Credit bureaus are essential elements of the financial infrastructure that facilitate access to finance.
Today, less than 25 percent of the people living in
developing countries have access to formal financial services, compared to up to 90 percent in
developed markets. Financial sector development
unleashes the productive power of enterprises
and facilitates inclusion of the informal sector in
the formal economy. Access to savings and credit
in rural areas allows farmers to smooth consumption and often survive the unpredictable risks of
droughts and natural disasters. Obtaining a loan to
send children to school helps a family create better lives for their children and reduces the need for
harmful child labor. Having long-term financing to
build a proper home is the direct result of a
complex interplay of different financial intermediaries within the right financial infrastructure and
regulatory framework.
Banks play a central role in extending financial services within an economy. In most markets,
commercial banks began by focusing on large
companies and select retail clients. Initially, their
organizational structure made it too costly to serve
smaller business clients and the mass markets.
Accordingly, it has been primarily through informal financial services and non-bank credit that at
least some of the needs of smaller entrepreneurs
and communities have been and are being met.
These include money-lenders, supplier credit, and
many forms of mutual financial self-help groups, such as the Rotating Savings and Credit
Associations or Tontines in Africa.The credit union
movement that originated in the 19th century and
has since spread around the world is probably one
of the most prominent examples of the power of
these mutual financial self-help groups.The rise of
credit unions and the revival of banks’ social
commitment towards their communities inspired
the rise of microfinance in developing countries
over the past two decades.
The approach to
lending, however, has remained traditional: making
decisions, based on subjective judgments, about a
borrower’s propensity to repay supported by
alternative risk-mitigating mechanisms such as
group guarantees.
A true revolution in lending occurred with
the introduction of modern financial technologies,
and this revolution has made access to credit
almost ubiquitous in developed markets.The technologies allowed banks to move from the traditional approach where credit is granted based on
subjective judgment to more automated processes
based on quantitative models. As a result, lenders
are able to deliver financial services at significantly reduced costs and expand credit to broader segments of the economy, thus further democratizing
financial services. In particular, the introduction of
credit scoring in the fifties in the United States—
coupled with the automation of workflow and
credit underwriting—played a key role in the
rapid rise of consumer lending. Credit bureaus are critical in helping lenders make faster and more
accurate credit decisions. Credit histories not only
provide necessary input for credit underwriting,
but also allow borrowers to take their credit history from one financial institution to another,
thereby making lending markets more competitive and,
in the end, more affordable.
The first chapter of this Guide provides the
basis for understanding the operations of credit
bureaus. It draws on the most recent empirical
research conducted by the World Bank on the
industry trends and the effects of using credit
information on availability of financing and
improved risk management.
Although the first credit bureaus may be
traced back to the early eighteen hundreds in
London, modern credit bureaus have rapidly
evolved only since the fifties fueled by improvements in technology and expansion of credit.
Among the developing and emerging markets,
Latin America has some of the oldest credit
bureaus in the world,but not until the nineties did
credit bureaus take off in most other developing
and emerging markets. Between 1990 and 2005,
the total number of private credit bureaus has
more than doubled. In Asia, many emerging
markets turned towards credit reporting after the
financial crisis in the nineties. New credit bureaus
have emerged at a rapid rate in Eastern Europe
over the past five years, with many of the projects
that started in the nineties eventually coming to
fruition.
The Middle East and North African region
has only recently seen a growing interest in credit
reporting, with new developments underway in
Morocco, Egypt, and Pakistan. Sub-Saharan Africa,
except for South Africa which is home to one of
the oldest existing credit bureaus, is still lagging
behind, but many reform-minded countries are
taking the lead to support their development in
line with reforms for greater access to financing.
Chapter 1 also discusses the roles played by
consumer and commercial credit bureaus to
support lending to small businesses.
With the rise
in retail banking, small business lending has
become the latest frontier in innovation.
Historically, small business borrowers represent a difficult market to serve because of the traditional
high-cost approach of judgmental credit evaluation. Wells Fargo pioneered the adaptation of
consumer lending technologies to small business
lending in the nineties in the United States.
Although no dedicated small business credit
reporting existed in the United States until a few
years ago, consumer credit histories of the owner
of a business proved highly predictive of the
credit performance of that business. The innovations in small business lending have since been
adopted widely in developed countries and have
also begun to find their way into developing
countries. Microfinance institutions, which have
relatively high operating costs,have seen this innovation as an opportunity to reduce cost and
become more competitive. As traditional retail
lenders have started poaching their clients in
some markets, such as Bolivia, it has also become
more important for microfinance lenders to join
and support credit bureau initiatives.
Reporting on small and microbusiness segments of the economy, have been neglected by
both consumer and commercial credit bureaus in
the past. Even in the United States, it took time for
an industry consortium to launch small business
credit reporting in 2002. Several developing market credit bureaus, such as in Thailand, India, and
more recently Turkey and the Kingdom of Saudi
Arabia (KSA), have already incorporated provision
of small business credit reporting into their business plans to avoid the mistakes of their more
developed counterparts.
The second chapter of the Guide summarizes
the experience of the IFC credit bureau expert
team in the development of private credit bureaus
in countries around the world. The chapter presents analyses of the various approaches to the
development of the bureau and discusses the technology, financial, and staffing issues a developing
bureau must address.
Development of a credit bureau takes a long
time, and requires a long-term commitment of all
stakeholders. The entire process of setting up a
credit bureau, from initial discussions to public
education and work on the legal and regulatory framework, to actual implementation of the
bureau’s systems,to uploading data and issuing the
first credit report may take five years or longer.
Active participation of creditors and the strong
support of government are necessary in this effort.
In many emerging markets, banks are the largest
creditor to individuals and firms in the formal system, hence credit bureau development often
focuses initially on facilitating information-sharing
among banks and then includes other creditors,
such as telecom companies and retailers.
Credit bureaus are characterized by
economies of scale, and coordination among creditors is critical for operations startup. In many
cases, the strong support of bank supervisors as
well as the willingness of government to provide
easy access to public databases, are critical to
enable credit bureau establishment. In some cases,
the central bank opted to operate a credit registry
and provide the data to lenders; more recently
Russia and Kazakhstan chose a private sector solution with strong encouragement from bank supervisors to share information.
Political support and willingness to share
information are essential, but challenges do not
stop there. Once the creditors are ready to share
information, the bureau has to overcome multiple
technical challenges.In several countries,the infrastructure for data exchange is inadequate; unique
IDs are unavailable; or other identifying information, such as names, addresses, dates of birth, are
recorded incorrectly and/or inconsistently. All
these issue make the collection and merging of
information difficult, but they should not stop the
development of a bureau. In many cases, the setting up of a bureau serves as a wake-up call for
lenders to start capturing and storing necessary
information. Over time, it enables banks to better
manage risks and optimize lending processes.
Basic information exchange is a first step.The
bureau uses this information to provide a comprehensive analysis of borrower creditworthiness
through such techniques as credit scoring. The
bureau can also use the information for portfolio
monitoring and fraud detection— just a few of the
value-added services discussed in Chapter 3 that a
bureau can provide.
In many countries, information-sharing cannot begin because an adequate legal and regulatory framework is lacking. Chapter 4 presents an
overview of approaches to regulating sharing of
information.With the rise in retail lending and the
collection of data on individuals and small businesses by credit bureaus, concerns about data protection and consumer rights are also on the rise.In
some countries, this debate has been highly political; in others, the debate focuses more on recent
abuses, such as identity theft. The latter has
become much more than a nuisance, especially in
the United States where people spend more and
more time protecting the integrity of their credit
histories. This situation emphasizes the importance of security measures that credit bureaus
must take, but it also has more far-reaching implications for the kinds of data that can be used for
credit decisions and the way bureaus ensure the
quality of the data and value-added services they
provide.
The difficulties in ensuring data quality,
which many developing markets face, could delay
the startup of a new credit bureau. Developing
markets are not the only ones that face this challenge, however, as data quality concerns are also
present in more developed markets, including the
United States. A recent study by the Consumer
Federation of America and the National Credit
Reporting Association revealed a significant variation in credit score accuracy and in the quality of
underlying credit history data among the leading
bureaus.Accordingly, the future of credit reporting
will not only require further consumer education
on the use, benefits, and risks of credit reporting
but also consistent endeavors by credit bureaus to
ensure data quality and consumer access.
Credit reporting legislation should carefully
balance the ability of creditors to share information with the individual’s right for privacy. Banks
often use their secrecy and confidentiality provisions as an excuse not to share information. Banks
generally are willing to provide information on
defaults but not on good loans.This unwillingness
to share positive information, however, limits competition and does not allow a good borrower to
leverage his/her good credit history to obtain better terms of credit. The borrower has a right to have his or her credit history disclosed to any
lender he or she may approach to obtain credit.
The law should enable a credit bureau to facilitate
information-sharing while at the same time
ensuring data security and protection of data
subject’s rights.
Credit bureaus are an important element in
promoting responsible lending. With the consumer lending crisis in Hong Kong (China) and
South Korea just a few years ago, reckless credit
card lending in the absence of credit bureaus with
positive information led to the over indebtedness
of individuals and subsequent rise in personal
bankruptcies. Since then, Hong Kong (China)
introduced positive credit reporting in order to
reduce the risk of this happening again. As other
markets struggle with predatory and reckless lending, credit bureaus can play a central role in allowing lenders to evaluate indebtedness of clients and
setting prudent and responsible lending limits.
Rounding out the theoretical discussions and
practical guidelines are five case studies about
credit bureaus that have been established or are
being established in recent years in different parts
of the world: an example of a successful credit
bureau serving microlenders in South Africa; a
regional credit bureau in Central America,which is
a promising solution for smaller markets where
lenders operate on a regional basis;a credit bureau
in the KSA that demonstrates the importance of
the long-term commitment of the stakeholders to
the bureau setup; the first credit bureau in Egypt,
which demonstrates how a private credit bureau
can be set up in a relatively short time when all
stakeholder interests are aligned and the project
has the strong backing of the authorities; and a
Vietnamese bureau that shows the importance of
a comprehensive policy for the development of
the private credit bureau and highlights the importance of public sector support.