Exploring the Impact of CRB Data Access Costs on Interest Rates for Digital Credit

The Financial Technologies Services Providers’ Association (FITSPA) is the umbrella body for fintech companies in Uganda, with a total 211 members, of which 25 are digital lenders. The association serves asa central hub for various licensed fintech companies operating under different regulators. FITSPA routinely conducts research to drive innovation, support the growth and development of the fintech industry, provide valuable insights for policymakers, financial institutions, and investors, and create business and investment opportunities for its members.

The purpose of the preliminary study on the impact of CRB data access on interest rates for digital credit in Uganda is to understand how the availability and use of credit reference bureau (CRB) data impact the pricing of digital credit products. The study aims to provide insights into the potential benefits of CRB data access for both digital lenders and borrowers, as well as the challenges and limitations associated with the use of CRB data.

This study is significant because it contributes to the ongoing debate on the role of CRBs in the digital lending landscape, particularly in Uganda, where the financial sector is rapidly evolving, and digital credit is becoming increasingly popular. The study also highlights the importance of accurate and timely credit information in promoting financial inclusion and access to affordable credit for underserved populations.

2. Findings from Desk Research

2.1 Influence of CRB data access on interest rates for digital credit in Uganda

Credit Reference Bureaus (CRBs) play a crucial role in the digital lending landscape by providing credit information to lenders, which helps them assess the creditworthiness of potential borrowers. The cost of CRB services influence interest rates for digital credit in Uganda in several ways:

  1. Risk Assessment: CRBs provide lenders with credit information about borrowers, including their credit history, financial history, and payment behavior. This information helps lenders assess the risk of lending to a particular borrower. The cost of accessing this information from CRBs is often passed on to borrowers.
  2. Fraud Detection: CRBs help lenders detect fraudulent activities by providing information about borrowers’ past loan applications and repayment behavior. The cost of accessing this information is often reflected in interest rates to cover the lender’s risk of fraud.
  3. Default Risk: CRBs provide information about borrowers’ past loan defaults, which helps lenders assess the risk of default. The cost of accessing this information may often be reflected in interest rates to cover the lender’s risk of default.
  4. Operational Costs: CRBs incur operational costs, such as data collection, storage, and maintenance. These costs can often be reflected in the fees charged to lenders, which in turn affect interest rates for digital credit.
  5. Regulatory Compliance: CRBs must comply with regulatory requirements, such as data protection and privacy laws, and prohibition of lenders from charging a defaulter more than a half of the total loan principal among others. The cost of complying with these regulations can often be reflected in the fees charged to lenders, which in turn affect interest rates for digital credit.

2.2 Other factors that influence interest rates for digital borrowing outside of CRB data access costs

Interest rates for digital borrowing in Uganda are influenced by several other factors beyond costs for accessing CRB data.

  1. Operational Costs: Digital lenders incur other operational expenses related to technology, customer acquisition, and loan processing. These costs impact the interest rates they charge.
  2. Risk Assessment: Lenders assess borrowers’ creditworthiness to determine the risk of default.Higher perceived risk often leads to higher interest rates.
  3. Market Competition: The competitive landscape affects interest rates. Because of multiple digital lenders operating in the same space, they often adjust rates to attract borrowers.
  4. Regulatory Environment: In Uganda, digital lenders are regulated under the Uganda Micro Finance Regulatory Authority (UMRA) through the Tier 4 Digital Lending Guidelines. These guidelines aim to streamline the operations of digital lenders to safeguard consumers against predatory lenders, including high interest rates.
  5. Loan Term: Short-term loans often have higher interest rates due to the perceived risk associated with rapid repayment.
  6. Capitalization and Profit Levels: Digital lenders consider their capital reserves and desired profit margins when setting interest rates.
  7. Default Rates: Lenders factor in the likelihood of borrowers defaulting on loans. High default rates often lead to higher interest charges.
  8. Overhead Costs: Administrative and operational overheads contribute to the overall cost of lending, impacting interest rates.
  9. Interest Rate Calculation Methods:
    i. Flat Rate: Interest calculated on the original loan amount and remains constant throughout the loan term.
    ii. Declining Balance Rate: Interest based on the outstanding loan balance, decreasing as the loan is repaid.
  10. Data Privacy and Confidentiality: Concerns about data privacy and confidentiality influence interest rates. Borrowers are often willing to pay more for secure transactions.
  11. Service Charges: Some lenders impose service fees or charges in addition to interest rates.
  12. Liquidity: A lender’s liquidity position affects its ability to lend. Liquidity constraints often impact interest rates.

3. Survey Findings from FITSPA Community

Based on the feedback received from both digital lenders and credit reference bureau (CRB) among theFITSPA community, several key findings have emerged regarding the impact of CRB data costs on interest rates for micro digital loans in Uganda.

Digital lenders indicated a strong interest in incorporating CRB data into their credit scoring models to improve decision-making and potentially lower interest rates. However, the high cost of accessing CRB data emerged as a significant barrier, especially for lenders with small ticket sizes compared to traditional banks. CRBs typically charge digital lenders UGX 500 to UGX 6,000 for accessing data for per-client or individual credit scoring depending on level of details required by the lender.

Despite this discrepancy, lenders expressed a willingness to use CRB data as it helps reduce bad debt rates and increase income to cover the costs.

CRBs, on the other hand, emphasized that while costs for CRB data are determined by various factors such as data acquisition, security, and technology, they perceive the impact of these costs on interest rates as negligible. They believe that interest rates are primarily driven by the cost of capital and the risk associated with collection, rather than the costs of accessing CRB data. Additionally, they indicated that the level of detail in the reports and the type of product consumed influence the costs charged to digital lenders.

Both digital lenders and CRB companies acknowledged the importance of accurate credit assessments but differed slightly in their perspectives on the role of CRB data in setting interest rates. Digital lenders emphasized the need for accurate credit assessments but also highlighted the importance of their own operation models and guarantees for payment alongside CRB data. In contrast, CRB companies viewed CRB data as informative but not solely decisive in setting interest rates, suggesting that interest rates are driven by multiple factors beyond just CRB data costs.

In terms of strategies for reducing costs and potentially lowering interest rates, digital lenders suggested developing more data and identifying different levels of customers for lower interest rates. They also expressed interest in lower-cost access options, such as APIs, and suggested government financing inclusion plans to reduce costs.

CRB companies suggested reducing the cost of data collection by establishing a Central Data CollectionHub and making CRB services compulsory for all digital lending institutions to increase the volume ofCRB consumers and reduce the cost per unit.

4. Conclusions

The preliminary study on the effects of CRB data access costs on interest rates for digital credit in Uganda has revealed important insights into the digital lending landscape. The findings highlight the different perceptions and aspects of the relationship between CRB data access costs and interest rates among digital lenders and CRB companies. While digital lenders are keen on incorporating CRB data into their credit scoring models to potentially lower interest rates, CRB companies perceive the impact of these costs on interest rates as negligible, attributing interest rates primarily to the cost of capital and risk associated with collection.

Furthermore, the study has identified various factors beyond CRB data access costs that influence interest rates for digital borrowing in Uganda. These factors include operational costs, risk assessment, market competition, regulatory environment, loan terms, capitalization and profit levels, overhead costs, interest rate calculation methods, data privacy and confidentiality, service charges, and liquidity among other factors. However, the study was unable to conduct a comparative or statistical analysis of these factors with CRB data access costs, limiting the ability to conclusively determine the impact of CRB data on interest rates for digital loans.