tax Payers Identification Number (TIN) provided by the Ethiopian Revenue and Custom Authority, said Mathiwos Shamo, Financial Sector Capacity Building Project Coordinator at NBE. The technology upgrading project will totally transform and expand the capacity of the former Credit Center under the Bank Supervision Department of NBE. It will replace manual correspondence between banks and NBE about both commercial and consumer loans borrowed once a month enabling a real time information exchange.
At present the database is set to link borrowers information from banks and microfinance institutions. In the near future it will also include insurance, added Mathiwos.
Experts in the financial sector argue that the creation of such an information mechanism will broaden and ensure fair access to credit by reducing the level of asymmetrical information on the part of tender about the borrower. This in itself facilitates access to credit and lowers credit costs thereby enhancing profitability for all parties involved in the lending and borrowing process. Above all, it ensures better financial resource allocation.
Non performing loans (NPL) will significantly fall following the implementation of the project because every lender will have full information about their clients credit history. This reduces risks of default. If the rate of default goes down, profitability will subsequently increase, contributing not only to the reduction of NPL but also to the stabilization of the financial sector in general, the project coordinator explained.
The program was financed by the World Bank and technically consulted by the International Financial Corporation (IFC); a World Bank Group financial advisory entity.
As we did yesterday and as we are today. IFC would be pleased tomorrow to provide its technical support to NBE with the overall objective of developing the private sector,said Adamou Labara, Country Director of IFC at Ethiopia.