Tuesday, May 28

Turning data into credit

Due to the increasing level of financial exclusion, individuals are without access

to common financial services. These can include but are not limited to: savings

accounts, loans, cashless transactions, credit, and other traditional banking

services. The central bank’s third quarterly report, titled ‘Private Credit

Bureaus in Pakistan – Enhancing Credit Penetration by Addressing Information

Asymmetries’ provides valuable insight on actions that may allow for the

augmentation of credit penetration and greater financial inclusion within the


A high level of government borrowing has reduced the financial capital available

to private sector firms, as well as lead to trade imbalances and even financial

crises and Pakistan’s private sector credit to GDP ratio did not fare well; roughly

17.4% in 2010-2019, in comparison to a whopping 18.5% in the 1990s. This ratio also fell short when compared to neighboring countries; India was able to muster a 97% ratio, Bangladesh: 44%, and Sri Lanka: 40%. The SPB report shed light on the role of private credit bureaus in boosting credit offtake. Extensive

coverage of data-related services which are presented by credit bureaus across

the world has been linked to the incrementation in private sector credit, the

reduction of credit cost, as well as a decrease in non-performing loans.

The current credit bureau coverage lists around 14.9 million individuals, with 12%

of adults under the SPB’s electronic credit information bureau, and another 7%

under the two private credit bureaus known as ‘DataCheck’ and ‘AISL’. As per this

the report, it is a plausible conclusion that Pakistan requires greater coverage of adult

population in private credit bureaus, which, other countries with decent credit

penetration has been able to procure.

Non-financial data becomes a turning point for those individuals who had limited

exposure to formal financial institutions. Regularly, Pakistanis are now

able to bring about abundant units of information known as data points, which

can be collected and amalgamated into significant insights with the use of new

computing solutions and meticulous selection of criteria or benchmarks that are

tailored to meet the demand of the local market.

Examples of such data points include consumer data deriving from the usage of

services such as cellular airtime recharge, household payment patterns, regular

spendings, irregular purchases, and other payment transactions that may be card

based or wallet-based. Non-traditional data such as tax filings and court rulings

maybe another method to identify individuals meeting the benchmark for

permissibility of loans and other forms of financial services.

These methods, however, bring their fair share of hurdles. Initially, freeing up such

alternate data is a difficult task as the non-financial service providers who control

such data must become involved in this process; they must become members of

credit bureaus for smooth and continuous data exchange. With a massive telecom

density, payments related to telecommunications and usage data provide a

variety of insights to explore. Nevertheless, since there are restrictions and

limitations on telco’s data sharing policy with third party individuals and

organizations, the telecoms regulators will have to assess and go over the already

existing policies and figure out how data can be shared while remaining within

those policies as well as keeping in touch with data privacy.

Other domains, such as the utility domain (besides K-electric), has not been provided

access of utility payment data, to credit bureaus. Most electric and gas

companies have shown hesitation to share such information, despite a

government directive ordering them to, which can be dated back to April 2020.

Furthermore, often, multiple families or individuals reside in one house and the

billing meters can be in the name of the owners of the house instead of those

who are actually using the utility services To resolve such an issue, the

government must take steps that include firm encouragement for utility firms to

share data with credit bureaus, as well as the inclusion of a mechanism which

allows for the actual users of utilities to be noted down, as opposed to the house


Though a change in the legal and regulatory amendments to bring forth an alternate data eases such data collection, there are other issues in this process, cited by the special report. Such an issue is the creation of databases that properly record

transactions such as monthly rental payments, and events like court decisions

that influence individuals and entities. This, however, is not a short-term process,

and the special report points out an urgent need for a national consensus on data

and policy reform majorly directed towards conveying the data needs of the country.

At the same time, the report also points out a need for having certain symptoms that can warrant data validity, accuracy, linkages, and preservation across various

data touchpoints.

The central bank surely has given forth fascinating information regarding financial inclusion, however, two big limitations remain prevalent in using alternate datasets to meet a particular goal. Primarily, in low trust environments full of passive aggression, and in a leakage-prone marketplace such as Pakistan, ensuring data privacy of individuals and firms is a rather difficult task. It is difficult to

predict how comfortable an individual would feel in having several aspects of

his/her wallet activity made public to third parties. Moreover, it is highly unlikely

that many bankers would accept individuals that arrived with decent credit scores

but lacked collateral.

Even so, such an alternate form of financial inclusion seems a satisfactory attempt

of sorts.

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