CREDIT SCORE-BASED CONSUMER CREDIT IN GHANA: Addressing Youth Unemployment, Economic Fundamentals, and Legal Challenges.

 

INTRODUCTION

Dr. Mahamudu Bawumia, the Vice President of Ghana, has proposed an ambitious initiative to implement a national credit scoring system. This system aims to make consumer products, particularly mobile phones, more accessible to the youth by allowing them to purchase these items on credit with monthly payments as low as GHS1 or GHS2. The goal is to evaluate individuals' creditworthiness based on their financial behaviour, thus enabling them to buy items according to their financial capacity and extend this credit system to other sectors such as automotive and home electronics.

A key aspect of this initiative is the integration of the Ghana Card with various databases to facilitate comprehensive credit evaluations. According to Dr. Bawumia, this integration will allow individuals to use their Ghana Card to access credit facilities, making it easier to trace and verify credit history across the country. This approach mirrors systems used in more developed markets, where credit scores facilitate the purchase of goods on instalment plans.

However, the implementation of this proposal faces significant challenges. Ghana is currently dealing with high youth unemployment, high-interest rates, and a depreciating cedi, which affects the affordability of imported consumer goods. For many young people, the lack of stable income and employment means they may struggle to access credit to build any meaningful credit scores.

This article will explore the fundamentals of credit scoring, the factors involved in the model, and assess whether unemployed youth with little or no source of income can build a credit history and benefit from such a system to foster their economic growth and empowerment.

UNDERSTANDING CREDIT SCORING

Credit scoring is a method used by financial institutions and credit bureaux to assess the creditworthiness of a borrower. This process involves the use of statistical models to predict the likelihood that a borrower will repay their debts. To understand the feasibility of implementing a credit scoring system in Ghana, it is essential to explore traditional and non-traditional credit scoring models.

Traditional Models

Common traditional credit scoring models include the FICO Score and VantageScore, both of which range from 300 to 850.

These models evaluate various factors such as:

• Payment History: Consistency in paying bills on time.
• Credit Utilization: The ratio of current credit card balances to credit limits.
• Length of Credit History: The age of your credit accounts.
• New Credit: The number of recently opened credit accounts.
• Types of Credit Used: The mix of credit accounts, including credit cards, retail accounts, instalment loans, and mortgage loans.
• Age and Type of Credit: How long your credit accounts have been active and the variety of credit types.
• Percentage of Credit Limit Used: How much of your available credit you're using.
• Total Balances and Debt: The total amount of money you owe across all credit accounts.
• Recent Credit Behaviour and Inquiries: Recent applications for credit and new credit accounts opened.
• Available Credit: The amount of credit currently available to you.

Each model assigns different weightings to a mix of these factors to calculate the final score. A higher credit score indicates a lower risk of default, leading to better loan terms and lower interest rates, while a lower score suggests higher risk and can result in less favourable terms. The credit scoring system is essential for facilitating credit decisions and promoting responsible borrowing and lending practices.

Maintaining a solid credit score requires consistently paying bills on time, keeping credit card balances low, avoiding the closure of old accounts, limiting new credit applications, and using a diverse mix of credit types. These practices help improve your credit utilization ratio, lengthen your credit history, and demonstrate responsible credit behaviour, leading to better access to credit and more favourable loan terms.

However, these traditional models are based on the assumption of already having access to some form of credit activity. This assumption might not be appropriate for those, especially the unemployed youth or those on low incomes, who cannot or have not been able to access credit to build a debt management history. A much more non-traditional source of assessment will be needed to initially assess the ability to pay for the youth to start having access to credit and then to build a credit history for the traditional model.

Non-Traditional Models

Non-traditional credit scoring models use alternative data, such as rent payments, utility bills, and mobile phone usage, to evaluate the creditworthiness of individuals with limited credit histories from traditional financial institutions. Examples include CreditXpert, which assesses risk using rent and utility payment data, and the TransRisk Score, which utilizes public and property records. These models provide a broader and more inclusive assessment of financial behaviour, enabling better-informed lending decisions and improving access to credit for underserved populations.

Non-traditional models are particularly beneficial for individuals who might not have an extensive credit history but have demonstrated financial responsibility in other ways. By incorporating these additional data points, lenders can make more accurate assessments of a borrower’s creditworthiness, thereby extending credit to a larger segment of the population.

This approach may be most appropriate for assessing the youth for first-time credit based on their ability to pay. However, the peculiar situation in Ghana presents unique challenges. Many working youth may not have utility bills in their names since they either still live with their parents or reside in rented accommodations where utilities are shared with other tenants. This limits the availability of alternative data points typically used in non-traditional credit scoring models.

Credit bureaux in Ghana must be innovative in adopting and adapting the use of a mix of both traditional and non-traditional risk assessment methods to develop a national credit score that gives assurance to lenders. They must not forget that lenders currently have their own internal credit scoring methodologies. By creating a comprehensive and reliable credit scoring system that incorporates a diverse range of data points, credit bureaux can help ensure that lenders have the confidence to rely on the score to extend consumer credit to a broader segment of the population, particularly the underserved youth.

LEGAL FRAMEWORK

The successful implementation of a national credit scoring system in Ghana also hinges on a robust legal framework. The Credit Reporting Act 2007 (Act 726) and the Data Protection Act 2012 (Act 843) provide guidelines for data collection, consumer protection, and privacy. These laws ensure that data is handled responsibly, with consumers' consent, and that they have the right to access and challenge their credit information.

Sources of Data

The Credit Reporting Act 2007 (Act 726) specifies various sources from which credit bureaux can collect data. Primarily, financial institutions provide information on borrowers, including loan amounts, payment history, and collateral details. Additionally, public sources contribute valuable data; these include government agencies that register businesses and property rights, police report on economic crimes, and court records of judgments and insolvencies. Credit bureaux are permitted to compile and report publicly available information. Utility companies and telecommunication companies may also supply credit bureaux with data on consumer payment behaviours.

This comprehensive data collection framework ensures a robust and accurate credit reporting system, facilitating better credit risk assessment and decision-making. The integration of the Ghana Card with other databases as data sources is technologically possible but subject to certain legal considerations.

Consumer Protection

The Credit Reporting Act 2007 (Act 726) of Ghana emphasizes the importance of consumer protection, particularly concerning their consent in handling credit information. Financial institutions and other sources of collecting data, such as utility and telecommunication companies, must obtain written consent from borrowers before reporting their data to credit bureaux, ensuring transparency and safeguarding privacy. This consent, which can be stored electronically, must be documented in account opening forms, loan applications, and agreements. Consumers retain the right to access and inspect their credit information without charge annually and can challenge inaccuracies at no cost. Data providers are required to keep consent records for ten years. Unauthorized disclosure of confidential information incurs significant penalties, including fines and imprisonment. These measures ensure that consumer data is handled responsibly, maintaining trust in the credit reporting system.

A borrower can refuse to give consent for their information to be provided to a credit bureau. However, exceptions exist where information must be reported without consent, such as loans that are ninety days past due or cases involving financial misconduct like issuing dishonoured cheques or engaging in financial malpractices. Financial institutions are not obligated to deny a credit application solely based on the borrower's refusal to provide consent. These provisions ensure that critical credit information is shared to maintain the integrity of the credit reporting system.

The Data Protection Act 2012 (Act 843) ensures the privacy of individuals by regulating the processing of personal information. It mandates that personal data cannot be processed without the data subject's prior consent, and individuals have the right to object to processing at any time. Data subjects can access their personal data, request corrections or deletions of inaccurate or unlawful data, and are entitled to have their data processed securely. Personal data must not be retained longer than necessary. These provisions protect consumer rights and ensure responsible data management practices.

THE ECONOMIC CONTEXT IN GHANA AND ITS IMPACT ON CREDITWORTHINESS

The current economic environment in Ghana presents several challenges to the proposed credit scoring system. High youth unemployment, high-interest rates, and currency depreciation negatively impact the ability of young people to build credit histories and access consumer credit. Addressing these economic issues is crucial for the successful implementation of the credit scoring system.

Youth Unemployment

Youth unemployment is a significant challenge in Ghana, with a considerable portion of the population struggling to find stable employment. According to recent statistics from the GSS Annual Household Income & Expenditure Survey for Q3 2023, the overall unemployment rate stands at 14.69%. The total workforce aged 15 and above is 19,236,721, with 11,962,599 employed and 2,060,037 unemployed. Additionally, 5,214,085 individuals are not active in the labour force.

The unemployment rate among young people is notably higher compared to the overall rate. This disparity highlights the ongoing struggle for youth to secure stable employment. High youth unemployment affects overall economic stability and growth, leading to reduced consumer spending and increased dependency on informal sectors.

Implementing a credit scoring system is not the issue since the technology exists, but with the current unemployment situation, its impact will be limited if the target is the youth. The majority of the youth will not be able to attract a favourable score with little or no income, rendering the system ineffective for a significant portion of the population.

Interest Rates

Ghana’s economy is characterized by high-interest rates, which have profound implications for consumer credit and overall economic health. According to available data from the Bank of Ghana, the average lending rate began in 2024 at 32.94% and saw a gradual decline throughout the year, dropping to 31.10% by mid-2024.

Lending rates have reached as high as 40%, depending on the risk profile of borrowers, and the interest rates for consumer credit are most likely to be based on floating rates instead of fixed rates, meaning the instalment payments will increase as interest rates increase. High-interest rates can lead to increased borrowing costs, making it challenging for low-income individuals to keep up with payments.

Unemployed youth or employed youth with low incomes are certainly considered risk borrowers in terms of their ability to pay back, posing a significant credit risk to lenders. Consequently, they will have unfavourable credit scores and are not likely to attract preferential rates even if they are able to secure credit.

Currency Depreciation

The persistent depreciation of the cedi against major currencies, particularly the US dollar, poses significant economic challenges. According to the Bank of Ghana, the cedi at the beginning of the year has depreciated by 14.6 percent against the US dollar as of May 22, 2024. This situation is particularly impactful given Ghana's heavy reliance on imports for essential goods to be purchased on credit. As the cedi depreciates against the dollar, the prices of consumer goods increase, making consumer credit more expensive. Even employed youth may struggle to meet repayment terms, negatively affecting their credit scores and future ability to buy goods on credit.

A national credit scoring system, though a good idea, will not have the expected impact in a situation where Ghana is import-dependent and the youth, who are either unemployed or on low incomes, cannot afford the rising costs, affecting their ability to pay due to a reduction in their purchasing power as the cedi depreciates.

Looking at the general present economic climate with the weakening fundamentals of high-interest rates, increasing youth unemployment, and worsening depreciation of the cedi, the majority of the youth do not stand a chance of having favourable credit scores to access consumer goods on credit.

Employment and Income as Key Factors

Employment stability is crucial in establishing a solid credit history. Regular, stable income allows individuals to meet their financial obligations consistently, which positively affects their payment history, a significant component of the credit score. Higher income levels generally enable individuals to manage their debts more effectively. They can maintain lower credit utilization ratios by paying down balances and avoiding maxing out credit cards, which are essential factors in credit scoring models.

Without a stable income, unemployed youth face significant challenges in building a favourable credit history. They may struggle to make timely payments, leading to negative marks on their credit reports. Youth with low incomes may also find it difficult to manage their credit effectively. High-interest rates on borrowed funds further exacerbate this issue, making it harder to pay off balances and avoid high credit utilization ratios.

Unemployed or low-income youth may have limited access to credit products, such as credit cards or personal loans, which are often necessary to build a credit history. This makes it difficult for traditional credit scoring models to assess their creditworthiness accurately.

OPERATIONAL CHALLENGES

Operationalizing a credit score-based consumer credit system involves linking shops to credit bureaux, managing the risks of Buy Now Pay Later (BNPL) schemes, and ensuring robust consumer protection. Shops need to invest in technology to assess buyers' creditworthiness, while BNPL schemes must be carefully managed to prevent impulse buying and defaults. Additionally, safeguarding consumer data and obtaining explicit consent are critical to maintaining trust in the system.

Linking Shops to Credit Bureaux

Shops may want to offer direct credit to buyers, allowing them to make regular payments directly to the shop’s account at a bank or via mobile money merchant accounts, which is efficient for retail collection. Shops would therefore need to integrate their retail systems with credit bureaux to assess buyers' creditworthiness accurately.

This process involves investing in the necessary infrastructure to link their systems with credit bureaux and paying credit score access fees. The related issues are:

• Technology Costs: Establishing and maintaining the technological infrastructure required to link shops to credit bureaux can be expensive. This includes software development, hardware acquisition, and ongoing maintenance.
• Credit Score Access Fees: Credit bureaux typically charge fees for accessing credit scores. Shops must evaluate whether these costs are justified by the potential increase in sales.
• Effective Demand: Retailers need to be certain that there is sufficient effective demand to justify these investments. If the volume of credit-based sales is not significant, shops may find it unprofitable to participate in the Credit Score-Based Consumer Credit.

Buy Now Pay Later (BNPL) Schemes

The introduction of Buy Now Pay Later (BNPL) schemes presents both opportunities and challenges, particularly among the youth. While these schemes allow consumers to make purchases on credit and pay in instalments, they can encourage impulse buying without considering long-term financial capacity. Without sustainable jobs and appreciable income levels, the youth are at a higher risk of defaulting on payments, leading to high default rates that negatively impact their credit scores and future credit access. Persistent defaults can create substantial individual debts, trapping young consumers in a cycle of hardcore debt and necessitating what I will call a "Compulsory Consumer Debt Restructuring/Haircut" Programme for lenders, resulting in significant losses. Additionally, shops offering direct credit rather than through financial institutions could face severe financial strain, ultimately ceasing to offer such facilities even to youth with favourable credit scores.

Consumer Protection

Ensuring consumer protection is crucial when implementing a credit scoring system. Consumers must trust that their personal information will be handled responsibly and that their rights will be protected.

• Information Abuse: There must be safeguards to prevent the misuse of buyers' information by sellers. Clear regulations and enforcement mechanisms are necessary to ensure compliance.
• Credit "Cooling Off" Periods: Consumers should have the right to reconsider their credit purchases within a specified period. This allows them to return goods if they change their mind or encounter unforeseen financial difficulties.
• Return Goods Policies: Since many goods purchased on credit may be imported, it is essential to have robust return policies. Consumers should be able to return defective or unsuitable goods easily and without incurring significant costs.
• Credit Score Manipulation: The system must also protect against the manipulation of credit scores by hackers. There is a risk that hackers could alter credit scores, giving rogue individuals favourable credit scores and undermining the integrity of the credit scoring system. Robust cybersecurity measures and continuous monitoring are necessary to detect and prevent such activities.

Data Privacy and Consent

Data privacy and consent are critical issues in the operation of a credit scoring system. Credit bureaux must handle personal data in accordance with legal requirements and ethical standards. The related issues are:

• Express Consent: Credit bureaux must obtain express consent from data subjects, especially for non-borrowing individuals, for collecting and using their data. This can be challenging, particularly in ensuring that consumers fully understand and agree to the terms.
• Compliance with Related Laws: The system must adhere to the Data Protection Act 2007 (Act 726) and the Credit Reporting Act 2007 (Act 726). Ensuring compliance with these laws can be complex and requires ongoing monitoring and enforcement.
• Redress Mechanisms: There must be effective mechanisms for addressing breaches of data privacy. Consumers need to know how to seek redress if wrong data is used in the calculation of their score or if their information being used is outdated, leading to unfavourable scores.

Credit by Financial Institutions

Financial institutions play a critical role in the success of a national credit scoring system. Their willingness to lend to low-income earners without stable employment is a significant challenge. The related issues are:

• Risk Aversion: Financial institutions may be reluctant to take on the risk of lending to individuals with unstable incomes. Traditional consumer credit practices favour government workers with stable employment, often referred to as "Controller Payroll" employees. Credit score is not likely to change that significantly.
• Informal Sector Exclusion: If financial institutions continue to exclude workers in the informal sector based on their internal credit scoring models, a national credit scoring system will have little impact. Strategies to incentivize lending to these groups must be developed.

Use of Ghana Card

The Ghana Card, primarily an identity card, currently holds only biodata, such as name, date of birth, and address, which can facilitate tracing individuals. However, it does not contain financial data regarding credit activity or history, which is essential for making instant credit decisions for consumer credit. The integration of the Ghana Card into the credit scoring system will at best use the personal number as a unique identity code to access credit scores maintained by credit bureaux.

There is a common misconception that merely having a Ghana Card automatically provides access to consumer goods on credit. In reality, the Ghana Card in its current functionality only holds static data. For shops or credit providers to access credit scores, they must have a linkage to the credit bureaux. This linkage is necessary to retrieve and verify the creditworthiness of individuals.

Even for tracing purposes, relying solely on the Ghana Card poses challenges, particularly if the address information is outdated. When individuals move from the address listed at the time of applying for the card, it complicates the tracing process. Therefore, while the Ghana Card can facilitate identity verification and basic tracing, its role in accessing and utilizing credit scores requires a well-established connection with the credit bureaux to be effective in a credit scoring system.

These limitations underscore the need for robust infrastructure and accurate data management to realize the full potential of the Ghana Card in a national credit scoring system.

Financial Planning Education

There is a critical need to educate the youth in financial planning, as having a credit score tied to BNPL schemes without proper financial planning can be counterproductive. Understanding financial management is essential for young consumers to make informed decisions about their spending and credit use.

Without financial planning education, the youth are more likely to engage in impulse buying and accumulate debt through BNPL schemes, leading to higher default rates and negatively impacting their credit scores. Poor financial habits can result in long-term financial instability, trapping young consumers in a cycle of debt that is difficult to escape.

Moreover, the lack of financial planning education can lead to an over-reliance on credit for everyday expenses, reducing the ability to save and invest for the future. This situation can hinder economic growth and personal financial security.

Educating the youth on budgeting, saving, and responsible credit use is crucial for fostering a financially literate population capable of making sound financial decisions. This, in turn, supports the stability and effectiveness of credit systems and contributes to overall economic well-being.

 

RECOMMENDATIONS AND WAY FORWARD

To move forward with the credit score-based consumer credit system in Ghana, several steps are necessary with respect to economic reforms, utilizing alternative data sources, enhancing Ghana Card functionality, consumer protection and education.

Necessary Economic Reforms

Consumer credit based on credit scores does not happen in a vacuum but is driven by healthy and stable economic fundamentals. Consumer credit is especially key for the youth who are starting to build their lives. Unfortunately, without income, there is no credit. Job creation and youth employment are therefore crucial for the youth to have stable income streams. Additionally, the products need to be affordable, which requires addressing the depreciation of the cedi against convertible currencies and the high-interest rates. There is also a need to start manufacturing consumer goods locally to facilitate a return goods policy, as retailers cannot afford to encourage this when the goods are imported.

Ensuring Data Privacy and Consent

Ensuring data privacy and obtaining explicit consumer consent are critical components of a successful credit scoring system. Enforcing strict compliance with the Data Protection Act 2007 (Act 726) and the Credit Reporting Act 2007 (Act 726) through regular audits and monitoring is necessary to protect consumer data. Developing user-friendly consent processes that clearly explain data usage and require explicit consumer approval can help build trust and ensure transparency. Consumers have the right to be left alone and not to be included in the credit reporting system if they do not avail themselves of any credit services.

Utilizing Alternative Data Sources

Expanding credit scoring models to include alternative data sources, such as utility payments, rent payments, and mobile phone usage, can provide a more comprehensive assessment of an individual's creditworthiness, particularly for those with limited credit history. Collaborating with utility companies and mobile network operators to collect, with consent, and integrate relevant data into credit scoring systems will help create a more inclusive and accurate credit scoring model.

Other innovative data sources can be considered, such as:

• Mobile Money Transactions: Frequent and consistent mobile money transactions can indicate financial activity and responsibility.
• Employment History: Verification of steady employment, even if informal, can demonstrate reliability.
• Savings Account Activity: Regular deposits and responsible management of a savings account can be indicative of financial discipline.

By adapting non-traditional credit models to consider these alternative data points, lenders in Ghana can better assess the creditworthiness of youth and other underserved populations. This mixed approach highlights the potential for individuals to transition from non-traditional to traditional credit models, offering a pathway to financial inclusion. This inclusive approach can help bridge the gap, allowing these individuals to build a credit history.

Artificial Intelligence (AI)

Integrating AI into credit scoring systems enhances the use of non-traditional sources and behavioural payment patterns to predict an individual's ability to pay. AI can analyse data from sources like the area the person lives, type of accommodation, number of years in employment, and marital status to provide a comprehensive assessment of creditworthiness. For example, if data shows that women nurses within a certain age bracket living in a particular region have a high rate of repaying credit, the credit scores for individuals within that group can be adjusted more favourably. This predictive analysis serves as a risk mitigation tool, helping lenders make better-informed decisions and reducing default risks by considering broader financial behaviours beyond traditional credit histories.

Incentivizing Financial Institutions

To encourage financial institutions to lend to low-income earners and informal sector workers, there may be the need to introduce government-backed risk mitigation programs such as guarantees or insurance schemes. Developing financial products specifically designed to use alternative data for credit assessments can also help. These initiatives will reduce the perceived risk for financial institutions and increase access to credit for underserved populations.

Enhancing Ghana Card Functionality

To address the challenges associated with using the Ghana Card for credit scoring, there is promising potential to upgrade its functionality as a smart card for instant consumer credit decision-making. This upgrade would involve the Ghana Card physically holding financial credit history and dynamic credit scores, allowing for real-time updates through ATMs linked to bank systems, which are then linked with the credit bureaux.

Borrowers could update their Ghana Cards at these ATMs, ensuring that their credit information is current and accessible. This system would enable retailers to access up-to-date credit scores instantly, facilitating consumer credit decisions on the spot. However, this would require retailers to invest in the necessary card reader hardware to read and interpret the data stored on the Ghana Card.

Implementing this upgraded functionality would not only streamline the credit assessment process but also enhance the accuracy and reliability of credit information. It would bridge the gap between static identity verification and dynamic credit evaluation, ultimately supporting a more efficient and inclusive credit system in Ghana.

Enhancing Consumer Protection, Ensuring Data Privacy, and Consent

Enhancing consumer protection and ensuring data privacy and consent are vital to the success of the Credit Score-Based Consumer Credit system. Implementing a robust regulatory framework is essential to safeguard consumer data, ensure transparency in credit transactions, and enforce strict penalties for data misuse. Clear guidelines for credit "cooling off" periods and return policies are also necessary. Additionally, nationwide education campaigns can inform consumers about their rights, the importance of maintaining good credit, and how to protect their personal information.

To achieve this, it is crucial to enforce strict compliance with the Data Protection Act 2007 (Act 726) and the Credit Reporting Act 2007 (Act 726) through regular audits and monitoring. Developing user-friendly consent processes that clearly explain data usage and require explicit consumer approval will help build trust and ensure transparency in the credit scoring system.

CONCLUSION

While the introduction of a national credit scoring system for consumer credit in Ghana is a promising initiative, it must be grounded in strong economic fundamentals to be effective. Credit scoring is a tool to access credit, not a solution to economic challenges of the youth.

For a credit score-based consumer credit system to work, employment and stable income are crucial as they support creditworthiness. Addressing key economic challenges such as job creation, stabilizing the currency, and lowering interest rates is fundamental. Incorporating alternative data sources and upgrading the functionality of the Ghana Card can enhance the inclusivity and reliability of the credit scoring system. Additionally, financial planning education is vital to help the youth manage their credit responsibly, avoid high default rates, and escape cycles of debt. A comprehensive approach that includes technological integration, consumer protection, and data privacy is necessary to make the credit score-based consumer credit system a viable and effective tool in Ghana to drive economic growth and benefit the youth. Without these fundamentals, many youths will struggle to achieve favourable credit scores.

There is more to credit scoring and consumer credit of the youth paying GHS1 and GHS2 monthly instalments for mobile phone handsets than Dr. Bawumia suggests. A credit score cannot be built on a weak economy. If the fundamentals are addressed, financial institutions and shops will naturally encourage consumer credit, making credit scores more meaningful and effective. Of course, "when the fundamentals of the economy are weak, a credit score-based consumer credit system will expose it."