Legislation to Allow Financial Institutions to Share Credit Information

The House of Representatives yesterday (February 9) passed legislation that will allow for the sharing of credit information between specified financial institutions and enable creditors to make better lending decisions.
The Credit Reporting Bill, which was passed with 42 amendments, also provides for the licensing and supervision of a credit bureau, and other connected matters.
Piloting the bill, Minister of Finance and the Public Service, Hon. Audley Shaw, said that given the problem of poor credit decisions and high levels of non-performing loans, which plagued the financial sector during the crisis of the 1990s, a system that provides better credit information will be beneficial to financial institutions in their loan decision-making process.
The legislation will also allow creditors to better manage risk and improve pricing of loans, once information is accurate and complete. “Financial institutions should therefore be able to improve their assessment of the risk associated with each loan and apply the appropriate price level, which ought to result in the lowering of interest rates,” Mr. Shaw said, noting that this is of particular importance to small and medium-sized businesses.
“Other benefits to be derived include the management of the information by the credit bureau that will facilitate the improvement of credit risk management by financial institutions. The regulatory authority will ensure that the bureau handles the data in a manner that will guarantee privacy of consumer data,” Mr. Shaw said.
He emphasised that a system of complete and accurate credit reporting will provide a new type of “reputation collateral” that will decrease moral hazard, and adverse selection in the credit market.
The Finance Minister further noted that the use of a credit registry to provide a credit history on borrowers would, in addition to allowing better credit assessment, facilitate greater access to credit to a wider segment of the population.
House leader and Minister of Education, Hon. Andrew Holness in his contribution to the debate, shared this view, stating that for too long, traditional financing has relied heavily on borrowers coming to the table with asset.
He stressed that by tying loans to physical asset, the poor are excluded from accessing credit. “There are many persons who have, for example, real estate, but they don’t have a title to the property. They can’t take that to the bank to use as collateral.in my constituency (West Central St. Andrew), there are people who have homes, but that side of Jamaica, the value of that real estate is so low, that it could not be used to secure a loan,” he said.
Mr. Holness asserted that in recent times, government policies have been moving toward providing non-secured credit or small loans that do not require collateral. However he said, the experience of this policy has been mixed, as in many instances, the default rate is high, and lenders charge extremely high interest to compensate for the risk.
“What that has done is to make businesses less profitable than they would be with a lower interest rate, but it also ensures that only certain types of businesses can come to the credit table.so even giving non collateral loans at high interest rates still does not solve the problem of making credit available to the poor, and small businesses,” Mr. Holness emphasised.
He said the legislation will also remove some of the imbalance in the provision of information provided to lenders.
“What this credit reporting bill will do is create an institution that will remove the asymmetry in information.it will make information about the borrower’s history available to the creditor so that he can make a proper assessment on the credit behaviour of the borrower, and that is fundamental for the markets to operate,” he stated.
A wide cross section of stakeholders made representation to a joint select committee of parliament, as it deliberated on the bill, which was drafted in 2002.
Mr. Shaw said the legislation is part of efforts to reform the financial sector, as agreed on with the World Bank.