Bright Simons: Does Ghana have a ‘Credit scoring’ system?

The Genesis of the Affair

A strange uproar has been rising on Ghanaian social media since the country’s Vice President announced during a speech at the country’s largest university that his government will introduce a credit scoring system next year.

This revolutionary development aims to lower the perceived risk of borrowers so that Ghanaians can pick up goodies like cars with nothing more than their precious Ghana Card, the much-vaunted national ID card. 

Why would such a lip-smacking prospect generate any kind of furore at all? Who can be against a government policy that strips away the pointless burdens of having to prove income whenever one fancies a nice SUV, provided one is blessed to be endowed with the almighty Ghana Card?

There is a small issue: Ghana has had a credit referencing system akin to that being promised since 2010. And this is not the first time a timeline has been given for this ethereal system to surface.

Old Promise

More than a year ago, whilst speaking to an audience of bankers, the Veep promised the launch of this magnificent system by the end of March 2023.

The Citizen App that he says will provide the doorway to accessing the new credit scoring system was launched as part of the Ghana.gov project years ago. In its latest reporting to UNCTAD under the eTrade Readiness Assessment scheme, the government claimed that ~1500 state bodies and agencies have already been onboarded onto the Citizen App to provide services to the population.

Which then makes one wonder why there is a need to “introduce” the app next year to, among other services, offer credit scoring. Perhaps, it helps knowing that the Citizen App is an important component of the Ghana Digital Acceleration Project approved for funding to the tune of $200 million by the World Bank in April 2022. When such relatively large amounts are at stake, politicians tend to get creative about spending money. In this specific case, however, something more bizarre must be going on.

The State of Ghana’s Current Credit Scoring System

As was explained at the outset, Ghana has a credit scoring system with active players trying to make the most of the situation. According to the World Bank, so do, at least, 24 other sub-Saharan African countries.

A credit scoring system is simply a statistical representation of the likelihood of a borrower to default on a loan or other form of credit. Such a score is relied upon, among other factors, by a creditor to gauge the risk of extending a particular credit facility, such as a car loan, mortgage or postpaid phone contract. Creditors use their own internal formulas, and also consult specialised entities, called “credit bureaus” or “credit referencing agencies”, that aggregate insights about borrowers at a scale that they on their own may not be able to do.

Ghana’s first credit bureau, XDS Data, was incorporated in 2003 and commenced operations in 2004. 

In 2008, one year after the substantive law on credit referencing was passed, Dun & Bradstreet (D&B) joined the fray. Both companies however had to wait till 2010 when the Bank of Ghana formally issued full licenses and set up the regulatory infrastructure for full-blown credit referencing in Ghana. Following this milestone, promoters of the bureaus, like policymakers, heartily announced a new era of loans without collateral.

In March 2020, Legislative Instrument (LI) 2394 came into force to provide regulations for the conduct of credit referencing activities in Ghana. Sections 4 and 5 of these regulations impose strict obligations on data providers to update information on borrowers monthly and to ensure/assure the quality of the data provided at all times.

In essence, financial institutions are not even at liberty to provide credit in Ghana without running a search in view of sections 30 and 31 of the regulations.

Besides the credit bureaus, the Securities and Exchange Commission of Ghana (SEC) has also recently licensed the country’s first Credit Rating Agency, Beacon. Typically, rating agencies target large corporations and may rate either the corporate client itself, its securities, or other financial instruments issued by it, or both. What this means is that Ghana now has a domestic equivalent of the well-known Fitch and Moody’s.

Beacon has so far only been able to complete one rating action in the one year since it started operating, but 14 other companies are in the queue. Obviously, as should be clear from the processes as outlined below, Ghana Card will make no dent in this backlog.

So What “Credit Scoring” again?

Given these various obvious facts, the Veep’s claim that the absence of credit scoring in Ghana is what has increased the risk-perception rating of borrowers in the eyes of creditors, and thus stunted availability of credit, is very strange, especially in a country where the base interest rate hovers around 30% and many borrowers have to contend with rates exceeding the 40% mark.

In response to the mounting confusion, the Technical Advisor of the Veep took to social media in a bid to shine more light.

His main arguments are as follows:

• The current credit scoring system excludes 80% of adults. 
• The current system is “bank-led” and has failed to expand its data sources beyond the traditional banking system.
• The proposed system will ride on the vaunted Ghana Card system, giving it access to a broader range of demographic and other forms of data, thereby embracing more effectively the population of the country.
• The data from this new and humongous constellation will improve credit decision-making, widen the net for more people to benefit from credit, and modernise the Ghanaian economy.
• The proposed system will make it easier for individuals to access their scores by posting them online.

These positions were more or less corroborated by a political risk analyst affiliated to the same think tank as this writer, but with an interesting new twist. Whilst acknowledging the existence of a credit referencing system in Ghana, the author disputed the maturity of the system to the point where it can generate individual credit scores.

In the rest of this short essay, we shall explore why none of these arguments hold much water.

Does the Existing Credit-Scoring System exclude 80% of adults?

No, it doesn’t.

According to the Bank of Ghana’s (BoG’s) own data, nearly 8.8 million Ghanaians have credit data captured by one of the country’s credit bureaus.

Roughly half of all active companies registered in the country are also captured.

Data from the 2021 census would thus indicate an adult population coverage level of nearly 50%. Not the 20% claimed by the Technical Advisor to the Veep.

Even more importantly, users report that more than 85% of the time when they attempt to query a borrower’s credit, they get a hit, suggesting that for the vast majority of economically active citizens who actually want credit, coverage exists.

After flattening between 2016 and 2018, usage of the existing credit referencing/scoring system has increased considerably, with more than 9.3 million checks being conducted by creditors annually. As well as information on more than 15 million credit transactions covered.

Of course, a system that covers every adult, small business, and every financial transaction in the economy will be more ideal, but such a system is very hard to establish anywhere in the world.

In the United States (US), arguably the most advanced credit market in the world, research by the US government’s Consumer Finance Protection Bureau has revealed that roughly 22% of Americans are “invisible” to the credit referencing/scoring system due to having no credit score at all or information too scanty to compute a score.

Whilst it makes sense to keep looking for ways to ensure the coverage of every adult and small business, it is essential to be clear as to how that could be achieved. The suggestion that the Ghana Card is some kind of silver bullet for killing credit invisibility is wholly unsupported since it is not a lack of civil identity that restricts individuals from engaging in reportable economic activity. 

At any rate, as will become obvious shortly, the issue of ensuring deep and broad reporting of economic activities is very well understood but never has the use of a particular civil ID been cited as the solution. Many of the most advanced credit markets in the world allow residents to use multiple IDs without favouring any one system.

Is the Existing System Limited to Banks?

Not at all.

As the data below from the BoG shows, the Ghanaian credit bureaus obtain their data from sources that go beyond the traditional banking system, including government agencies and retailers.

Furthermore, in 2021, the BoG, activated powers under section 13 of the LI 2394 regulations to demand that other data holders in the economy not reporting to the credit bureaus commence doing so. The directive is so informative about the state of credit referencing in Ghana that it is worthwhile publishing it in full.

The delay in reporting by some utilities, mobile network operators, fintech institutions and mobile money platforms, contrary to law, is due more to unwillingness to foot the data and data security infrastructure bill than to the absence of policy intent. Some major commercial data owners are also averse to the loss of competitive advantage if their competitors can access the same market insights that they have. 

None of these problems can be fixed by introducing a new system backed by Ghana Card. What is required is effective implementation of the law, continuous sensitisation, and the encouragement of data infrastructure pooling by industry associations.

Reporting Gaps not Unique to Ghana

It bears mentioning also that everywhere in the world, some data reporters are preferred more than others by credit bureaus. 

According to IFC data, banks predominate globally in the ranks of data providers simply because creditors think they are best placed to help them with information about a borrower’s payment habits.

Source: Ghana News