Overview of Credit Reporting and Financial Infrastructure

1
Overview of Credit Reporting and Financial
Infrastructure
Nataliya Mylenko Program Officer Financial
Infrastructure Institution Building Internationa
l Finance Corporation

• Cape Town, October 5, 2006

2
Lack of Access to Financial Services

• In Emerging Transition Markets
• The bottom of the pyramid remains underserved
• Banking sector penetration of 5 to 25 vs. 70
  to 90 in developed markets
• Banks tend to focus on large commercialclients
  and top retail clients
• Targeting the underserved
• Microfinance (up-scaling) Total reach 70
  million clients globally
• Banks (down-scaling) Requires retail skills and
  systems
• Non-bank financial institutions
  (diversifying)Leasing, factoring, housing,
  insurance

Large Cos and A Clients
Well-served
Retail, Micro and Small business market
Under-served
3
Two levels of intervention for successful retail
and SME finance
IFCs Work with Credit Bureaus

• Basic information services market
  infrastructure accessible to lenders
• Credit bureaus
• Payment systems
• Enforcing creditor rights
• Retail skills and strategy of the financial
  institution
• Leadership, experience, and organization
• Products, Delivery Channels, Systems
• Improved risk management (underwriting, portfolio
  management, collections using tools like
  credit scoring)

Market Infrastructure
Bank B
Bank A
Bank C
Success of the banks in retail and SME finance is
the primary objective IFCs involvement on
market infrastructure aims to contribute its
experience with financial institutions as well as
with the credit bureau industry.
4
Elements of Financial Information Infrastructure

• Legal and regulatory framework for information
  exchange
• Private credit bureaus
• Public credit registry, if one exists
• Public sector databases such as property, vehicle
  collateral and asset registries, voter
  registration and national ID databases, etc
• Credit rating agencies
• Financial statement databases

5
Role of Credit Bureaus in Financial Markets

• Decreases information asymmetries between
  borrowers and lenders
• Allows lenders to more accurately evaluate risks
  and improve portfolio quality
• Eases adverse selection problem and lowers the
  cost of credit for a good borrower
• Increases credit volume/ improves access to
  credit
• Supports introduction of credit scoring and
  automated underwriting, lowers lender operational
  costs and improves profitability

6
Credit Information Coverage
Public
Private
Rating Agencies
Large Corporates
Commercial Credit Bureaus
Public Registries
1
Mid-size Companies
3
Consumer Credit Bureaus
Small Businesses
2
Consumers
1 Purpose of public registries is banking
supervision, while private bureaus seek to help
lenders make better credit decisions.
However, there is a need for greater
differentiation and development of
relevant public registries and data sources, e.g.
financial statements databases. 2 The role of
public registries vs. private bureaus What role
can national loans registries play and
what other public registries or data sources can
provide valuable input for private bureaus,
e.g. ID data (lost/stolen, unique identifier, tax
header information etc.) 3 Link between
consumer and commercial credit reporting very
important, in particular for owners of
small businesses and directors on SMEs Closing
the gap of information coverage and
developing value-added services such as small
business scores
7
Growth of private bureaus
Growth of public registries
8
Drivers of Credit Bureau Growth

• High growth of retail credit in emerging markets
  (62 increase during 1996-2004)
• Move towards more responsible lending following
  various consumer loan crises
• Increased awareness of credit reporting (e.g. in
  Eastern Europe the number of private credit
  bureaus rose from five to twelve in 2006)
• Falling start-up costs for credit bureaus with
  decreasing costs of database management software
• Growing competition

9
New Private Credit Bureaus Since 2003

• Asia India
• Eastern Europe Central Asia Armenia,
  Bulgaria, Croatia, Georgia, Kazakhstan, Ukraine,
  Slovakia, Russia
• Latin America Nicaragua, Honduras
• Middle East North Africa Saudi Arabia, Egypt
  (will be operational in 2007)

10
Doing Business in 2006 Credit Information
Indicators
Average private bureau coverage ( adults)

• Credit Information Index
• Both firms and individuals are listed
• Both positive and negative information
• Retailers and/or utilities submit data
• 5 or more years of historical data
• All loans included above 1 GNI per capita
• Consumer right to inspect is guaranteed by law

Source Doing Business 2006
11
Challenges Developing Credit Bureaus in Emerging
Markets

• Data quality and role of credit bureaus
• Supporting responsible lending practices
• Enact appropriate laws and regulations to support
  growth of private credit bureaus
• Ensure consumer rights and data protection
  Educate consumers and protect their rights
• Provide for proper supervision and codes of
  conduct
• Change perceptions and build awareness
• Build trust
• Persuade lenders to share positive information
• Ensure commercial viability in smaller countries

12
Global Credit Bureau Program

• Number of credit bureaus created and/or
  significantly improved 7. In Bosnia and
  Herzegovina, Romania, Bulgaria, Costa Rica,
  Nicaragua, Guatemala, Honduras.
• Number of new laws/regulations drafted or
  contributed to the drafting 12.
• Credit bureau development strategy reports,
  feasibility studies and in-depth market
  assessment reports 14.
• Support organization of roundtables, seminars,
  conferences and other outreach events 26 events
  in 21 countries.
• Monitoring of credit reporting environment in
  over 120 countries through Doing Business Report.

13
Latin America and the Caribbean
14
Program Status in LAC
Brazil Legal framework, outreach upgrade to positive sharing and new CB regulation
Bolivia Legal framework, market assessment, training upgrade to full sharing, new CB regulation, risk training/ seminar
Costa Rica Legal framework upgrade to positive sharing and new CB
El Salvador Institutional sharing enhancement upgrade to positive sharing, new CB
Haiti Market assessment
Honduras Legal framework, outreach upgrade to positive sharing and new CB
Mexico Market assessment, CB development for small lenders / MFIs
Nicaragua Legal framework, CB development CB opened in 2005 and new CB regulation enforced
Panama Legal framework, outreach, value-added services amendment to CB law, development of bureau scores, and SME CB project definition
Overall LAC Financial literacy program, WHCRI supported program launch in LAC
15
Asia
16
Program Status in Asia
India Assessment of a credit bureau for rural/micro/SME borrowers
Philippines Development of a private bureau, legal and regulatory framework, outreach/awareness
Timor Leste Workshop undertaken to assess potential for development of credit reporting
Vietnam TA underway to establish private credit bureau including work on legislation and technical scoping study
17
Eastern Europe and Central Asia
18
Program Status in Eastern Europe Central Asia
Bulgaria Market assessment, outreach PCB established in 2004
Georgia Outreach, advice on regulatory framework negative-only bureau in 2005 regulatory issues to be addressed
Kyrgyz Rep. Advice on regulatory framework
Macedonia Market assessment, advice on regulatory framework
Romania Market assessment, outreach, advice on regulatory framework, diagnostic/feasibility study bank-owned bureau established in 2004
Russia Market assessment, outreach, advice on regulatory framework PCBs established in 2005
Ukraine Market assessment outreach, advice on regulatory framework PCBs established in 2006
19
Middle East and North Africa
20
Program Status in Middle East and North Africa
Algeria Diagnostic
Egypt Assistance to set up a private credit bureau and select a technical partner
Morocco Diagnostic, assisting central bank in developing private credit reporting infrastructure
Pakistan TA for development of value-added services
Saudi Arabia TA for development of SME bureau
Tunisia Diagnostic
UAE Diagnostic
21
Sub-Saharan Africa
22
Program Status in Sub-Saharan Africa
Ghana Assistance with legal and regulatory framework
Kenya Assistance with enabling regulation
Nigeria Assistance with the development of a private sector bureau
South Africa Assistance with development of microfinance bureau scores. Develop credit reporting services covering previously disenfranchised market segments
Tanzania Assistance with the development of a private sector bureau

• World Bank Africa Credit Reporting and Financial
  Infrastructure Program
• Policy dialogue at subregional level on common
  policy issues, experience and best practice
• Country assessments and specific assistance

23
Links Contact Information

• Research Links
• (1) http//www.ifc.org/ifcext/gfm.nsf/Content/Fi
  nancialInfrastructure - IFCs Global Credit
  Bureau Program
• (2) http//www.worldbank.org/wbi/banking/credit
  scoring - Focus on small business by WB/IFC
• (3) http//econ.worldbank.org/programs/credit_re
  porting - Comprehensive research by WB
• (4) http//rru.worldbank.org/doingbusiness -
  Focus on business environment
• Contact information
• Peer Stein, Head, Pstein_at_ifc.org
• Nataliya Mylenko, Program Manager,
  Nmylenko_at_ifc.org
• Regional Credit Bureau and Risk Management
  Advisors

24

• Thank you!