The World Bank Group and the International Committee on Credit Reporting (ICCR) have been investigating the role that credit reporting can and should be playing in financial inclusion and improving access to credit. A free credit report for individuals is a step toward financial inclusion. A free credit report and credit score is generated by credit bureau services and includes payment behaviour, personal, account information on individuals and companies. But what is financial inclusion and how do credit reports fit in with it?
What is Financial Inclusion?
Financial Inclusion means that all people and businesses have access to affordable and useful financial products and services that meet their needs; amongst which should be a free credit report allowing them to make informed financial decisions. Furthermore, these products and services should be delivered in a responsible manner, in such a way that there is accountability and that the financial relationship remains sustainable. In other words, SMEs, and consumers should all, regardless of background, race, and gender, have access to financial accounts that provide them a realistic and sustainable step towards becoming financially solvent.
Having access to payments, transactions, savings, credit, and insurance facilities, is recognised as being included financially within the framework of the global financial world. The World Bank Group has indicated that access to accounts, and therefore, financial inclusion, is an enabler for 7 of the 17 Sustainable Development Goals set forth by the United Nations – this means being armed with access to an account or credit facility can be the first sustainable step out of poverty for many people, and small businesses, provided they are administered responsibly. This should boost shared prosperity, and uplift financially vulnerable individuals by giving them access to business loans, and transactional facilities in such a way that they cannot but benefit – resulting in financial security and stability.
Financial Inclusion in South Africa and Free Credit Reports
In South Africa, 23.5% of the population is considered financially excluded, this is an estimation of R12 billion kept “under mattresses” as opposed to in financial institutions. The drive of financial inclusion is to get the “unbanked” access to financial systems and services that can aid in poverty alleviation.
In 2011, 54% of South African adults had a transaction account, happily in 2017 that number rose to 69% with the ratio of male to female access standing almost equal with 70% female and 68% male. This is promising growth for the country and can be very much linked to the access that mobile banking, and other such products, provides. Of course, this does not consider informal finance – successful delivery of financial inclusion needs to be administered by policy and a regulatory framework that is in line with the benefits and risks, resulting in an appropriate financial solution for a given consumer or business client. Therefore, measures of inequality, remittances and micro-finance need to be looked at to provide a properly designed policy that takes the bigger picture into account.
While internet and mobile banking has opened up access to banking institutions for many who previously had no access, the fears about fraud, and exorbitant bank fees, still keep many “unbanked” away from institutions that they feel they cannot trust. Technology alone cannot serve as a catalyst to financial inclusion in South Africa – stakeholders will need to try to look at several different factors to meet consumers’ needs and surmount the perceived barriers to financial services that exist in the minds of consumers and SMEs. This is why giving all RSA citizens access to a free credit report is a step toward financial inclusion, as they will be able to make sound decisions in terms of becoming productive members of the economy to their own benefit and the benefit of the country at large.
Why is Financial Inclusion Economically Important?
The inclusion of the underserved population into the larger financial ecosystem creates reciprocal benefits for institutions, the economy, and the individuals involved.
Individuals are looking for safe and easy ways to stockpile, save, and transfer money – inclusion offers individuals a way to save for retirement, unforeseen emergencies, and start savings funds for education or rent or deposits. Having access to accounts could improve income and increase savings – which means that previously underserved individuals will be able to start investing in necessities like health care, growing their businesses, and managing financial risk. Digital inclusion is the easiest way to bring the basics of these services to such individuals – as studies suggest that being able to access benefits, pay recurring bills etc. on a digital platform saves these individuals an average of 20 hours of commute and waiting time. By economically empowering these people, overall welfare improves, providing building blocks for future economic growth.
Focussing on SMEs and entrepreneurs, and bringing them to the table can only benefit the economy in the long run. These are people who are innovative, but need capital, services, and markets to be able to grow and thrive. Creating a doorway for these individuals and businesses to enter the formal financial sector begins building a stable and better-connected financial market that can ultimately have an impact on global markets. This can only be good for a growing economy because it allows mature businesses to connect with emerging markets through giving young entrepreneurs opportunities to grow their businesses. This, in turn, gives banks the opportunity to grow new segments of the economy for future markets; creating brand equity for underserved businesses and individuals will create valuable and enduring relationships.
Governments also benefit when citizens are better connected and economic activity increases, which can help to bring economic stability and increase GDPs.
How does Credit Reporting fit in?
While access to accounts and transactions is a good first step, the role of credit bureaus and free credit reports in financial inclusion is becoming increasingly obvious: The credit report is a tool that can be used to improve access-to-credit issues for both individuals and SMEs who have so far been underserved or unserved by formal licensed/regulated financial institutions or other formal channels of lending (like retailers). Credit bureaus have an obligation to educate underserved consumers, and can do so from an equal opportunity position, because a free credit report is issued and compiled without looking at gender, wealth, background etc. To find our more about bureaus, read our Credit Bureau Services Guide.
Credit reporting systems can be used to enhance and contribute to financial inclusion by:
- Improving consumer and SME financial literacy.
- Helping combat fraud.
- Helping SMEs and individuals build up a credit profile hinging on “reputational collateral” by collecting and advising them to build up payment history (reasonably and sustainably) and other predictive data sets.
- Credit bureaus can also help lenders to expand markets to unserved SMEs and individuals.
- Making access to credit sustainable over time.
- Contributing to responsible finance.
- Levelling the playing field for small lenders to compete with large lenders.
- Helping lenders to price risks more accurately, thereby helping lower-risk individuals and SMEs that already have formal loans to get more flexible and affordable terms for subsequent loans.
Your Free Credit Report
By providing consumers with their free credit report, Compuscan is contributing to financial inclusion as stated by the National Credit Act Section 72 (1)(b)(i)(aa). This entitles all RSA citizens to a free credit report from credit bureaus once a year.
As a leading South African credit bureau, Compuscan takes this a step further and provides RSA citizens with their free credit report and free credit score for life, so that they can always be informed of where they stand financially, and to aid them in making better, and sustainable, financial decisions to ensure a stable and healthy financial future for themselves and institutions in South Africa.