COMMENT: Is it time to establish a Credit Bureau in Cyprus?

By Stavroula Kousiappa

 

Credit Bureaus have been described as the backbone of successful credit economies. Their emergence dates back to the beginning of the 20^th century in the United States and Canada, even though there is information that the first credit bureaus were traced previously in the early 1800s in London. Of course, through the years with the support of technological advance and the expansion of credit, such credit bureaus turned into developed modernized bureaus with a presence all over the world. Nowadays there are about 129 credit bureaus operating globally.

When we refer to credit bureaus we normally mean an institution that gathers information from creditors and other public sources for individuals’ demographic records, payment and credit history and allows its members to have access on the data. A credit bureau is not a credit rating agency. It does not collect financial information on large corporations neither does it grant credit ratings on individuals or firms. What it does, is to provide access to its subscribers on its database in order to help them to evaluate the credit worthiness of the individuals who are interested in receiving credit either for trading or private purposes, i.e. loans, credit cards. The subscribers need to have this information in hand so as to get a hint before granting a loan or credit; whether the borrower has the ability to repay his or her debts in the future. Within its database positive and negative information is combined together in order to give a complete set of information to those who want to determine the level of credit or loan.

The increasing competition among the financial institutions, the need for extended credit, the necessity for risk management and the requirement of an independent provider of data for the support of credit rating confirm that the foundation of a Credit Bureau is a must. The establishment of a credit bureau will definitely be beneficial for its members since it protects financial institutions and lenders against the asymmetric information problem that appears before the approval of a loan. Furthermore, it eliminates the possibility of bad debts, helps the lenders to make better decisions based on accurate information, accelerates the process of providing credit and prevents fraud.

Another advantage that comes out from credit bureaus is the possibility of data exchange among other countries’ credit bureaus. The graph below presents two ways of data exchange between countries. The first one is the direct method in which the lender; financial institution; directly access the credit bureau in the other country. The alternative way is the indirect one which is the most widespread.

In this case two credit bureaus from two countries make an agreement for data exchange. A financial institution contacts the credit bureau in its country and the credit bureau gets in touch with its partners in the other country to submit a request for information on borrowers in that area. A financial institution in that country collects the data from the borrowers and submits them to the credit bureau. The information is then delivered back to the associated credit bureau and then to the requesting financial institution.  

 

Cyprus has not established its own credit bureau yet. The increasing demand for credit and financial facilities raises the need for information on payment habits and credit history on individuals, thus the establishment of such institution is imposed. A credit bureau will be the third eye which will observe and record consumers’ payment tendencies and will provide unbiased information on the potential borrowers. Of course, a credit bureau requires operating under specific regulations and having high levels of communication with the financial institutions.

 

Stavroula Kousiappa has an MA in Industrial Economics, and is Research Executive at Creditinfo Cyprus.