Making access to new credit easier

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In anticipation of a coming economic slowdown, governments are rushing relief policies to alleviate the impact on the economy and, in particular, on businesses. One such policy is easing credit, which aims to (1) avoid permanent job losses, (2) expand the social safety net, and (3) boost consumer demand. For example, Italy has approved a 25 billion euro stimulus package that includes a moratorium on existing company debt. A special relief fund with over $450 million was established in Malaysia to provide short-term financing to businesses facing liquidity problems. In Africa, Nigeria announced $150 million in credit relief for businesses. 

However, implementing such policies is proving challenging for countries in which access to private credit is constrained to begin with. A new approach is needed in nations like Egypt, where the World Bank’s latest enterprise surveys show that over 90 percent of businesses do not have a line of credit or a loan (figure 1).

Figure 1: Percent of businesses without a loan or a line of credit

Percent of businesses without a loan or a line of credit

Analysis of Doing Business data on access to credit information suggests that governments can use credit registries and credit bureaus to identify potential recipients of funds, thereby broadening the total number of businesses that would stand to benefit from credit easing. Globally, 168 countries have a registry or bureau already in place.

Credit bureaus and registries give governments useful information on businesses that are not current borrowers. Poland, for example, has a credit bureau that covers 97% of the population and can share more than two-years of historical data. Many credit agencies also provide information on microloans, giving governments insights on smaller firms that could benefit from easier access to credit in times of crisis. The credit bureau in the United Kingdom, for example, collects data on loan amounts below 1% of income per capita. Bureaus and registries that have data beyond banks and financial institutions can provide useful credit-worthiness information even on businesses that were never borrowers. In Lithuania, the credit bureau – which has a full coverage for firms – collects information on payment history from nearly 100 retailers and utilities.

With such information in hand, governments can reach every formal business. This outreach can take place in coordination with commercial banks, through state-owned development banks, or by engaging other financial institutions like micro lenders. The government can guarantee loans, as in Albania and Turkey. The government can extend liquidity to the banking sector, as in Italy and North Macedonia. Alternatively, governments can temporarily subsidize small business loans, as in Saudi Arabia. Such measures will prevent spikes in unemployment. 

Other things can be done to expand the safety net and to maintain consumer demand – the next two steps needed to fight the economic slowdown. These actions involve directly subsidizing the livelihood of families. Here, credit information can come to the rescue again: credit bureaus and credit registries in 148 countries collect information on individuals as well as companies. Examples include Georgia and Serbia, where 100% of individuals are covered. Individuals’ credit information can be used to extend family financing -- not just provide credit. Such financing would keep poverty in check, the ultimate goal of any relief program.
 

 

Authors

Erica Bosio

Program Manager of the Growth Analytics, Development Economics Vice Presidency at the World Bank

Simeon Djankov

Director, World Development Report 2019

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