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14 February 2019

Amnesty strengthens credit scoring rather than imprisoning cheque writers

By: Daoud Kuttab
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The general amnesty draft law that the government of Omar Razzaz presented to Parliament gave many in Jordan a reason to have hope. But by the time Parliament reviewed and voted on the law, one of its key components, namely individuals imprisoned for writing bad cheques, was removed. Under strong pressure from chambers of commerce, legislatures removed the segment giving amnesty from jail for those giving bad cheques.

The imprisonment of those who write cheques without a balance is a cruel punishment. Governments should not interfere in a financial trade between two people/entities. Those who accept cheques instead of cash are aware that they are taking a risk that a final payment might be delayed or not carried out. This is the same risk of someone who buys stocks or invests in a company with a chance of profit and loss. You do not put someone in jail for having made a bad choice, even though a person receiving a bad cheque can always use the courts to demand redress of their loss.

Public information says that some 180,000 people in Jordan are involved in bad cheques. Imprisoning a person for not having enough to cover your cheque costs the government a lot of money. Not only does a prisoner costs an average of 700 JD per month, but his family is often in need of government aid. Furthermore, such a restriction actually means that a breadwinner is unable to work to pay the debt that came with his unpaid cheques.

A senior banking official told me that it is a mistake to pay too much attention to the cheque crisis because it is a symptom, not a root cause. My banking friend believes that the problem is the informal economy, where a large number of Jordanian companies and individuals retain two parallel banking records; one that is real and the other, which fake, is audited and stamped by a registered auditor, for the right fee, but shows a small amount of profit or even a loss. The Jordan Strategy Forum estimates that the informal economy in 2015 constituted 15.1 per cent of the economy, constituting a loss of some JD600 million in lost revenue. Jordan’s informal economy is among the highest in the region.

Without a public economy where the majority of people and companies declare accurately and publicly their status, it is impossible to create a more civilised way of holding people accountable. The Jordanian banker says that credit scores cannot work with such a large forgery of the informal, and even formal, economy.

To address this problem and to help companies come out of this “informal” closet, the government needs to create an incentive that includes the possibility of a general economic amnesty on past taxes. The idea would be that in return for companies coming clean and agreeing to honestly declare their economic status, the government would give them amnesty so that they will not be punished for previous errors. Without such an amnesty, the informal system would continue, the banker insisted. In addition, of course it is vitally necessary that the new comers to the formal economy are treated properly with a fair, simple and clear new tax law which takes away the burden of the proof from the customer. At present, and because of the informal economy, tax collectors use arbitrary estimates to figure out the taxes due to the Treasury.

Bringing business to the formal economy with a fair and simple tax law would need further help through the existence of a robust credit system which can be used by the business community to determine the credit strength or weakness of any client wanting credit.

A proper credit scoring mechanism would go a long way in helping lift the economy, as it will provide credible credit scores, which allow people to get loans from banks rather than depend on the government to guarantee them when they take a number of post-dated cheques. Of course, bankers are complaining that they are paying the highest tax in the Arab region and in the world, with a whopping 38 per cent, which explains the gap between the low interest given on deposits versus the high interest on loans, in addition to the fact that banks are paying the tax that they are due, while many companies are tax evaders using the welcoming informal accounting environment.

In Jordan, a credit score company was established recently and received its official licence to work from the Central Bank of Jordan in 2015. CRIF Jordan provides credit scores for the Jordanian banking community based on a decision in 2010 issued by prime minister Samir Rifai that “every Jordanian has the right to know what is in their credit report and how it affects and impacts their ability to borrow and do business”.

CRIF Jordan was founded with the objective of providing a world-class credit bureau and related value-added services to Jordan. CRIF SpA  an Italian-based global leader in the provision, management and operation of credit bureaus around the world. CRIF SpA is currently managing consumer credit bureaus in Italy, the Czech and Slovak republics in addition to more than 50 country around the world and working with 6,300 banks.

The CRIF bureau efforts in Jordan so far are limited to the banking sector, but if given government support and information in other sectors, it could eventually provide badly-needed credit information, thus relieving businesspeople from having to depend on post-dated cheques as a quasi-credit system, without depending on credit scores so long as the government guarantees that it will imprison anyone who fails to honour their cheques, which is an uncivilised way of dealing with an economic rather than a criminal issue.

Giving and receiving cheques is a transaction between two individuals/entities and the government should not be involved in this transaction. If a cheque fails to be honoured, people should go to court and ask it to redress their problem. The court can put its hands on the bad cheque giver’s assets and ask that they cash them to pay their debt. Putting a person in prison does not solve the problem and, in fact, it perpetuates the tribal system, where a person puts pressure on his extended family to bail him/her out. Putting the bad cheque presenter in jail is uncivilised and inefficient, and most countries around the world do not do that.

The government needs to work closely with the private sector in order to strengthen the credit bureau so that more and more people and companies can use credit scores as a means of deciding whether to take a cheque or give a loan to someone, based on their credit ability to pay back. A holistic strategy that combines greatly reducing the informal market through a tax amnesty for past discretions in return for coming clean, combined with an improved, fair and simple tax law, with the help of an empowered credit scoring bureau, can help the government end this brutal practice of imprisoning financial cheque non-payments.

* A Palestinian columnist based in Amman, Jordan. - dkuttab@ammannet.net

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