#BTColumn – Credit reporting and Credit bureaux

The credit reporting legislation recently passed in Barbados points to some of the potential complexities in making public policy. The formalization of credit risk analysis through credit reporting legislation and broad credit bureau coverage is increasingly seen as a normal and critical part of the architecture of modern financial systems. The underlying theory is that the lack of adequate information to assess credit risk is a major factor inhibiting the flow of credit or access to financing. Hence, laying the legislative framework for broad credit bureau coverage is part of a drive to make it easier for players in the economy to access credit by providing financial institutions with the information they need to adequately assess credit risk.

On one hand, the overall financial system may also benefit from increased stability due to a likely reduction in non-performing loans, as lenders are better able to assess credit risk. The additional information provided through broader credit bureau coverage may provide some players with an additional and objective metric to demonstrate their creditworthiness and therefore access more credit and maybe on better terms.

The new legislation will likely pave the way for an improvement in Barbados’ score on the World Bank Ease of Doing Business, The Global Competitiveness Index and other influential rankings where credit reporting legislation and broad credit bureau coverage are major factors.

For example, on the most recent issue of the World Bank Ease of Doing Business survey, Barbados’ overall ranking is 128 out of 190 countries while on The Getting Credit aspect of the survey, Barbados’ rank is 152 out of 190. In arriving at the Getting Credit score and ranking countries are assessed on Strength of Legal Rights Index, Depth of Credit Information Index, Credit Registry Coverage and Credit Bureau Coverage. Barbados has a Strength of Legal Rights Index score of (6/10) and Depth of Credit Information Index, Credit Registry Coverage and Credit Bureau Coverage scores of zero (0). If the new legislation leads to broader credit bureau coverage, these scores and rankings may well improve.

However, depending on how important the credit score becomes in the lending decision and the terms and conditions of financing, the credit reporting legislation and broad credit bureau coverage may impact negatively on the access to financing of some players in the economy who are currently able to access financing. Some may argue that they don’t deserve to access financing because of their negative credit history.

Some players who have not built up a credit history, negative or positive, may also face challenges in accessing financing.

Some of the negative reactions to the credit reporting legislation in Barbados may also reflect the sense of vulnerability and powerlessness consumers already feel.

The advanced countries where credit scores are the norm may also have the benefit of strong consumer protection legislation, agencies, and advocacy groups.

Since this development is coming relatively late in the development of our financial system where several players have been accessing credit or not under varying terms and conditions, the net effect on the “ease of access to credit” is an empirical question, “we will see over time.” It is also quite possible that we may face distribution or equity issues in that the potential negative and positive outcomes may be skewed towards certain groups in society. Whether access to adequate information for credit risk analysis is the major or a major impediment to the flow of credit in Barbados is also another question.

Professor C. Justin Robinson is the Pro Vice Chancellor and Chair, Board For Undergraduate Studies.
The University of the West Indies