This briefing has been published by Aderonke Alex Adedipe and Oyebade St. Matthew-Daniel of Strachan Partners, Nigeria, who have agreed to Simmons & Simmons making it available to elexica subscribers.
Credit Reporting is identifiably a necessary tool which has been used across countries in Europe and America over the past decades. This tool has proven to be effective to the extent that banks, finance houses, private equity investors, mortgage companies have consistently relied on the credit reporting systems in their countries in order to obtain relevant information and ascertain the credit-worthiness of their potential borrowers. Therefore, it is rarely ever the case that the difficulty in obtaining credit or financial assistance arises as a result of lack of available credit information on a target. Thus, debt accumulated through student loans, car loans, mortgages, capital and investment facilities from lenders is an average way of life in many developed countries - for instance, the USA. This is partly attributable to the availability of credit reports.
Conversely, according to a Mckinsey report1, research shows that in many developing countries across Africa, Asia and Latin America, an essential factor which inhibits financing and investment is the inherent unavailability of reliable credit information. The paucity of reliable credit information coupled with other inhibiting factors discourages lending by financial institutions.
On the contrary, it has been reported that in countries where credit reporting institutions are maintained, borrowers act more responsibly and have a tendency to repay their loans as at when due. Therefore, credit reporting does not only assist lenders in gathering information but also encourages adherence to repayment terms amongst borrowers.
The Nigerian perspective
Small businesses in Nigeria otherwise known as “SMEs” experience a number of difficulties in their quest for survival within a tough and highly competitive emerging economy; but one of the most persisting challenges remains lack of access to funding. Reasonably, financial institutions express reluctance in providing financial assistance to SMEs for several reasons- i) lack of sufficient collateral (ii) lack of formal corporate structure and (iii) unreliable information gathering system. For instance, only 3% of operational SMEs in Nigeria were identified as having received support through financial institutions in 2016.
In recognition of this fact and in an attempt to curtail its negative impact on SMEs, the Federal Government of Nigeria signed into law, the Credit Reporting Act of 2017 (Act) on 30th May 2017.
Review of the Act
Whilst the Central Bank of Nigeria (CBN) has by virtue of its regulatory powers, overseen the operation of credit bureaus in Nigeria in the past, there has been no solid legal framework for the operation of Credit Bureaus in Nigeria until the passing of this Act. The main objective of the Act is to promote access to credit and to help credit institutions better manage some of the risks associated with lending.
Functions, powers and obligations of credit bureaus
Primarily, all credit bureaus must be licensed by the CBN to lawfully operate in Nigeria and they have the obligation to create and maintain a database of credit, receive, collate and compile credit related information from Credit Information Providers (CIPs) and issuing credit reports to Credit Users.
CIPS are defined in section 27 as banks, insurance companies, leasing houses, asset management companies, suppliers of goods/services on basis of instalment payment, amongst others. In addition, credit bureaus are responsible for ensuring that already obtained credit-related information is kept accurate and updated from time to time.
In order to protect the indiscriminate use of a subject’s information, the Act requires that a data exchange agreement must be executed between the credit bureau and the party requesting the information except the subject of investigation provides a written consent that such information be released.
To keep processes confidential, the Act specifically prohibits the use of credit information for purposes other than those prescribed in the Act. Some of the purposes for which Credit information may be used are identified below;
- consideration of a person’s qualification for loan applications or for the purpose of acting as a guarantor
- renewal or restructuring of existing loans
- conducting employment checks on employees
- assessing the credit-worthiness of a potential tenant, and
- enforcement of a monetary judgment or claim.
Rights of data subjects
In addition to stating the obligations of the Credit bureaus, the Act also seeks to protect the interest of potential borrowers/data subjects. To ensure confidentiality and to protect subject’s information, credit bureaus are compelled to keep their data safe, secure and confidential. The Act also gives data subjects the right to request for the correction of credit reports which may be found to be false or inaccurate by providing additional information to rebut disputed information or to support additional claims. Furthermore, a credit bureau which gathers information from providers which appear to be untrue, is required to take necessary steps to verify such information.
Section 13 of the Act gives an aggrieved data subject who has a complaint concerning the accuracy or validity of his/her credit information the right to make a formal complaint to a credit bureau concerning a credit report and where such issue remains unresolved, he/she has the right to escalate such complaint to the CBN before finally filing a claim before a court of competent jurisdiction.
The purpose of the Act is in line with the Federal Government’s agenda to curtail the difficulties of doing business in Nigeria which includes difficulty in accessing facilities especially amongst SMEs. To achieve its objectives however, it is important to create consistent and interaction amongst credit information providers. It is also imperative that issues surrounding record keeping, data collection, bureaucracy within relevant government agencies, lack of technology, etc be addressed and resolved systematically to maximize the efficiency of the Act.
1 Mckinsey Working Papers on Risks, December 2009
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