The Importance of Credit Bureaus for Microfinance Institutions

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The Importance of Credit Bureaus for Microfinance
Institutions

• The experience of Red Financiera Rural (RFR) -
  Ecuador

Javier VacaExecutive DirectorRed Financiera
Rural
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1. Why RFR was interested in promoting credit
bureaus service?
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• RFR is formed by 40 MFI members, representing
  over 560,000 clients (50 of total micro
  entrepreneurs of Ecuador).
• MFI members credit unions, private banks, NGOs
  and local MFI networks.
• General RFR objectives are
• Policy advocacy
• Microfinance market development trough
• information transparency,
• product development and
• second floor finance.
• Technical assistance and training.

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• Information transparency means
• Financial MFI information
• Financial and social client information.
• In order
• To increase efficiency in credit
  underwriting/approval
• Prevent over indebtedness
• To decrease the level of default rate
• RFR implemented the project Regional service
  of credit information (SERVIR project) financed
  by IICD (Holland)

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2. SERVIR project
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Preliminary information

• All financial institutions regulated by the
  Superintendence Bank in Ecuador are obligated to
  share credit information with a credit bureau.
• A new credit bureau law was approved, so there
  are 4 operational private credit bureaus in
  Ecuador
• There are more than 800 MFI that are not
  regulated by Bank Superintendence,
• This represents 40 of the market.
• They are not obligated to share credit
  information.

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Project objectives

• To include at least 20 non-regulated MFI of a
  specific regional zone, as a pilot project (it
  was not necessary that chosen MFI should be
  member of RFR).
• To establish an alliance with a credit bureau to
  develop specific process to collect information
  and develop ad-hoc services.
• To analyze regional credit information
  establishing trends and to advice policies.
• To replicate the experience in other regions.
• To increase the number of non-regulated MFIs
  that provide credit information.

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Regional zone of the project

• 2 provinces of Sierra Central
• Influence located mostly in rural areas
• High level of indigenous people
• High level of poverty
• At least 100 small MFI.

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Project methodology
CREDIT UNION
CREDIT BUREAU
CREDIT UNION
NGO
Credit information structures

• Adaptation of credit information formats
• Product development
• Information validation
• Contract models
• Reports

• Technology level (sw, hw)
• Credit management
• Credit information (structures)
• Training
• Communication

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Activities performed

• Promotion and selection of MFIs
• Credit Bureau selection
• MFI requirements definition
• Informatics MFI diagnostic
• Adjustment of credit information structures (big
  problem)
• Credit information delivery
• Information validation or rejection
• Information processing
• Ensure availability of information in credit
  bureau database
• MFI consulting
• Market reports
• Monthly recompilation
• Adding new MFI
• Improving products

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Types of MFIs included in the project

• Credit Unions regulated, and non-regulated
  (though most of them non-regulated and rural.
• NGOs.

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Type of clients

• 80 rural, 15 urban marginal, and 5 urban
  people
• Most of them are indigenous
• Most of them living in poverty conditions
• Most of them are small producers.

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Problems and solutions
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Project results (jun. 05 to oct. 06)

• Loans and inquiries
• 44.056 inquiries
• 9.877 credits
• 90 of inquiries useful to officers for approving
  credit.
• IMF number
• Increased from 2 to 37
• Users number
• Increased from 7 to 171
• Total credit portfolio
• Increased from USD.13.264.478 to USD. 20.232.880
  (53 in 16 months)

• Portfolio at risk
• Credit default rate decreased (2.)
• Credit collection (legal actions), reduced by
  0,4.
• Clients number
• Increased from 43,496 to 58,134 clients (
  33.65 in 16 months).
• Average loan amount
• Increased from USD. 1,800 to 2,400 ( 33.33 in
  16 months)

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Example of market analysis and policies over
indebtedness
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Example of market analysis and policies default
rate
Beginning of SERVIR project
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Increase of micro entrepreneurs who obtained a
loan
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Increase of MFIs reporting to a PCB
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Next steps

• In addition to credit information, collect also
  social / demographic information age, gender,
  family structure, education level, territorial
  area, economic activity, among others.

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Next steps

• To establish a common standard core system for
  many MFIs to process better financial and social
  information data base.
• Develop a complete credit scoring model.

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3. New products for MFIs provided by private
credit bureaus
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TAILORED SOLUTIONS

• To decide
• ( Decision systems )

KNOWLEDGE Score Rating Decision
INFORMATION Credit portfolio revision strategy,
Monitoring Market Trend, Alert Share credits

• To manage

• To Know

DATUM Credit Reports Smart, Plus, Full,
Cellular SMS Microfinance IMFs, Custom reports
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Microfinance credit report
Number ID
NAME
Default rate
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Mobile telephone report
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Client evaluation (pre-approval)
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Scoring models
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Management report
A review of Ecuadorian market
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Potential risk credit cards
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THANK YOU
www.rfr.org.ec info_at_rfr.org.ec Quito - Ecuador