Clean credit record is the best collateral

By Editor

Editorial Cartoon

Three United Arab Emirates (UAE) based commercial banks are attempting to recover 30bn/- from some 700 Tanzanians who borrowed the money and three years down the road, are nowhere to be found.

It is because of this insecurity that lenders place stringent borrowing conditions to mitigate the risk. On top of the list of preferred collaterals are immovable assets, buildings and land, so if you don’t have a title deed you are automatically disqualified.


Second choice for collateral is cars and other items of high monetary value which again disqualifies a large portion of Tanzanians who live from hand to mouth.

Another loan security option that lenders use is high interest rates on borrowing which makes it less attractive and as such, only a few seek out these high interest loans.

So what is to become of these multitudes of hardworking and innovative Tanzanians seeking capital to apply their business ideas or to better their lives?

This group has for a long time been in limbo but on par with the rest of the world, the government has of recent years increased its attention to small and medium entrepreneurs urging them to form groups that will increase their loan credibility and repeatedly bid lenders to ease restrictions on borrowing.

However the reality on the ground is that, loan defaulters increasingly cut into the profits of commercial banks and potential government revenues.

This leaves one option, credit reference bureaus that would collect individuals’ credit information providing a clear illustration of their financial behaviour in respect to payment of bills and loans.

The credit reference bureau (CRB) would provide banks and other lenders, credit information on individual borrowers and their paying habits helping the lender determine one’s credit worth, or in other words, decide to lend or not to lend.

In 2012 the ‘Bank of Tanzania announced the long awaited Credit Reference Bureau was in the offing and mid last year, the first private Credit Bureau in Tanzania was licensed.

Having a credit data system in place has a lot of advantages to the financial sector but the very basic is that, lenders use positive credit history as collateral for loans. The presence of the bureau will also push for better competitive terms from the lending institutions like better interest rates.

"The credit data sharing system is expected to promote increased level of trust between lenders and borrowers, resulting in increased volume of credit in the economy," BoT Governor Prof Benno Ndulu said while announcing opening of the CRB.

The key aspect of the bureau is that it places the burden of proof on the borrower, that is, it is up to the borrower to maintain a clean credit record by paying their bills in a timely fashion making them creditworthy by merit of their recorded bill/loan payment history.

The data is compiled from various sources including electricity, water, grocery bills and debt repayment from other lenders and banks. So the credit bureau (due to commence operation June this year) literally places the power of borrowing into the hands of the borrower.

So now the only limitation to borrowing will be your own repayment history.

SOURCE: THE GUARDIAN