WEEKLY TRENDS 07 DECEMBER 2012

Investment Research

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WEEKLY TRENDS 7 December 2012 FINANCIAL 1. CREDIT BUREAU TO DEEPEN ZIMBABWE FINANCIAL MARKETS MARKETS

and thus does not need to pay the full cost of a damage. • McKinsey and Company, 2009 says that the beneficial effects of the presence of credit bureaus on lending especially to small and medium-sized businesses (SMEs) and corporate lending are

The need to improve the functionality and stability of the financial systems and condensing non-performing assets especially loans while improving credit grantors' portfolio quality has compelled many governments to establish credit bureaus. Countries with credit bureaus in Africa include South Africa, Botswana, Uganda, Rwanda and Egypt. In Zimbabwe, the banking act is in the process of being amended for the establishment of a credit bureau. A credit bureau is an institution that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill-paying habits. Credit information such as a person’s previous loan performance is a powerful tool to predict his future behavior.

attested to in several studies such as Mylenko, 2003 and Jappelli & Pangano, 1999. These investigations concluded that 27% of SMEs report financial constraints in markets with credit bureaus compared to 49% in markets without credit bureaus. There is also a 40% probability of granting a loan in markets with credit bureaus compared to 28% in markets without credit bureaus. • Credit bureaus can effectively reduce default ratios through a set of combined effects. Visible credit histories permit the appropriate lending activity. Where potential borrowers are overextended

(existing debt and repayment difficulties), lenders 1.1 Impact of Credit Bureaus to Financial Markets • Credit bureaus reduce the consequence of can avoid clients that may be unable to repay. Credit bureaus work as enforcement tools, pushing clients to repay their debt in order to avoid being included in the list of bad debtors. These credit information institutions will also help in reducing fraud by providing positive identity checks.

asymmetric information between borrowers and lenders, and alleviate problems of adverse selection and moral hazard thus increasing access to credit. Adverse selection occurs when the seller values the good more highly than the buyer, because the seller has a better understanding of the value of the good. Due to this asymmetry of information, the seller is unwilling to part with the good for any price lower than the value the seller knows it has. On the other hand, the buyer, who is not sure of the value of good, is unwilling to pay more than the expected value of the good, which takes into account the possibility of getting a bad price. This prevents the transaction from occurring.

According to McIntosh et all, 2006, credit bureau use has a large and positive impact on loan performance. In America in the Micro finance business, the use of credit bureaus in selecting new clients resulted in the decrease in the average percentage of individual loans with at least one late payment decreased from 67.2%( pre-credit bureau period) to 52.8%. This decrease in arrears indicated the efficiency gains for the Micro Finance

Institutions. Non-Performing Loans (NPL) ratios Moral hazard is seen for services such as insurance and warranties. In these cases, after the deal is done, one of the parties to the deal (in this case, the person purchasing the insurance or warranty) may be more careless because he/she has the insurance, MMC Capital Investment Research 2 were reduced from 6.67% to 4.52% in banks in Shanghai at the end of 2002, one year after launch of the local credit bureau. Arrears rates declined by 2%