Overview of Credit Reporting and Financial

Infrastructure

Cape Town, October 5, 2006Cape Town, October 5, 2006

Nataliya MylenkoNataliya MylenkoProgram OfficerProgram Officer

Financial Infrastructure & Institution BuildingFinancial Infrastructure & Institution BuildingInternational Finance CorporationInternational Finance Corporation

Lack of Access to Financial Services

Retail, Micro and

Small business market

Large Co’s and

“A” Clients

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

Well-served

Under-served

Basic information services & market Basic information services & market infrastructure accessible to lendersinfrastructure accessible to lenders

Credit bureausCredit bureaus Payment systemsPayment systems Enforcing creditor rightsEnforcing creditor rights

Retail skills and strategy of the financial Retail skills and strategy of the financial institution:institution:

Leadership, experience, and organizationLeadership, experience, and organization Products, Delivery Channels, SystemsProducts, Delivery Channels, Systems Improved risk management (underwriting, Improved risk management (underwriting,

portfolio management, collections – using portfolio management, collections – using tools like credit scoring)tools like credit scoring)

BankC

BankA

BankB

MarketInfrastructure

Two levels of intervention for successful retail and SME finance

Success of the banks in retail and SME finance is the primary objective: IFC’s involvement on market infrastructure aims to contribute its experience with financial institutions as well as with the credit bureau industry.

IFC’s Work with Credit Bureaus

Elements of Financial Information Infrastructure

Legal and regulatory framework for Legal and regulatory framework for information exchange information exchange

Private credit bureausPrivate credit bureaus Public credit registry, if one existsPublic credit registry, if one exists Public sector databases such as property, Public sector databases such as property,

vehicle collateral and asset registries, voter vehicle collateral and asset registries, voter registration and national ID databases, etcregistration and national ID databases, etc

Credit rating agenciesCredit rating agencies Financial statement databasesFinancial statement databases

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

Credit Information Coverage

LargeCorporates

Mid-sizeCompanies

Small Businesses

Consumers

Public Private

Public Registries

Rating Agencies

Commercial Credit

Bureaus

Consumer Credit

Bureaus

1

2

3

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

Growth of private bureaus

Growth of public registries

0

10

20

30

40

50

60

Pre-1964

1966 1972 1975 1978 1983 1986 1990 1992 1995 1997 1999 2002

Middle East and North Africa

Latin America

Eastern Europe and Central Asia

Asia

Africa

OECD

0

10

20

30

40

50

60

70

Pre-1970

1974 1977 1981 1985 1989 1992 1994 1996 1998 2001 2003 2005

Eastern Europe and Central Asia

Middle East and North Africa

Africa

Asia

Latin America

OECD

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

Drivers of Credit Bureau Growth

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)

New Private Credit Bureaus Since 2003

Doing Business in 2006 – Credit Information Indicators

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

Average private bureau coverage (% adults)

Source: Doing Business 2006

0.6

1.7

3.5

6.6

9.6

31.2

59.0

0 10 20 30 40 50 60 70

South Asia

Middle East & North Africa

Sub-Saharan Africa

Europe & Central Asia

East Asia & Pacific

Latin America & Caribbean

OECD

5.04.5

2.52.0 1.8 1.8

1.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

High IncomeOECD

Latin America& Caribbean

Europe &Central Asia

Middle East &North Africa

East Asia &Pacific

South Asia Sub-SaharanAfrica

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

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.

Latin America and the Caribbean

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

Asia

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

Eastern Europe and Central Asia

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

Middle East and North Africa

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

Sub-Saharan Africa

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

Links & Contact Information

Research Links

(1) http://www.ifc.org/ifcext/gfm.nsf/Content/FinancialInfrastructure - IFC’s Global Credit Bureau Program

(2) http://www.worldbank.org/wbi/banking/creditscoring - Focus on small business by WB/IFC

(3) http://econ.worldbank.org/programs/credit_reporting - Comprehensive research by WB (4) http://rru.worldbank.org/doingbusiness - Focus on business environment

Contact information

Peer Stein, Head, Pstein@ifc.org

Nataliya Mylenko, Program Manager, Nmylenko@ifc.org

Regional Credit Bureau and Risk Management Advisors

Oscar Maddedu, Omaddedu@ifc.org

Stefano Stoppani, Sstoppani@ifc.org

Tony Lythgoe, Tlythgoe@ifc.org

Credit Bureau Specialists

Peter Sheerin, Psheerin@ifc.org

Colin Raymond, Craymond@ifc.org

Thank you!Thank you!