NewsDay Friday July 24 2015 19
MONTHLY FINANCIAL SECTOR BULLETIN “credit protection”
It’s all about partnerships W
Reserve Bank of Zimbabwe
ELCOME to the Credit Protection Supplement, the first in a series of thematically-driven and informative monthly publications brought to you courtesy of the smart partnership between NewsDay, a publication of Alpha Media Holdings (AMH) and the Monthly Financial Sector Bulletin (MFSB). The MFSB is an independent provider of proprietary data, business intelligence and analytical content supporting decisionmaking in the financial and related markets. The MFSB’s aim is to enhance the decisionmaking processes of its
targeted audiences by aggregating and distributing relevant content for their convenience, an idea which NewsDay shares. Through this partnership, NewsDay will fulfil its commercial ends while providing meaningful financial sector information. The idea is to produce supplements that meet advertisers’ genuine brand building needs while also catering for the information needs of the financial sector’s diverse stakeholders. Content for the monthly supplements will include (but not be limited to) advertising material on financial (banking, insurance and microfinance) products, analytical pieces, historical industry data otherwise scattered in different sources, interviews with, as well as guest articles written by industry professionals where necessary. It’s not just about making money off advertisements; it’s also about taking responsibility for improving financial literacy in the country’s markets. We intend
for the supplements to be sources of reference now and in future, in addition to being launch pads for financial sector brands’ valuable products. The distribution model for the supplements recognises the ongoing shift in the consumption of media products by increasingly tech-savvy and well-clued audiences — that is why in addition to being available as pullout supplements in the print edition of NewsDay, the supplements will be downloadable on NewsDay’s website and also be distributed to proprietary mailing lists of the MFSB. This means the supplements can be easily shared which no doubt increases their reach locally and internationally. We emphasise on partnerships because the credit protection industry itself is dependent on an elaborate network of partnerships in which financial sector players (credit providers) will feed credit information into the custodianship of the Reserve Bank of Zim-
babwe’s National Credit Registry, which will then sell the information to Credit Bureaus accredited to the Reserve Bank of Zimbabwe for further processing and synthesis with information from other sources in order to service the evolving information needs of credit grantors — creating a virtuous cycle of credit risk management. Lastly, the partnership between NewsDay and SoundGarden Publishing — the publishers of the MFSB — which brings you this supplement is also important in that it demonstrates the scaling up of a relationship between a long-standing columnist and a newspaper title into a mutually beneficial and empowering business partnership. Omen N Muza, the editor of the MFSB who is working with NewsDay as a technical resource person for this project, has been contributing the weekly Financial Sector Spotlight Column to NewsDay since the paper’s inception in mid-2010.
In their own words Stakeholders view on importance of credit reference system THE Monthly Financial Sector Bulletin (MFSB) has compiled these quotable quotes on the subject of Credit Reference Bureaus, attributable to financial analysts, regulators, industry players and economic analysts — most of them opinion leaders in their own right. Apart from revealing popular thinking on the subject dating as far back as the onset of dollarisation, these nuggets also highlight the pros and cons of Credit Reference Bureaus (CRBs). They establish the imperative for this important institutional infrastructure and its benefits. Limiting abuse of pledged assets “In the absence of a national credit bureau, as is the case with Zimbabwe, chances that individual bank loans may be secured against the same pledged assets for other borrowings from other sectors such as retailing (for example furniture and clothing shops) is very high. The situation will expose the banking sector to credit risk as the probability of default and impairment of such loans cannot be ruled out,” — Brokerage Firm MMC Capital, March 2011 “We recognise that the absence of a credit bureau has created information asymmetry which is being exploited by borrowers who commit against the same cash flows from different banks. This is resulting in the disounted cash flows of the said borrowers not being able to service debts. We estimate that most firms and individuals in the market could be over borrowed and this may be contributing to the current state of acute debt overhang and cases of unsustainable levels of default in the banking sector.” — The then BAZ President George Guvamatanga, June 2012
Establishing borrowers’ true creditworthiness “What the economy is in need of is a centralised credit bureau system which would help lenders establish the true creditworthiness of potential borrowers. This will ensure that individuals only borrow to levels their salaries can accommodate. Again, it will remove the existing loophole, whereby a single payslip is capable of securing multiple loans. A centralised credit bureau would also single out individuals with a poor credit repayment history” — Kumbirai Makwembere, March 2012. “One of the main challenges in the early stages of a business is access to credit, as many new and prospective business owners simply do not have sufficient credit record to verify their creditworthiness. Government is therefore engaging financial institutions with a view to establish a Credit Reference Bureau, whose objective is to build a data bank of creditworthiness of individuals and firms.” — former Finance Minister Tendai Biti presenting the 2013 National Budget, November 2012 “Absence of the CRB results in information asymmetry in the financial services sector as it is difficult to evaluate creditworthiness of borrowers.” — DPC Chief Executive Officer John Chikura at the Chief Financial Officer Winter School in Nyanga, June 2015. Strengthening Risk Management Practices “It is still my opinion that the financial sector needs to take further steps to strengthen the risk management practices through the re-establishment of a credit bureau and implementation TO PAGE 22
G-analytiX ratings, credit scores and financial identities are providing the essential building blocks and tools required to assist the Zim Asset plan achieve its Vision and execute its Mission. 2.3 million individuals and 145 thousand SMEs that already have an FCB track record 1.5 million entities operating in the agricultural value chain,, including; small-scale farmers, agro-dealers, traders, off-takers, etc. 1.2 million individual business owners and 250 thousand SMEs that are currently outside the formal financial services system
Goodrich Analytix (Pvt) Ltd www.g-analytix.com
info@g-analytix.com
Tel.: +263 77 904 3180
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NewsDay Friday July 24 2015
Credit Protection Supplement
Economic empowerment through value chain management A
griculture is the backbone of Zimbabwe’s economy inasmuch as Zimbabweans remain largely a rural people who derive their livelihood from agriculture and other related rural economic activities. it provides employment and income for 60%-70% of the population, supplies 60% of the raw materials required by the industrial sector and contributes 40% of total export earnings. Despite the high level of employment in the sector, it directly contributes only 15%-19% to annual gross domestic product, depending on the rainfall pattern, and this is a statistic that understates the true importance and dominance of the agricultural industry. it is generally accepted that when agriculture performs poorly, the rest of the economy suffers. there are an estimated 1,5 million small-holder and communal farmers occupying a total of 21 million hectares in Zimbabwe. the greatest challenges faced by the sector can be summarised as follows: lAccess to inputs: it takes too long to get input credit agreed and often the funds available are insufficient to get the correct quantities or the volumes are not attractive to suppliers. lAccess to credit: Farmers struggle to access credit for inputs due to factors such as; a lack
of conventionally accepted collateral for formal finance, and/or no track record / history. in addition, past experience has made contract buyers nervous of providing inputs. lLogistics: Zimbabwe has eight provinces with 59 districts and 1 200 wards or municipalities. Most buyers and input suppliers limit collection and distribution services to the district level as the high cost of going deeper into the field makes it uneconomical. Furthermore, most buyers and input suppliers do not want to deal with volumes of under 20 or 30 tonnes and are not prepared to stock small supply shops without upfront payment. lKnowhow: Selecting the right crops and strains of seed for the land reduces risk of failure/ under-production. Balancing land usage between seasonal and higher frequency crops reduces concentration risk of a crop failing and reduces the risk of cashflow shortfalls. Seed strains with greater resistance and higher production levels reduce risk of failure/ under-production. irrigation kits reduce risk of failure/ underproduction and allow higher frequency crops/ horticulture to be introduced to again reduce the risk of cash-flow shortfalls. ict is a critical component to addressing these issues and, in so doing, elevating small-holder farmers out of a subsistence ex-
Small-holder and communal farmers struggle to access credit for inputs istence to commercial sustainability. A value chain linkages and management solution, which increases visibility and stimulates linkages between all stakeholders in the value chain of small-holder farmers, ultimately providing an agricultural reference bureau, can make huge differences. in east Africa, such a platform has been in place for a number of years, in 2014 the platform had increased farmer revenue by 8% on average and off-taker intake by 14%. this is an impressive impact in markets that were already better structured than our own in Zimbabwe. Hurudza Zimbabwe (Pvt) ltd, is a local company that has taken the original concept developed in east Africa, adapted it to the local needs of the Zimbabwe market and built an ict solution that helps overcome many of the challenges. the platform creates an ecosystem that reduces the risks
and improves efficiencies, which ultimately improve; production levels, sustainability and profitability for all participants in the physical and financial value chains, elevating small-hold farmers out of a subsistence existence to commercial sustainability. the platform collects, maintains and manages physical and financial supply chain data through multiple channels, including mobile devices, relevant to the target end-users. the demographic and transactional data are then analysed and, using special scoring models developed by g-analytiX for both the east African version and now the Zimbabwe implementation, combined with accessing Zimbabwe’s leading credit reference bureau, the Financial clearing Bureau (FcB), establishes a financial identity, i.e. a searchable score or rating, for participants in the value-chain, which, in turn, creates
economic empowerment though greater access to affordable formal financial services. the Hurudza solution has been selected for a proof of concept (Poc) under the livelihoods and Food Security Programme (lSFP) in Zimbabwe. lSFP is a multiyear £70 million ($100 million) poverty reduction and economic growth programme, supported by DFiD designed to improve the nutrition and food security of smallholder farmers and consumers across eight diverse agro-ecological districts of eastern and Northern Zimbabwe. in addition, Hurudza is also working with other NgOs and bodies such as the Zimbabwe Farmers’ union, with which a Mou has been signed, to accelerate the economic empowerment of smallholder farmers. lFor more information, please contact Alan Goodrich at alan@hurudzazim.com
Hurudza Zimbabwe (Pvt) Ltd
Hurudza’s Agrilife platform is an Agricultural Reference Bureau and Value Chain Linkages & Management solution, which increases visibility and stimulates linkages between all stakeholders in the value chain of smallholder farmers. Mobile Transaction Capture Market Linkages & Targeting www.hurudzazim.com www.agrilife.co.zw Loyalty Cards www.facebook.com/hurudzazim Reference Bureau Stock/inventory Management email: info@hurudzazim.com tel.: +263 4 794366/7/8 Financial Transactions Management
Economically Empowering Agricultural Value Chains
NewsDay Friday July 24 2015 21
Credit Protection Supplement
Credit risk – busting some myths F
OR many people the subject of credit risk management and measurement is viewed almost as a “dark art”, practiced by specialists using sophisticated tools and methods. Many people equally are quick to lay the blame for both global and local financial credit-fuelled crises on these practitioners. However, unless one is delving into the world of exotic financial instruments, the reality of credit risk is actually much more simple and comprehensible to the majority of people. So let’s bust some myths, breakdown the barriers and open the doors to greater access to finance. Many studies over the years have shown that humans are honest in nature — typically, only between 5% and 10% are naturally dishonest. Statistics from Zimbabwe’s leading Credit Reference Bureau (CRB), the Financial Clearing Bureau (FCB), confirm this assertion well with a “bad rate” on searches of between 5% and 6%. If non-performing loan (NPL) rates for lenders are higher than this, then there is likely to be an issue with how applicants are being selected for credit facilities and subsequently managed, i.e. credit is either being afforded to those where there is already evidence of not being good at paying back, or the amount of credit being provided is skewed towards higher risk applicants. Too often, the term “risk” is confused with “uncertainty”. Equally, “capacity” to pay back is given greater weight than “willingness” when assessing applicants. Credit “risk” is something measurable. If it cannot be measured reliably then it is “uncertainty”. As credit “risk” is measurable, so it can be used to take decisions and price products, i.e. higher-risk applicants may still be given credit but at an elevated interest rate to cover the increased probability of default. The element of “uncertainty” requires insurance to cover the potential loss. Credit providers have often used collateral as insurance. However, the reality is that, for the lender, collateral is inconvenient as a form of insurance — much better is for the lender to require the borrower to cover potential loss with appropriate insurance. The “risk”, or probability, of default is generally measured using a credit score, calculated using a number of factors that usually provide predictive measures and indicators combining both the “capacity” and “willingness” of an applicant to repay a loan. FCB was the first CRB in Zimbabwe to integrate credit scores for individuals into its standard reports in 2014. When it comes to measuring “risk”, understanding “willingness” is arguably more important than “capacity”, especially in markets with limited credit history data available. Analysing an applicants the track record of regularly paying other credit and service providers on time, over a period of time, can be used to understand the “willingness”. In the absence of such track record, it is also possible to assess “willingness” using psychometrics. Equally, there are significant differences in the ways women and men Small- and Medium-Size Enterprise (SME) owners approach, access and use credit to start and grow their businesses. Women are recognised to be lower risk. Therefore, it should be a priority to incorporate women-specific solutions, with more suitable credit terms and better risk assessment practices, into the frameworks for improving credit access in the SME sector. Evidence suggests that credit scoring models, based on psychometric testing, generate significantly fewer rejections of creditworthy small business owners than traditional conventional models. As part of its SME Ratings initiative, FCB is collaborating with Harvard’s Entrepreneurial Finance Lab (EFL) to further extend the availability of this type of scoring and assessment to lenders in the SME sector in Zimbabwe. Finally, credit risk assessment and management need not be over-sophisticated and access to affordable credit can be increased significantly by using the tools
and data available through a credit reference bureau like FCB. We encourage every Zimbabwean to make it their business to know their credit status in 2015 and to take responsibility for their own economic empowerment. For further information, please contact Alan Goodrich at: alan@fcbureau. co.zw
THERE are significant differences in the ways women and men Small- and Medium-Size Enterprise owners approach, access and use credit to start and grow their businesses. Women are recognised to be lower risk.
Emily Mafuke runs a tile manufacturing firm
Servicing the financial services sector in Zimbabwe for over 25 years as a trusted credit clearing bureau and custodian of credit information sharing and referencing data. In August 2014, FCB introduced credit scores into its standard reports. As at end of June 2015, approximately 500,000 individuals had been scored (economically empowered) since it was introduced and approximately 50,000 individuals are being scored every month. Multiple modes of usage are supported to suit your institutions needs: Web-based Search
Batch processing
API / Web service
Portfolio Monitoring
Mobile Phone COMING SOON !
Comprehensive suite of reports:
Standard Skip Trace Exposure Directors Employment Connections
Tel.:
+263 4 794367/8
Fax:
+263 4 794366
Email: info@fcbureau.co.zw www.fcbureau.co.zw
22 NewsDay Friday July 24 2015
Credit Protection Supplement
XDS Credit Bureau offers smart information solutions E
xpErt Decision Systems (xDS) is an information bureau in Zimbabwe offering both consumer and commercial reports, credit scores and analytics giving a complete data picture. We believe in delivering innovative, user-friendly, and affordable information solutions and technology that can be trusted and tailored to your specific business needs. xDS Zimbabwe is part of a pan-African group that has operations in South Africa, Ghana and Nigeria. the parent company has also been involved in projects across Africa, positioning us as a uniquely African company with a solid international track record. A unique combination of strong business practices, information technology skills and experience enables us to provide consumer, business and personal solutions that significantly contribute to organisations making smarter decisions. With the largest database of Credit profiles in Zimbabwe, xDS will help your business successful-
ly manage credit risk through consumer and commercial credit reports and specialised credit management analytics. xDS’ product offering includes, but is not limited to, consumer credit exposure reports, trace reports, agro exposure reports, employment verification, tenant verification and commercial reports. All these reports aide in the prevention of future delinquencies by analysing behavioural patterns. xDS Zimbabwe has brought together expertise across the agriculture industry to enable small scale and rural farmers to access financial and contracting services. Our suite of solutions encourage sustainable lending and contracting to agriculture and have been tailormade for the small-scale and communal farmers. through our Authentication Services, clients can access verified information on potential employees, tenants and business service providers which will help you make better decisions. Verify employment history, educational
XDS Zimbabwe Bureau Products in the Credit Value Chain background, criminal history, payment patterns and trade references. xDS believes in providing as much information as is available in order to get a detailed profile of individual or company being transacted with. As such, our credit exposure
report details demographic data, address history, detailed payment history, amounts owed, length of credit history and a bureau rating. this is the standard across all the sectors, with tailor made solutions depending on the needs of the particu-
lar group of companies. Our It infrastructure provides data security standards that match a credit bureau that is operating within a regulated credit market. It is xDS’s intention to be recognised as a trusted custodian for information especially that which has been provided by credit providers. to that end, a robust data security policy has been put in place which outlines the rules to be followed when handling and storing data that has been collected from credit providers. As a result, all data entrusted to xDS is secure, safe and guarded against any misuse by internal or external parties.
Stakeholders view on importance of credit reference system l FROM PAGE 19
of robust risk management frameworks. We have noted the increase in credit coming from non-bank sources. This poses challenges in the market particularly in the absence of credit bureaus. It is critical that as the financial services sector tries to meet demand for credit across both retail and corporate customers a clear and well-defined risk management framework be followed” — Barclays Bank Zimbabwe managing director George Guvamatanga, March 2011 (2010 Annual Report) Supporting infrastructure for Basel II “The Reserve Bank of Zimbabwe encourages banking institutions to consider funding the setting up of a Credit Reference Bureau. The establishment of a Credit Reference Bureau will provide a central database for credit information sharing which will, among other things, augment credit risk management and provide the requisite support infrastructure for the implementation of Basel II.” — The then RBZ Governor Dr Gideon Gono. “The (Basel) Accord recognises three main risk categories: i.Credit Risk, ii. Market Risk, iii. Operational Risk and ultimately a bank must hold capital against these three types of risks. The role of credit reference bureaus is the first risk category of Credit Risk. We enable banks to objectively and accurately assess the quality of its credit assets and thereby evaluate and analyse the concentration of its risk exposures.” — Farayi Dyirakumunda, XDS Zimbabwe, June 2015 Sharing credit information to enhance access to affordable finance The basic function of a credit bureau is to enable banks to share information about borrowers for business decision making, that is credit granting decisions.
The bureau also keeps a credit history record of the borrower and can even assign a score related to the credit history. Good credit scores can ease access to more credit which could be an opportunity for borrowers to access credit without the restrictive collateral requirements … It is also high time that Zimbabwean companies get credit ratings so as to broaden their financing options. It is currently difficult for corporate borrowers to issue debentures as they have no credit rating scores to determine the yields. — Kingdom Market Report with Anymore Taruvinga February 2012. “Credit information-sharing is a critical component of economic empowerment. In order for the financial services sector to be able to increase access to affordable finance while managing risk, the visibility that credit information-sharing provides is essential.” — Dr Kupukile Mlambo, Reserve Bank of Zimbabwe deputy governor, June 2015 Assessing and pricing risks “A functional credit bureau would enable businesses to effectively assess counterparty risks and hence improve the efficiency of their processes. It also allows for the accurate pricing of risk and therefore will allow for the wider availability of credit and greater volume of sales in the credit retail industry.” — The late Bulawayo-based economic analyst Eric Bloch, November 2012 “Money and information are the critical components in lending. The very survival of any provider depends on the availability of both ingredients and full information allows for the accurate pricing of risk thereby allowing for the wider availability of credit and a greater volume of sales across industries.” — Farayi Dyirakumunda, XDS Credit Bureau, June 2015 Checking the growth of non-per-
forming loans “The absence of a credit bureau is the reason why bad debtors are increasing. I am not saying in countries where the bureaus exist there are no bad debtors. They will always be there, but not as in countries where it is not (in existence).Everyone has borrowed from someone. So, no matter how tight one is on debt, bad debtors will always be there but could be less if there was a credit bureau.” — Truworths Zimbabwe Chief Executive Officer Themba Ndebele presenting the company’s financial results, March 2013 “We are working on a national credit bureau to minimise bad apples in the banking sector. That we are going to do without fail. It will go through just like any other important Acts. We need to find a lasting solution to non-performing loans.” — RBZ governor John Mangudya, speaking at the Confederation of Zimbabwe Industries (CZI) annual congress, July 2014. Functions & benefits of a Credit Reference Bureau (CRB) “The completion of the framework, which is targeted for March 2013, will pave way for the commencement of operations by accredited bureaus. The bureau is expected to overcome the existence of asymmetric information between borrowers and lenders, gathering reliable information on potential borrowers on their past repayment behaviour that would determine the credit risk. It will also reduce the default rates through the development of payment histories or reputation collateral used in securing more competitive loan rates. The credit bureau will stop debtors who go around borrowing money from many banks without repaying it as there would be a track record.” — The then BAZ and BCZ president George Guvamatanga, speaking
at the Business Council of Zimbabwe (BCZ) conference, February 2013 “The purpose of CRBs is — fundamentally — to address asymmetries with regard to credit information in such a way that socio-economic issues relating to indebtedness for instance, are better managed and the risk of doing business with an individual or company is better understood. However, it is very important to point out that a CRB is purely a trusted custodian of information which neither holds nor expresses opinions regarding individuals or companies. A CRB does not ‘black list’ anybody or any entity, which is a very common misconception. It is the credit providers and the courts that ‘black list’ people and companies — the CRB simply stores and shares the information provided to those that are authorised to access it. A modern CRB — and this is where FCB is heading — is actually the custodian of far more positive data than negative data and, as such, can help increase access to affordable finance for those with good credit records.” —Alan Goodrich, FCB Managing Director, May 2014 “A credit reference system is expected to improve the performance of the financial sector and stimulate economic development by making lending and borrowing easier, faster, and ultimately cheaper. Further, borrowers can use their positive credit history as “collateral” to access loans at better rates and seek more competitive terms and from different lending institutions. A credit reference system promotes and supports a high level of trust between lenders and borrowers — resulting in an increased volume of credit in the economy. In addition, timely and accurate information on borrowers’ debt profiles and repayment history enables banks to make more informed lend-
ing decisions.” — RBZ deputy governor Dr Charity Dhliwayo, July 17 2015 So close, yet so far: previous attempts to set up Credit Reference System “Unfortunately we are bound by certain confidentialities, but we are working with an international technical partner to set up a credit bureau, which should be operational by September of this year (2012).” — BAZ Chief Executive Officer Sijabuliso Biyam, June 2012 “The responsibility of the credit reference bureau has moved from BAZ to the Reserve Bank of Zimbabwe and Ministry of Finance. We hope they will be able to finalise it this year.” — BAZ and BCZ president George Guvamatanga, speaking at the Business Council of Zimbabwe (BCZ) conference, February 2013 Privacy of information & confidentiality issues “ There are also issues to do with the privacy of information and the associated sensitivities, it is important that the government through its various arms comes up with a legislative framework that will create a win-win scenario for the economy and the various economic agents without prejudice to any one section.” — RBZ Registrar of Financial Institutions Norman Mataruka, February 2014 “Building a full-service credit reference bureau (CRB) continues to require significant investment in terms of systems and capacity building. However, the main challenge is to raise awareness of the positive benefits of sharing credit information and acceptance levels amongst both credit providers and consumers of credit. We have had to work hard to break down some of the barriers that arise from a fear of competition and, to some extent, confidentiality issues.” — Alan Goodrich, FCB Managing Director, May 2014
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