Credit Referencing: The permutations of the Court of Appeal Decision in the case of Melissa Supermarket and Another vs. Stanbic Bank Zambia Limited  ZMCA 17 (the “Melissa Decision”)
Over the years, varied sentiment has arisen over the establishment and use of credit reference bureaus in Zambia. To one judge, credit reference bureaus represent hidden powers that would be gathering “black information” on individuals and business houses to assist banks and lending institutions to make decisions on whether to lend money. Nonetheless, to some, it is a tool used to determine the credit behaviour of individuals and entities since as they say, “the best predictor of future behaviour is past behaviour”.
So then, what is Credit Referencing?
Credit referencing is a process of assessing the ability and willingness of an individual or an entity, to meet its financial obligations in full and on time. This is achieved through credit reports obtained from entities called credit reference agencies which are allowed to collect and keep information about consumers’ borrowing and financial behaviour.
In the commercial world, while credit reports may be misused to create a blacklist used as an automatic reason for denying customers access to credit, the use of credit reference reports, from a financial standpoint, is inimical to the stability of the financial sector and understandably, helps financial institutions assess whether a potential customer is likely to make timely payments.
What laws governs Credit Referencing?
Credit Referencing is mainly governed by the Credit Reporting Act No. 8 of 2018 (the “Act”). In summary, the Act provides for the regulation of credit reporting agencies by the Bank of Zambia; the licensing of credit reporting agencies; the establishment of a Credit Registry; the governance and management of credit reporting agencies. It also provides for the eligibility for licensing and prohibits any person, unless duly licensed, from carrying on the business of credit reference services. The Bank of Zambia has licensed the Credit Reference Bureau Africa Limited (the “CRB”) to offer credit reference agency services in Zambia. The Act also provides, amongst other things, for the collection, accuracy, use, security, access and correction issues as they relate to data of a person who has accessed credit or has been an applicant for credit.
In addition to the above, the Bank of Zambia has issued directives under the Banking and Financial Services Act (Provision of Credit Data and Utilisation of Credit Reference Services) Directive, 2020, Guidance Note No. 1 of 2014 and Guidance Note No.10 of 2021 (the “Directives”) placing an obligation on financial service providers to submit credit data to CRBs in accordance with the law. Verily, having in mind that the credit reference system is not intended to create a blacklisting system but seeks to give full disclosure to potential lenders by minimising information irregularities on borrowers.
Previously, the law on credit referencing was mainly governed by the Credit Reference Services Licensing Guidelines (the “Guidelines”) and the Credit Data Privacy Code (the “Code”), both of which were gazetted on 30 March 2006 through Gazette No. 5457. These were subsidiary pieces of legislation issued pursuant to the repealed Banking and Financial Services Act, Chapter 387 of the Laws of Zambia. Whilst the Act does not expressly provide for the repulsion of the said subsidiary sources of law, it has in effect superseded and repealed some provisions of the Guidelines and the Code. Market players are encouraged to seek specific advice on the interplay of their obligations under the Act and these subsidiary sources of law.
What was the relevant contention in the Melissa Decision?
By way of background, Melissa Super Market Limited (“Melissa”) and Stanbic Bank Zambia Limited (“Stanbic”) were in a long-term relationship of customer and banker for a period of over ten years. Over the life span of the customer and banker relationship, Melissa was accorded several banking facilities by Stanbic to finance its working capital and for acquisition of motor vehicles, various machinery and equipment. The loan facilities were secured by way of a third mortgage on Stand No.194, Chindo Road, Kabulonga, Lusaka (the “Property”) belonging to Ms. Philomena Petsa. Melisa operates a supermarket on the Property.
Untimely for the parties, fire gutted the Property together with much of the equipment and stock. Subsequently, the parties discovered that insurance cover on the Property had not been renewed. As a result, neither parties could receive any compensation. This led Melissa and Philomena in dismay and they approached the courts of law stating that Stanbic acted negligently and breached its mandate to insure the Property as the loan facility letter obligated it to settle insurance premiums by debiting Melisa’s bank account.
In addition, and upon this deterioration of Melissa’s relationship with Stanbic, Melissa sought to move its accounts to other banks but was unable to do so on account of an adverse credit reference report that was said to have been submitted by Stanbic to the CRB. Obviously, this did not sit well with Melissa and they ultimately had to seek the Courts intervention as they argued that Stanbic was in breach of the duty of confidentiality when it gave confidential information to third party financial institutions and consequently in breach of the Code for not verifying the accuracy of the information it gave to the CRB.
So then, what was the decision by the Court of the issues?
In relation to who has the obligation to insure a property that has been pledged by a customer as security to a financial service provider, the Court unequivocally guided that were the parties have agreed in writing on whom the obligation to insure the secured property lies with, the court’s duty is only to give life to what has been agreed by the parties. Unlucky for Melissa, the loan facility documents were clear and placed the obligation on it to insure the Property. The fact that Stanbic could have been able to renew the insurance cover on Melissa’s behalf by debiting its account did not in any way shift the obligation to insure to Stanbic. This aspect of the Court’s decision re-enforces the need for parties to draft their agreements in simple and clear terms.
In addressing the second issue as to whether Stanbic breached the banker and customer relationship by disclosing credit information to the CRB, the Court, concluded that quite clearly, a financial service provider is obliged to give credit information to the CRB as a statutory obligation under the Bank of Zambia Directives. The Court re-iterated, however, that in exercising this duty, a financial service provider must ensure that it notifies the customer of the consequences of obtaining credit, including that credit information may be provided to a credit reference agency.
However, with the coming in of the Act, the position taken by the Court in the Melissa decision has been overtaken by the new provisions of the Act which make it very clear what type of credit information will require a customer’s consent before information may be given to CRB’s. The law now only obliges a financial service provider to obtain written consent from a customer in so far as it relates to positive credit information, which means that adverse credit information may be disclosed without any consent from a customer in a bid to safeguard the integrity of the credit market.
The financial sector in Zambia was coming from an era where most banks were experiencing financial difficulty and others were collapsing on account of poor credit assessment and lack of an avenue for detecting persistent defaulters. Bank of Zambia, therefore, moved in and issued the Directives and Guidance Notes making the submission of, and resort to, a credit reference agency mandatory for purposes of protecting the integrity of the banking sector in Zambia. These interventions were re-enforced by the enactment of the Act which provides for the regulation of credit reporting agencies and information sharing and reporting to enable assessment of the credit worthiness of customers. However, while financial institutions have the obligation to share credit information about their customers with the credit reference agencies, they are to do so in a manner that does not offend consumer rights of customers as contained in the Act and other applicable laws.