The Credit Reporting Act passed by parliament last week is an important piece of legislation that will transform Lesotho’s economy.
It will change, for the better, the way people and financial institutions interact.
Put simply, the new law regulates the collection of credit data, how it is used and protected.
It makes those who collect your credit information more accountable and empowers you to participate in how that information is used.
The law will make it easier for individuals to access credit.
There is no denying that lack of capital is the reason why many Basotho cannot start businesses.
It is for the same reason that many cannot build their own houses.
While collateral has always been an issue the other problem has been that banks were reluctant to lend to people whose credit history they cannot trace.
Financial institutions loath to extend credit to individuals whose risk profile can only be assessed on the basis of the present.
The Credit Reporting Act will change that.
The banks can now assess your risk profile by merely looking at your history at the credit bureaus.
You can also keep tabs on your credit status by simply checking with the bureaus.
Because those who default on their debts will be easily identified, banks can easily screen good customers from bad ones.
As the banks give out more credit the economic activity in the country increases. People with access to credit will be able to spend more.
This leads to economic growth.
The Act will put an end to the practice of people “borrowing from Peter to pay John”.
Reckless lending and borrowing will also be a thing of the past.
Over the years we have seen more and more people sink deeper into debt.
As the net closes in on them they have been able to play off banks against each other.
When one bank calls its loan they simply close the account and move on to the next bank to continue their borrowing spree.
The result has been that as such people continued to sink in debt they have also bled banks through losses.
To protect themselves, banks have either made it harder to get loans or upped their interest rates to cover their risks.
In the end it is the innocent customers who have suffered.
So has been the economy which has been starved of much-needed credit.
The Act seeks to protect the economy, customers and the financial institutions.
Customers who have borrowed beyond their means will not be able to get more credit.
While that might be painful in the short-term it is for their own good in the long-term because they will have to strive to repay their outstanding debts before they get more.
That way they will be to manage their debt.
Banks will give more credit because they understand the customers’ profile and history better.
Our worry is that the new law will not be effective unless the government speeds up the ID project.
It is only through a proper national registration system that we can capture the data required for the credit bureaus.
We are also apprehensive that the law does not provide support mechanisms for those who fall into debt.
By “support mechanisms” we mean counselling and helping people get out of debt.
The law must help people avoid getting into unsuitable debt and assist those who are already in trouble.
We however get solace from the fact that the Act marks the beginning of better things to come.
This Act, we believe, is the beginning of just one of the many steps we have to take to modernise our financial system.
