What’s your credit history? How Pakistan needs to help out its credit bureaus - for its own good
W
hen does one hear about the State Bank of Pakistan in the news? Typically, it is when there is some news about the interest rate. In fact, just this week, the monetary policy committee is set to announce a new rate. But outside of that function, and the usual news rush regarding it, there are few who hear what the central bank is up to, let alone read its multiple annual reports.
BANKING
And yet buried away in the third quarterly report of the board of directors for the year 2020-2021, which was then submitted to parliament, is a section that Profit, at least, deemed somewhat curious. The report covered the usual areas of interest: real sector, monetary policy, inflation, public debt (one can almost hear the reader nodding off at this point). But there was a special section attached titled “Private Credit Bureaus in Pakistan: Enhancing credit penetration by addressing
information asymmetries.” The title may be a mouthful, but the gist is that Pakistanis don’t have credit histories, and that there are significant hurdles in the way of trying to create an actual credit profile. Still, there could be potential solutions to be gleaned from other developing countries with the same problem, argue authors Ahmad Mobeen, senior analyst at SBP; Sohaib Jamali, senior economist at SBP; and Sabahat Zafar, deputy director at SBP. The situation So, first, what is the scale of the problem? In a nutshell, pretty bad. According to Jamali, Mobeen and Zafar, formal credit to the private sector is among the lowest among emerging and developing markets. Private sector credit to GDP ratio stood at 17.4 over the last decade - lower than Sri Lanka at 40; Bangladesh, at 44.1; Nepal, at 59.4; and India, at 97. Even as banks profitability has improved, ‘information asymmetries’ aka a lack of information means that they have been reluctant to lend to agriculture, small and medium enterprises. If formal lending is entirely geared towards the well-off and people who have documented credit history, exactly how will credit penetration improve? Enter the concept of a credit bureau.
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