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Supporting the Development of Private Credit Information Bureaus
IFC increases technical assistance
and invests in regional credit bureau initiatives
By
Nataliya Mylenko,
Peer Stein, Stefano Stoppani and Oscar Madeddu, IFC
Sharing information
on borrower credit histories allows lenders to improve risk
management and expand lending to new market segments. Correlation
between existence of credit information registries and depth of
credit markets is widely documented. There is also evidence that
the private sector is better suited to serve the needs of lenders by
providing detailed credit history information and value-added
services, such as credit scoring, while public credit registries,
run by bank supervisors, should focus on monitoring systemic risks.
Rationale for IFC involvement.
Consumer and small
business finance is of great significance to the IFC, given its
substantial portfolio of mid-sized banks and commitment to
increasing access to financial services for the underserved. More
than 40 percent of IFC’s financial markets portfolio is held in
financial institutions that are doing business primarily with micro,
small and medium-sized enterprises. Growing retail and SME lending
requires that client banks introduce adequate risk management and
loan approval processes to ensure that growth remains healthy. The
use of credit bureau information and the introduction of credit
scoring can significantly reduce risks of default and enable banks
to lend to new segments of the market. Thus support for the
development of private credit bureaus through technical assistance
and investment is a core part of IFC’s work in the financial sector.
While the IFC is
providing support for credit bureau development to small and big
countries alike, particular attention is paid to those countries
where IFC’s exposure to banks is significant. In almost all of these
markets, growth in retail and small business finance is outpacing
commercial lending with the respective risks and constraints imposed
in the case of non-existing or poor credit bureaus. Of IFC’s top 10
country exposures to banks at the end of 2004, six out of 10 either
did not have a credit bureau or had a credit bureau that recorded
negative data only. IFC is now involved in the development of credit
reporting in Russia and China and supports efforts to introduce
positive information sharing in Romania and Brazil.
IFC closely
collaborates with the World Bank to coordinate policy advice and
joint interventions, for example in the reform of the legal and
regulatory framework for credit reporting, as well as consumer
education and training activities. IFC also continues to work with
Project Development Facilities (PDFs) and regional development banks
during technical assistance implementation and for local support.
Technical Assistance. IFC is managing its technical assistance for credit reporting under the
Global Credit Bureau Program funded from different donors. To-date,
US$2 million have been approved in donor financing, of which about
73 percent had been committed and/or disbursed as of February 2005.
Given the long development cycles for credit bureaus, effective
support requires a combination of on-going support and specialized
assignments. To provide the necessary on-going support, IFC has
hired dedicated regional credit bureau advisors for Eastern Europe
and for Latin and Central America, who work on the ground for the
period of at least two years. Africa, the Middle East and Asia are
currently covered on a case-by-case basis.
Credit bureau advisors work together with IFC staff to
develop private credit bureaus. Key challenges in the development of
credit reporting are mostly concentrated in three areas: (1) legal
and regulatory issues, (ii) concerns of financial institutions about
making their information available to competitors, and (iii) lack of
adequate public policy in the sector.
IFC provides assistance on legal and regulatory issues in
coordination with the World Bank and other donors. For example, in
Ghana and in Costa Rica donor funding was used to prepare legal
opinions on credit information sharing which are now used to engage
government in discussions on legal reform.
To overcome lenders’ unwillingness to share information, an
important part of building the ground for the establishment of
private credit bureaus is to explain the benefits of sharing data
and the ways lenders can integrate credit bureau information into
their loan approval processes. IFC has organized roundtable
discussions among potential credit bureau participants in Nigeria,
Egypt and Morocco, supported conferences on these issues in
Kazakhstan and Russia, among others, and is currently in active
consultations with large lenders in about 30 countries. IFC also
provides assistance to individual institutions to develop credit
scoring solutions and is working on shared scoring solutions for
banks in East Africa. In countries where credit bureaus operate,
IFC focuses on the introduction of positive information, for example
in Brazil and Pakistan, and the development of credit scoring, by
developing a microcredit bureau score in South Africa for example.
In some countries the development of the private credit
reporting industry is hampered by misguided public policy. For
example, expansion of public registries to cover all retail loans
issued by regulated institutions is costly and undermines private
sector initiatives. Empirical research and international practice
have demonstrated that private registries are better suited to serve
the needs of lenders. Public registries may play an important part
in improving banking supervision and monitoring systemic risks, but
they should not serve as the main information providers to
commercial institutions. Mandatory collection and provision of
information-- often at subsidized prices--distorts market incentives
for financial institutions to develop a private registry. A case in
point is the expansion of the public registry in Bulgaria, which put
on hold the development of a private registry that was almost ready
to start operations. Discussions of public registry expansion in
Armenia make banks unwilling to commit to joining a private credit
information-sharing enterprise. While the development of a public
registry might appear to be an effective means to fill the gap of
available credit information, in the medium to long term it
undermines private initiatives and thus hurts creditors who will not
have access to a broad set of credit data, including the information
from non-banks that is usually collected by private bureaus.
Creditors who rely on public registries will not be able to benefit
from value-added services such as bureau scores, moreover, which
allow them to maximize the value of credit information. At the same
time, the public sector could play a very important role in
supporting the development of private credit reporting by providing
an adequate legal and regulatory framework, and by making
information from public registries available to private sector
operators as, for example, in Chile.
Investment
projects.
IFC can complement its TA work by financing the creation or
expansion of private credit bureau operations. In 2002 IFC completed
its first investment in a consumer and SME credit bureau, Trans
Union Central America (TUCA), which is the first regional credit
bureau. TUCA currently operates in Guatemala, Honduras, El Salvador
and Costa Rica, and plans to expand its operations to Nicaragua by
mid 2005. Managing data from several small economies within one
information technology system allows economies of scales and
improved efficiency and profitability for the credit bureau.
Product standardization across countries
in the region will also facilitate cross border financial
service offerings in Central America.
Another investment
project currently being considered by IFC is supporting Experian in
the creation and operation of credit bureaus and the provision of
value-added products and services, such as scoring and fraud
detection tools, in several countries in South Eastern Europe and
the Middle East. Experian is one of the leading international
players in the sector with credit bureau operations in 16 countries
and clients for its decision support solutions in more than 50
countries. By bringing to the table its expertise and experience in
developing business in emerging markets, Experian will partner with
IFC in promoting the development of needed credit information
infrastructure in the target countries. Moreover, introduction of
state of the art credit scoring systems will allow financial
institutions to improve their underwriting processes for consumer
and small business lending.
Overall, the IFC does not view investing in credit bureaus as
its main role in the sector. Its primary objective is to develop
credit reporting in the private sector, principally through
technical assistance.
For any questions on
IFC’s work on credit reporting please contact:Peer Stein, Head,
Financial Infrastructure and Institution Building,
pstein@ifc.org Nataliya Mylenko, Program Officer, Global Credit
Bureau Program,
nmylenko@ifc.org Stefano Stoppani, Regional Adviser for ECA and
MENA,
sstoppani@ifc.org Oscar Madeddu, Regional Adviser for LCR,
omadeddu@ifc.org
1World
Bank, 2003. Doing Business in 2004: Understanding Regulation.
Love, I.
and Mylenko, N., 2003. Credit reporting and financing constraints.
World Bank Policy Research Working Paper 3142.
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