Credit bureaus, also known as credit reference agencies, are institutions that collect details on a commercial or individual borrower's obligations from a variety of sources, including - for individuals - banks, credit card companies, and retail lenders, or - for businesses - public sources, direct investigation, and suppliers. Once collected, the data is then cross-checked and merged to produce a comprehensive credit report which can be used by potential creditors. A credit history report can contain negative information, that is information on defaults, or both negative and positive information, containing details on all open and closed credit accounts, credit amounts, and repayment behavior.
Credit bureaus are critical to the expansion of credit in any economy, as they overcome some of the information asymmetries that prevent lenders from assessing risk profiles. On the one hand, credit histories ease adverse selection problems as they allow good creditors to establish reputational collateral (where complete information is recorded). On the other hand, they reduce moral hazard by recording negative financial behavior, thereby improving repayment and default rates. The consequent expansion of lending volume is particularly beneficial to generally underserved economic actors, such as micro, small and medium enterprises.
Middle East and North African countries have recently seen a growing interest in credit reporting, and Tunisia, Egypt and Morocco successfully reformed their credit information system last year. As for Sub-Saharan Africa, with the exception of South Africa, only eight countries have any public or private bureau coverage. However, between 2002 and 2007, important legal changes were made to enable private credit bureau operations in Ghana, Uganda, Tanzania and Zambia, and at least three private credit bureaus were established in Nigeria. Several countries, including Mozambique, Angola, Madagascar, and Mauritius have initiatives to develop credit reporting.
A major challenge in developing credit reporting in Africa is the small size of the credit markets, as credit bureaus rely on economies of scale to cover their large up-front investment through the sale of credit reports.
Another important challenge is often the lack of national IDs, the absence of physical addresses, or variations in names. The use of biometric identification, such as has been recently implemented in Uganda, promises to provide a valuable solution to borrower identification problems.