wider access to credit, lower npl, gdp growth, and...
TRANSCRIPT
OSCAR MADEDDU - Beirut - Iraq Workshop
17 October, 2011 – v6.1/111016/OM
Building effective credit
reporting systems
Wider access to credit, lower NPL, GDP growth,
and consumers’ empowerment through
credit reporting best practice
. . . .1
. . . . 2
. . . . 3
International status of credit reporting
How can regulators help? International best practice
Contents
. . . . 4
Credit reporting legal framework
A strategy for Iraq
Global Credit Bureau Program: current projects
Argentina
Barbados
Chile
Guyana
Jamaica
OECS (**)
Trinidad & T
Afghanistan
Algeria
Djibouti
Egypt
Jordan
Lebanon
Morocco
Libya
Oman
Palestine
Syria
Tunisia
Yemen
Cape Verde
DRC
Ethiopia
Ghana
Mauritius
Mozambique
Nigeria
Rwanda
UEMOA (*)
Tanzania
Bangladesh
Cambodia
India
Lao
Nepal
Pacific
Islands
Latin America & Caribbean
Middle East & North Africa
Asia & Pacific
Sub – Saharan Africa
(*) Western Africa Economic and Monetary Union - 8 countries
(**) Organization of Eastern Caribbean States - 7 countries
Azerbaijan
Kyrgyzstan
Tajikistan
Uzbekistan
Mongolia
Moldova
Eastern Europe & Central Asia
Why would the WB and IFC start such a program?
The “Mother” of all problems?
Countries without
Credit Bureaus are
generally the same…
…where access to credit
is more difficult!
The role of PCBs and PCRs?
different but complementary
OWNERSHIP
MISSION
TYPE OF DATA
CONTRIBUTORS
CONTRIBUTION
TICKET SIZE
ACCESS
END USERS
DATA ACCURACY
CONSUMERS’
PROTECTION
Private Credit Registry
Central bank / supervisory authority
Credit system supervision
Commercial, corporate, SME loans
Banks and other regulated financial
entities
Compulsory, regulated by bank’s law
Large (restrictions on low amounts)
Restricted (aggregated data only)
Regulated entities (no consumers)
Imposed and controlled by authority
Low – subjects of information rarely
have access to their own data
Private Credit Bureau
Private providers
Information services
Consumer credit, retail
Banks, retailers, credit cards, utilities,
mobile tel, microfinance, insurances
Voluntary, or mandatory
Micro, small, medium
Open on “reciprocity” principle
All contributors (yes consumers)
Regulated by code of conduct
High – subjects of info have access to
their info and may amend wrong data
• Both Private Credit Bureaus (PCBs) and Public Credit Registries (PCRs) are operating worldwide
• Both are important pillars of an effective national credit reporting system
• Best systems are where both are operating covering different needs
Growth of Private Credit Bureaus
Source: Doing Business 2006 – 2010 and GCBP team
knowledge
0
10
20
30
40
50
60
70
80
90
100
Pre-1974 1977 1981 1985 1989 1993 1997 2001 2005 2009
OECD
Sub-Saharan Africa
East Asia & Pacific
South Asia
Eastern Europe & Central Asia
Latin America & Carribean
Middle East & North Africa
Growth of Public Credit Registries
Source: Doing Business 2006 – 2010 and GCBP team knowledge
0
10
20
30
40
50
60
70
80
Pre-1964 1973 1983 1991 1997 2003 2008
Middle East and North Africa
Latin America
Eastern Europe and Central Asia
Asia
Africa
OECD
Who contributes data to PCBs and PCRs?
94%
73%
57%
69%
88% 81%
54% 54% 48%
27%
58%
90%
60%
39% 46%
79% 79%
65% 58%
43%
25%
8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% Total 2010 % Total 2005
Private Credit Bureaus
Source: Doing Business 2010
86%
67%
56%
38%
58%
24%
1% 3% 7%
24% 25%
100%
74%
56%
46%
75%
19%
7% 4% 5%
0%
25%
0%
20%
40%
60%
80%
100%
120%
2010 2005
Public Credit Registries
Both firms and individuals are listed
Source: World Bank Doing Business in 2005
How is credit reporting quality rated? Doing Business report (www.doingbusiness.org)
Credit Information Sharing Index
Both positive and negative
information are shared
1
2
2 or more years of historical data
is stored and disseminated 3
retailers, MFIs, utilities and other
non-regulated entities submit data 4
All loans are included (above 1%
GNI per capita)
5
Consumers’ rights to see/ correct
own data it is guaranteed by law
6
• World Bank / IFC rank the quality of
credit reporting
• It is an annual survey, worldwide
• 183 countries surveyed in 2011
• A basic parameter is considered:
the Credit Information Sharing Index
(score 0-6 based on the parameters
indicated on the right side)
(www.doingbusiness.org)
Source: Doing Business 2011
What is the Credit Information Sharing Index in MENA?
• Saudi Arabia & Egypt are the highest performers
• Iraq and Djibouti have the largest improvement and reform potential
Source: Nat. Chamber Foundation- June 2003 Washington D.C. - “The Fair Credit reporting Act: access/efficiency /opportunity. “
And PERC – “Economic fairness through smarter lending” – October 2007
•With PCB acceptance increases for all categories of applicants = more business for the lenders
•Minorities and underprivileged increase more = more access to credit for “non-bankables” •Latinos + 15% than white, African Americans +6%
•Younger applicants usually discriminated + 30% than those aged 66
•The lower income segment (< 15.000) increase most + 18% compared to the richest
How effective are they? Example: the “democratization” of credit
•Success factors?
•Loan applications accepted by Internet, phone, mail (or branch)
•Fully automated decisions (70% taken with credit bureau + bureau scores + WF scoring)
•No tax return or financial / income statements required;
•No collateral required (about 94% of loans unsecured)
•Decision based mainly on SME owner consumer loans information
•Lower processing costs (US$ 30)
•Lower processing time (15minutes) to underwrite a loan
•By end 2004 over 1,5 million applications processed automatically
•Background:
•In 1994 Wells Fargo started Business Direct (new SME division)
•Average client profile: sales <US$ 325.000 year; employ <5 people
•Average loan amount US$15.000; max loan amount US$ 100.000
3.7
5.4
7.4
9.9 9.9
0
2
4
6
8
10
12
National City U.S. Bancorp Bank One Bank of America
Wells Fargo
US$ billion
Small Business Lending by Selected U.S. Banks in 1999
25 32 62
200
297
415
0
50
100
150
200
250
300
350
400
450
98 99 00 01 02 03
(thousands)
Wells Fargo Online Small Business Customers 1998-2003
•Results:
•Portfolio: by 1999 US$ 9.9 billion; by 2003 US$ 15bn
• In 2002 WF rated number 1 SME lender in the USA
How effective are they? More credit for SME using personal loans data
• MFIs in Egypt were unwilling to share data with the PCB
• IFC proposed a cross-tabulation analysis between 3 major MFIs data and the PCB data (banks)
PCB
How effective are they? PCB and Microfinance Avoid cross-lending and over- indebtedness
• MFIs discovered that: many clients also had loans with banks (credit lines twice larger)
• MFIs immediately signed an agreement to share data with the PCB
. . . .1
. . . . 2
. . . . 3
International status of credit reporting
How can regulators help? International best practice
Contents
. . . . 4
Credit reporting legal framework
A strategy for Iraq
•Financials systems collapsed •NBFIs liquidated,
•16 banks (out of 40) closed •Deposits were frozen
• Long queues of depositors outside the banks •20% of GDP lost
•Debt/GDP ratio went from 81% to 156%
•The consequences
•In 1994 capital inflows surged from US$200 mn per year to US$780 mn (5% of GDP). •Liquidity glut provoked lax credit policies for households and enterprises •Private credit increased 60% (or 30% of GDP compared to less than 15% in 1989-92) •This led to a lending boom offered without proper risk assessment and information •Moral hazard, excessive risk taking, financial corruption increased phenomenally •No Private Credit Bureaus were present at the time
•The problem
How can regulators help - Ecuador
the problem
16 Fuente: SBS
How can regulators help - Ecuador the results
• The Central Bank (BAM ) established a first class credit reporting systems
1. Both PCR and PCB are part of the equation
2. All regulated entities must supply BAM with all data on all loans typologies (monthly)
3. Borrowers’ consent not required
4. BAM consolidates data and supplies all Credit Bureaus with the same information base
5. Historical data is part of the database
6. Non–regulated lenders share data directly with PCBs (borrower’s consent is required)
7. Inquiring a PCB before granting credit is mandatory for lenders
8. After first PCB started lenders no longer allowed to consult BAM’s public registry
9. BAM is the only supervising and licensing authority for PCBs
10.BAM can access any PCB database for supervision/systemic risk prevention purposes
11. Banks and FIs cannot own more than 5% of a CB individually, and 30% as a group
How can regulators help - Morocco
the solution adopted
Credit Applicants (information)
1
2
3
Regulated entities
Banks
Regulated entities
NBFI
Regulated entities
MFI
Non-regulated
commercial entities
Non-regulated
financial entities
Central Bank (no borrowers’ consent required)
Bank 1 Bank 3 NBFI MFI RETAILER TELCO
4
PCB 1 PCB 2 PCB 3 PCB 4
5 Bank 2
Sharing model adopted in Morocco: mandatory indirect data sharing
Borrowers’ consent
is required
Jun-08 Jun-09 Dec-09 Mar-10
Consumer Loans in (LE mn) 78,332 84,588 88,924 89,419
72,000
74,000
76,000
78,000
80,000
82,000
84,000
86,000
88,000
90,000
92,000
Jun-08 Jun-09 Dec-09 Mar-10
Consumer Loans growth in (LE mn)
How can regulators help - Egypt Results: increased credit access
ASSET CLASSIFICATION ACCOUNTS % 2009 Mar-10 Improved % 2009 vs. 2010
A) PERFORMING 91.0 92.5 2% B) SUB_STANDARD (30-90 DPD) 3.6 3.2 -11% C) DOUBTFUL (90+ DPD) 1.2 0.6 -50% D) BAD ** 4.2 3.7 -12% ** 150+ DPD (Days Past Due) for loans and 180+ for Cards.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2009 Mar-10
C) DOUBTFUL (90+ DPD)
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
2009 Mar-10
D) BAD **
90.0
90.5
91.0
91.5
92.0
92.5
93.0
2009 Mar-10
A) PERFORMING
3.0
3.2
3.4
3.6
3.8
2009 Mar-10
B) SUB_STANDARD (30-90 DPD)
How can regulators help: Egypt results: decreased Non Performing loans
Credit Applicants (information)
1
2
3
Regulated entities
Banks
Regulated entities
NBFI
Regulated entities
MFI
Non-regulated
commercial entities
Non-regulated
financial entities
Credit Bureaus
Bank 1 Bank 3 NBFI MFI RETAILER TELCO Bank 2
Sharing model adopted in Egypt? Mandatory direct data sharing
0
50
100
150
200
250
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
0
20
40
60
80
100
120
140
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
69.7 71.2
73.7
80.6 80 82.3
60
65
70
75
80
85
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10200
5200
10200
15200
20200
25200
D ec-07 Jun-08 D ec-08 Jun-09 D ec-09 M ar-10
# of Credit files up by 33% #of Borrowers up by 35%
& # Guarantors up by 155%
Hit Ratio up by 18% # of Inquiries & Open records
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
Banks & MFIs portfolio
growth up by 52%
50
70
90
110
130
150
170
190
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
50
100
150
200
250
300
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-10
Non-performing loans
down by 66% Provisions down by 61%
Million
Million Million
How can regulators help – Palestine the PMA’s PCR results so far…
Utilities data is key though not always allowed Why is this data so important?
Collateral Credit Bureau
???
• Credit and the Catch-22 situation: “Credit must be obtained to build a credit history but… without
a credit history no credit can be obtained!”
2. THE PROJECT:
• Project started by the local administration of region in the South of Italy
• Objective: increase credit access for non bankable applicants and/or without a credit history (
“thin file or no file).
• The Water Company (public utility) has given historical data on water bills payments
• Sample window: data with bills payments from 2006 to 2008
• Population analyzed : 154,000 payers - 112,000 with a credit history in the Private Credit Bureau
- 42,000 without credit history in the Private Credit Bureau
1. THE CHALLENGE:
• can a good payment track on water
(and utilities) bills be considered as
good as credit data to build a creditc
history and scores for “unbankable”,
informal economy, MSME, and individual
customers without credit history?
Case Study – the power of public utilities data
Water-score: Italy 2010
• The answer is yes, the scoring model developed on water payment data allows a robust
risk assessment of those clients that pay their water bills regularly and punctually
The results
SCORE Media
% en
cl asse Classe
Bad Rate
odds
514.932 <= -- <=938.917 881.067 7.15% 1 12.27%
938 .917 < -- <=970.647 959.753 9.69% 2 4.15%
970.647 < -- <=977.784 976.107 16.10% 3 2.47%
977.784 < -- <=982.541 981.626 19.02% 4 1.78%
982.541 < -- <=985.418 984.718 10.26% 5 1.50%
985.418 < -- <=986.880 986.838 30.92% 6 1.11%
986.880 < -- <=990.488 988.987 6.85% 7 0.48%
In particular,
among the 42,000
with no credit
history, roughly
37,000 customers
(83% of them) can
become eligible
for credit, with a
good score
• If appropriately fine tuned the model can easily be extended to other utilities / or municipalities
• In conclusion, a potential 'good' customer that finds it difficult to access credit through
traditional channels and traditional information, could vastly benefit from the utilization of
alternative data
. . . .1
. . . . 2
. . . . 3
International status of credit reporting
How can regulators help? International best practice
Contents
. . . . 4
Credit reporting legal framework
A strategy for Iraq
Legal framework: what solutions are generally available?
1. CONSUMER’S CONSENT + CODE OF CONDUCT (e.g. Switzerland) • borrowers power to choose whether to allow sharing of own information or not
• generally supported by Code of Conduct,
• consent clause may vary
2. BANKING SUPERVISING AUTHORITIES’ REGULATION ( e.g. Morocco, Egypt, Honduras) • ad-hoc compendium of norms, not a law, regulating information sharing, enacted by Central Bank
• combines a quick, flexible enforcement, while disposing of banks secrecy impediments
• advisable in those countries where banking regulators have the power to enforce such norms
3. CREDIT BUREAU LAW (Ecuador, Ghana, South Africa, Mexico,) • best regulatory framework, prevents alibis and misinterpretations about info-sharing viability,
• establishes unmistakable consumers’ rights,
• allows healthy development of credit reporting
• advisable those countries where solution 2 is not feasible
4. DATA PRIVACY LAW (e.g. European Union) • Law containing general provisions on data confidentiality (rules over all personal data in a country)
• by default it also regulates credit information and Private Credit Bureaus activity
• advisable in those country where data privacy awareness and retail credit literacy are high
Various approaches of different complexity are available
Source: Doing Business 2011. According to survey data for 85 countries with PCBs.
• Many countries do adopt
more than one solution
• Data Protection and
Banking Laws are most
common due to a rising
use of data sharing
• Banking law is mainly
related to PCRs and Data
Privacy more to PCBs
• Code of Conduct +
Consent is customary in
many countries and
simplest way to operate
Which solution is the best one?
•Not a “one size fits all” solution
Enabling legal framework? Issues to consider
NORMS ISSUES
LICENSING Establish challenging requirements. Ad-hoc Authority to approve license
SUPERVISION Ad-hoc Authority to be empowered. Clear oversight role/responsibilities
BANK SECRECY Clear definition of non-applicability of bank secrecy to shared info
SHARING / INQUIRY Define if mandatory or voluntary, if one or both
CONSUMER’S CONSENT When? Prior, informed, specific consent. Care of lender. Digital or written
PERMISSIBLE DATA Clarify data allowed (credit info, utilities, etc) and not (e.g. sensitive)
PERMISSIBLE PURPOSE Clarify which purposes CB can be inquired for ( e.g. credit)
CONSUMER’S RIGHTS To see, dispute, correct data at any time. Free periodical report.
CONSUMER’S RELATIONS Ad–hoc structure. Internet accessibility, toll free number, digital signature, message.
SECURITY / SYSTEMS Define minimum operational requirements for system and security
HISTORICAL DATA Duration of historical database not lower ( max 5 years)
DATABASE LOCATION Do not inhibit the possibility to export data
VIOLATIONS / PENALTIES Norms not to discourage sharing. Administrative penalties,
REPORT TYPE Lenders’ report may not to show lenders’ names. Consumers’ report to show
CODE OF CONDUCT Mandatory. Regulates operation between users/CBs. enforce reciprocity
SHARING AMONG CBs PCBs allowed to share info among them without consumer’s consent.
CB OWNERSHIP CB ownership. lender’s participation is ok but possibly avoid shareholding majority
BANK SECRECY Clear definition of non-applicability of bank secrecy to shared info
• In 1713 • Geneva bankers mandated to keep secrecy on their clients’ information
• Civil Code (1907) and in the Labor Code (1911) enforce confidentiality provisions
• 1934 Banking Law, established criminal responsibility (up to 6 months in prison) for violating bank secrecy
• Very few exceptions for information disclosure but a significant one: customer’s explicit consent is given
• In 1968 • ZEK Credit Bureau founded,
• Users: consumer credit banks, leasing companies, credit card issuers, commercial banks
• Roughly 80 users sharing positive and negative credit information on 1 million borrowers.
• Users requested an explicit consent from borrowers to share information
• Stringent bank secrecy did not stop the development of a Private Credit Bureau
• In 2001 • Federal Law on Consumer Credit is enforced
• Law establishes an Information Center (IKO) using ZEK infrastructure as a basis
• Law mandates banks to inquire prior to grant credit
• The new Law swaps from consent model for collecting information to notice model
• The law requires banks simply to notify customers that account information will be sent to the IKO
• Accordingly, consent is no longer necessary to obtain information, since the law requires it
Bank Secrecy facts and myths: the “Mother of all Bank Secrecies”
A law is not always required to start PCBs: borrowers’ consent can be stronger than Bank Secrecy
Switzerland
Borrowers’ rights
Source: Doing Business 2010
• In most countries (94%) borrowers have
the legal right to:
• inspect their own credit report
• dispute information
• have it corrected if wrong
• In more than half of the countries (60%)
surveyed, borrowers have the legal right
to view the list of their credit report
requestors
60%
94%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Law guarantees access to list of parties requesting borrower
information
Law guarantees that borrowers can inspect their data
% o
f PC
Bs
resp
ondin
g
aff
irm
ati
vely
•Consumers may request own report at any moment (free once a year)
•Consumers right to dispute and correct information is prescribed (Art 14)
•The procedure is the following (Art 15.) :
– Consumers may send request for corr ection to the CB
– Within 5 days fr om r equest r eception CB must contact user s for amending r ecor d
– User must comply with r equest and answer to CB w ithin 10 days
– If user s accepts to corr ect the infor mation fully or even par tially, a new am ended
r ecor d must be sent to the CB
– CB must subsequently deliver new corr ected r epor t to the consumer
– If the consumer is not fully satis fied he must highlight his/her disagr eement to the
CB and has the r ight to incor por ate an aler t message (o f limi ted length ) in the r epor t
stating the r easons for disagr eement.
– If user s do not continue corr ection pr ocedur es within the established deadl ine the
CB must er ase the r ecor d fr om the Cr edit Repor t until a final solution ( pr ivate
agr eement or cour t sentence) is r eached.
Nicaragua CB Regulation: consumers’ rights
How can regulators help? Nicaragua
Other borrowers’ rights When is data on arrears deleted?
Source: Doing Business report 2009
14%
54%
17%
11%
3% 6%
51%
17%
25%
2%
0%
10%
20%
30%
40%
50%
60%
Immediately 1 to
5 years
More than
5 years
Never Other
% o
f B
ure
au
s R
ep
ort
ing
Repaid Not repaid
“Other” category includes bureaus where data is erased when account is closed, or upon instruction.
50%
23%
50%
17%
28%
38%
75%
0%
32%
13%
21%
50%
9%
13%
22% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
South Asia (4)
Latin America & Caribbean
(22)
Sub-Saharan Africa (8)
OECD (24) Europe & Central Asia
(18)
East Asia and Pacific (8)
Middle East & North
Africa (8)
% o
f PC
Bs
for
each c
ate
gory
Mandatory Sharing
Mandatory Inquiry
Mandatory Sharing/Inquiry
•Regional comparison of Regulators mandating lenders to share information with the
PCBs (mandatory sharing) or to inquire PCBs before granting credit (mandatory inquiry)
•Trend: recent regulations / laws s tend to mandate sharing and inquiring…
•…WHY?
Source: Doing Business 2010
How is data sharing and inquiry regulated?
• Originally and before a specific law was enforced:
• All lenders members of the Credit Provider Association (CPA).
• Agreement: each lender should have shared data with all PCB associated with CPA
• Voluntary sharing model chosen (lenders not mandated)
• Problem:
• Not all lenders provided the data
• Not all data submitted (best customers not provided)
• Bad quality of database, ineffective PCB/s
• No reciprocity
• Government enforces National Credit Act (2005):
• All lenders forced to share data with all licensed credit bureaus
• In order to be licensed the credit bureau must be an associated member of the CPA
• Benefit of the approach:
• Full complete information and rapid creation of database
• More PCBs operational, competition, good quality
• The regulator (NCR) s the ultimate point for dispute resolution
• Most operational issues are handled through the CPA
Why mandate sharing /inquiry? The case of South Africa
•Voluntary sharing does not often work (lenders are not willing to share data)
. . . .1
. . . . 2
. . . . 3
International status of credit reporting
How can regulators help? International best practice
Contents
. . . . 4
Legal framework
A strategy for Iraq
…and today
TUNISIA
ALGERIA
MOROCCO
EGYPT SAUDI
ARABIA
YEMEN
OMAN
U.A.E
IRAN
IRAQ
KUWAIT
SYRIA
JORDAN
LEBANON
WEST
BANK &
GAZA
QATAR
LIBYA BAHRAIN
PCB & PCR DEVELOPMENT / REFURBISHMENT IN MENA (2010)
PCB PCR
AFGHANISTAN
PAKISTAN
• A phenomenal progress: most improved region in 2010
• 5 new PCBs (MO/ KSA/ BAH/ EG/ UAE / PAK)
• 4 new PCRs (YM / Palestine / LI / IRAN)
• 5 PCRs revamped (LEB/ SY/ OM / TN/ MO)
• Projects underway in Algeria, Jordan, Syria, Afghanistan, Yemen
• Legal framework revised in many jurisdictions (JD, UAE, AF, SA,
MO, BH, EG)
• IFC directly involved at different level in 15 countries
“Not rowing = being pulled back by the stream”
Economy Year
Ease of Doing
Business Rank
DOING BUSINESS - Getting Credit: 2009- 2010 comparison
Rank
Depth of credit information index
(0-6)
Public registry coverage (% of adults)
Private bureau coverage (% of adults)
Iraq 2009 .. .. 0 0 0
Iraq 2010 166 167 0 0 0
Iraq 2011 166 168 0 0 0
• Most countries in MENA have been reforming in 2010
• Iraq is losing positions in the Credit Reporting Index (ranking 168 from 167)
Therefore a crucial mission for CBI….
Develop a new credit registry for own and lender’s use
OBJECTIVE
The set-up of a new credit information sharing system integrated,
automated, complete (positive and negative information on all customers /
loans regardless of type and amount) built on international best practice to
satisfy a double need:
- INTERNAL - Improve CBI’s capacity to supervise the credit system
-EXTERNAL - Supply lenders with a first class tool to underwrite credit risk
An impelling reason to move quick?
Strengthen supervision!!!
• IFC’ s
recommendations
report to Central
Bank Afghanistan:
September 2008
Customers wait outside Kabul Bank, Kabul to empty their accounts as the bank
collapsed, Sep 2010. Photograph: S. Sabawoon
• The nemesis:
September 2010
• Borrowers’ consent allows data sharing
with any third parties (PCBs)
• As a consequence information sharing
between PCBs, regulated, and non-
regulated lenders as well could be
started without further legislation
• CBI law further establishes wide and
absolute power for CBI to issue
regulations ( art 4/3-5 - 40)
• A CBI’s regulation based on best
practice would suffice to establish PCBs
(e.g. Afghanistan, Egypt, Morocco)
• All to be confirmed by a legal opinion of a
local lawyer
BL 94
+
CBI Law
+
CONSENT
Banking Law No. 94 ? A shortcut to establish information sharing
• The Iraqi banking law clearly makes reference to the Jordanian Banking Law 28/2000
• Banking Law 94 + CBI Law allow establishment without further legislation/norms of:
Full PCB for all lenders
(with consent)
Partial PCB for banks only
(no consent)
PCR for CBI / banks
(no consent)
BL 94 +
CBI LAW +
(Consent)
Improving the legal framework? Some work would be necessary…
NORMS ISSUES
LICENSING Establish challenging requirements. Ad-hoc Authority to approve license
SUPERVISION Ad-hoc Authority to be empowered. Clear oversight role/responsibilities
BANK SECRECY Clear definition of non-applicability of bank secrecy to shared info
SHARING / INQUIRY Define if mandatory or voluntary, if one or both
CONSUMER’S CONSENT When? Prior, informed, specific consent. Care of lender. Digital or written
PERMISSIBLE DATA Clarify data allowed (credit info, utilities, etc) and not (e.g. sensitive)
PERMISSIBLE PURPOSE Clarify which purposes CB can be inquired for ( e.g. credit)
CONSUMER’S RIGHTS To see, dispute, correct data at any time. Free periodical report.
CONSUMER’S RELATIONS Ad–hoc structure. Internet accessibility, toll free number, digital signature, message.
SECURITY / SYSTEMS Define minimum operational requirements for system and security
HISTORICAL DATA Duration of historical database not lower ( max 3-5 years)
DATA OFF-SHORING Do not inhibit the possibility to export data
VIOLATIONS / PENALTIES Norms not to discourage sharing. Administrative penalties,
CODE OF CONDUCT Mandatory. Regulates operation between users/CBs. enforce reciprocity
CB OWNERSHIP CB ownership. lender’s participation is ok but possibly avoid shareholding majority
GOVERNANCE Establish clear rules to govern PCB and avoid conflict of interest
Phase I - short term Phase II – medium term Phase III – long term
•Establish Public Credit Registry (PCR)
•Involve regulated entities to start with
•Mandate sharing and inquiry
•Legal framework enabling (both for PCR and PCBs)
•Prepare CBI to supervision and licensing of PCBs
•Lenders’ awareness raising (introduce information sharing culture)
•From PCR to first PCB
•Inclusion of MFIs and other traditional financial companies
•Trigger introduction of advanced risk control methodologies (scoring)
•CBI’s shift to new role: supervisor of PCBs as well
•PCR utilization for supervision only (closed to inquires)
•Risk management training program for lenders
The right strategy for Iraq?
A phased approach….
•Full PCBs - inclusion of ALL lenders
•Break monopoly: 2° license
•Focus on V.A.S implementation
•Consumer financial education program
2012 - 2014
2015 -2017
2017-2019
Goals
• Is Iraq environment ready for a PCB or is this still premature?
• Would a phased approach, tailored to country’s needs, credit growth, / culture /
development be instead more advisable?
Time
Project timetable (tentative)
TASKS M
1
M
2
M
3
M
4
M
5
M
6
M
7
M
8
M
9
M
1
0
M
1
1
M
1
2
M
1
3
M
1
4
M
1
5
M
1
6
M
1
7
M
1
8
M
1
9
M
2
0
M
2
1
M
2
2
M
2
3
M
2
4
M
2
5
M
2
6
M
2
7
M
2
8
M
2
9
M
3
0
ASSESSMENT
1 Market assessment
2 Appraisal report preparation
3 Report presentation
IMPLEMENTATION START
4 Report review / strategy def
5 RFP preparation
6 Enabling legal framework
7 RFP publication
8 Proposals submission
9 Study tour and training
10 Proposals review / vendors
short listing
11 Site visits / vendor final
selection
12 Contract negotiations /
signing
13 Workshop for lenders
14 Implementation begins
Thank you!
Oscar Madeddu
Strategy highlights
1. Create an Iraq Credit Reporting Working Group (ICRWG) with representation of all industry sectors
2. Define a long term credit reporting national strategy tailored to the country/ credit industry/ CBI’s needs
3. Introduce strategy to the lending industry and get the buy-in
4. Implement a phased approach:
• PHASE I : establish state-of-the-art Public Credit Registry (PCR) based on best practice, operated by CBI
• PHASE II: shift to Private Credit Bureau (PCB) - first license - delegate credit reporting to private sector
• Close PCR to lenders’ inquiries maintain data collection for SPV purposes
5. Improve / amend legal framework to enable full credit reporting operations and consumer’s rights
6. Structure a modular financial education program
• Module I - short term - foster lenders’ awareness on credit reporting benefits/tools
• Module II – medium term - build financial literacy / social responsibility program for borrowers
7. Encourage the introduction of advanced credit risk management tools (scoring)
8. Support the introduction of National ID (definitive, unique, universal)
9. Enhance utilization of existing financial services by borrowers
10. Introduce simple credit products that foster financial utilization among lower segments of customers
11. Plan the establishment of a collateral registry
12. Reinforce supervision: implement a PCB’s audit procedure – create synergy with banking SPV
• The obsolescence of the credit industry has a cost:
• Loan market accessibility is limited to the privileged few
• Majority of potential good customer are neglected (consumers, SME, informal economy)
• Collateral is omnipresent though not at hand for consumers, Micro, SME
• Real competition is missing and a virtual loan market oligopoly existing
• A “virtual” price cartel (loan cost) is in place
• Bank’s skills in evaluating risk are minimal (and biased by collateral)
• Sound and prudent portfolio monitoring is not feasible
• NPL / over indebtedness is difficult to control and decrease
• Limits to product offer and innovation exist
• Individual risk-based interest rates cannot be offered, hence cost of credit cannot decrease
A a credit industry in need of transformation
Exactly the issues that a good credit reporting system could mend
•Underwriting cycle / process: conventional, expensive, time consuming, manual, paper based
•Credit decision: non-automated, subjective, centralized, crowded credit committees,
•Collateral is the most common requirement to protect risk regardless of customer, loan type, amount
•Application scoring: in its infancy, mostly absent or generic and internally built
•Behavioral scoring: absent
•Instant credit: absent
•Account management: not automated
•Collections: traditional recovery strategies/actions
•PCB: absent
•PCR: generally obsolete, paper based, unreliable, costly, inefficient
•Information provided: aggregated and insufficient for consumer / micro / SME assessment
•Public information: difficult to obtain, generally not available/not electronic format
•Major sources of information: banks’ oral references (unreliable)
•Borrowers’ consent: generally absent, or restricted to PCR, or not systematically taken
•Borrowers’ rights on information generally neglected not established by law, or not known
IRAQ: a traditional risk management environment
IRAQ: the status of CBI’s PCR
•In Syria there are no PCBs yet
•Level of advanced risk management culture among Syrian banks is very low
•Only source of information is the public Credit Registry of the Central Bank which…
•In June 2009 contained roughly 350,0000 records (22 million )
•Has a thresholds (SYP 300,000) that cuts off all small ticket loans (e.g. consumers, micro and SME)
•Thus covers 1.6% of the population
•Data returned is minimal and in an aggregated form (useless for consumers credit)
•Data is not current (data provided to lenders is at best 50 days old)
•Intervals between updates are quite long making data obsolete
•Upload /download are manual and require manual intervention from both the users and PCR
•The whole process is time/cost consuming labor intensive and allows for significant savings
•Banks compliance in supplying information is not full and not monitored
•No checks / penalties for violations concerning data contribution deadlines and quality of data supplied
•No standard controls on information quality / quantity are yet available
•On-line inquiry facility is not available
•Technology, system, network, not tailored and will not suffice to support a massive credit system growth
Syria is not an exception: rather the rule!
Recommendations (1)
1. Implement a
phased
state-of-the-art
Public Credit
Registry
PHASE I
• In this initial Phase I, based on the credit industry status, the development of a Public Credit Registry (PCR) internal, managed, operated by CBI, seems the most rational choice.
• Private Credit Bureau (PCB) set-up seems premature, as basic prerequisite (credit penetration, lenders awareness, legal framework, business case) are not adequate to lure international firms.
• However, the system should be built following best practice so to match the technical performance of a state-of-the-art PCB, facilitating the transition to the future Phase II (PCB establishment).
• This may happen in the medium term with a more solid credit market, a broader credit demand, improved consumer literacy and lenders’ skills, motivated international providers.
• The PCR to be a full-file information sharing system, the first such experiment in the country.
• It should be an effective and concrete answer to two main necessities of: 1. provide CBI with an efficient tool to conduct a reliable supervision of the credit system 2. provide lenders with an efficient, data base/underwriting tool and increase their risk m.ment skills • PCR to be seen as an important preparatory step enabling the environment, promoting
information sharing benefits/usage, luring international providers, improving supervision
• All available data, should be part of the initial database. Bank’s number of records, is risible, limited to business firms and not a sufficient critical mass to set-up a credit registry.
• MFI data as well, should be part of the initial sharing scheme, since this is the “kernel” of credit information. Therefore, no effort should be spared to include MFI since the onset of the project.
• Regulatory changes will be most probably required, and possibly a new bespoke law drafted/enforced, since it appears that a CBI regulation may not suffice to disseminate data.
Recommendations (2)
2. Implement a
phased
state-of-the-art
Private Credit
Bureau
PHASE II
• CBI, supported by technical assistance and by a dependable provider/maintenance contract,
should be able to implement and operate the registry in the starting PHASE I.
• However, CBI will have to consider that, as it generally happened in other developing markets,
the evolution of credit will require a more advanced management of the registry, specific and
specialist skills not proper to a Central Bank.
• Also, significant investments in technology and resources, will be required to keep the pace
with technology, with the evolution of the credit market, and for the development of ad-hoc value
added services (e.g. scoring, anti-fraud systems etc).
• Therefore after a initial period (3-4 years) CBI should consider: the licensing of Private Credit
Bureaus (PCB), and the delegation of info-sharing to the private industry.
• According to the quality of the work done in PHASE I, and to the existence of a friendly, specific
information sharing legal framework, the transition from public to private credit reporting can be
smooth and fast with international information providers keener to invest in the country.
Recommendations (3)
3. PCR
Implementation
guidelines
•Data contributed should comprise all loans (all credit products) possibly from MFIs as well on all typologies of customers.
•Data sharing should be mandatory, to kill any potential alibis / reluctance to share from lenders.
•Inquiry to the PCR should be mandatory as well, before granting credit, for all type of loans.
•Lenders to contribute full-file records (all positive/negative data on the loan).
•No amount threshold should be applied, all loans even the smallest amounts to be shared.
•Data to be distributed back to lenders under the form of full credit reports (containing all detailed data at account level ) not at aggregated level.
•Historical data (previous 3 - 5 years) should be contributed to the initial database by all lenders, (if data of a reliable quality, and lenders technically able to contribute such data).
• This will increase the wealth of information contained and initially allow an higher hit-rate).
•Lenders’ I/T system and capacity will have to be probably upgraded, and investments made.
•A new structure to respond to borrowers’ requests and deal with borrowers’ rights will have to be created inside CBI and inside each lender.
•A proper Code of Conduct should be drafted to regulate the sharing of information among users, with penalties, in case of misconduct or non-compliance by users, to be applied by CBI.
•CIB’s random on-site supervision missions to be run for crosschecking lenders’ compliance with sharing regulation (completeness / quality of information, deadlines, data security/, privacy etc.).
Recommendations (4)
4. Enable legal framework
• Many issues to consider: among them (follows list on next slide)
Recommendations (5)
5. Support
creation of
national ID
• It is of key importance, and not only for the implementation of an information sharing system, to
start discussions concerning the introduction of a National Identification Number that is unique,
definitive, electronic, and secure. CBI should sponsor discussions and proposals on this topic.
6. Introduce
project to
financial
entities
• CBI to officially introduce the project to the lending community. This will:
-give lenders a sense of implications, duties, responsibilities and level of involvement required from them.
-show DAB’s full endorsement / commitment to this project.
7. Encourage the
introduction
of advanced
credit risk
management
tools
• Information alone is not sufficient if not backed-up by parallel logical steps, like introduction of
statistical risk models (scoring) portfolio monitoring techniques, in a fully automated environment.
• Large volumes of small loan tickets differentiate consumer/M & SME from corporate credit.
Operational costs must be as low as possible. Decisions must be automated, immediate, non-
subjective. This is not the reality of today’s lending industry.
• CBI should foster the introduction of advanced risk management tools.
8. Foster
lenders’
awareness
and education
• Lenders must be aware of benefits introduced by credit reporting. While credit data need is felt by
lenders, new concepts, processes, changes that the PCR will introduce may not be as evident.
• Therefore, to facilitate the acceptance of the concept of a full-file PCR it is imperative that a
thorough awareness campaign - be undertaken (e.g. sponsored by CBI and ABA).
• Conferences, workshop, need to be organized and a training program on risk management.
Recommendations (6)
9. Build
financial
literacy
among
consumers
• Borrowers' right on own information will be enforced by law and responsibilities as well will arise.
• Rights and responsibilities unknown = no rights and no responsibilities.
• A joint literacy campaign (CBI, lenders, governmental bodies multilateral org. must be designed.
• Among the various activities suggested are:
• A media campaign (radio, TV, newspaper) illustrating the benefits for consumers, maybe cosponsored / co-
financed by the ABA and the lenders.
• Participation to workshops conferences
• Educational programs (e.g. university, corporations, high schools, etc.).
• Mailers explaining consumers’ rights and importance of building a good credit history.
• Pamphlets mailed through the lenders ordinary mail (e.g. monthly statement of account)
• Explanation of borrowers’ benefits rights on CBI, lenders, and other authorities’ Internet sites
• Public companies which have h salary agreements with banks should be utilized (e.g. leaflet distributed with
the monthly salary slips explaining consumers’ rights)
• Internet site dedicated to the Public Credit Registry, accessible to borrowers for requesting information and
their report should be developed (or it could be part of the existing site).
• A toll free telephone number should be implemented for the consumers that may call at no charge,
• A Micro & SME’ guide to managing credit and credit history could be developed and distributed.
• “Train the trainers” programs (with banks’ employees, and high school teachers)
• There are many examples of successful campaigns, that can be researched on the Internet:
www.globalfinancialeducation.org
www.financialeducation.citi.com
http://www.banamex.com/esp/grupo/saber_cuenta/index.html
https://www.annualcreditreport.com/cra/index.jsp/
http://www.finanzaspracticas.com/prehome/
Recommendations (miscellaneous)
10. Implement a bounced checks
file / database
•If feasible, and if good quality data is available, a database concerning all bounced checks and check issuing interdictions, is generally a useful complementary risk indicator.
•Though the build-up of a database with positive information will gradually decrease the importance of negative information, in an initial stage this information may reinforce credit assessment.
11. Build lenders’ local capacity
• Build credit risk management skills inside the banks, particularly among local resources. • Any possible training experiment is to be supported and DAB’s moral suasion and active
participation to be leveraged to achieve the goal of creating some kind of structural training.
12. Reinforce supervision
• The current tools and information used by CBI to supervise the system cannot be considered satisfactory to grant an effective and rigorous monitoring of the systemic credit risk.
• The establishment of a credit information system that can support DAB’s effort of supervising systemic credit exposure is a paramount objective to be achieved urgently.
13. Increase banking coverage
• The current territorial banks’ coverage is extremely low (ratio branch/population is roughly 1 branch: 123,000 people - also considering the 27 installed ATM).
• Alternative solutions to broaden financial services in less serviced provinces/ rural areas, exist: • Banking correspondent agent’s network or (“branchless banking”) - a system that dramatically
increased the availability of financial services (Peru, Brazil, now to be adopted in India, Angola, etc..)
• Also, in some countries (e.g. India) regulators force banks opening new branches in populated centers (e.g. Kabul) to open branches, in a proportional manner, in rural or less serviced areas.
Recommendations (miscellaneous)
14. Enhance utilization of existing financial services
•Credit reporting is a great opportunity to foster a new, more responsible credit culture among consumers/borrowers. New payment systems and credit facilities should be promoted.
•For instance, a consistent effort to associate by default a debit card to the checking account and to replace cash and check payments with plastic money could be made.
•A significant portion of the active employed population is represented by public employees.
•These could represent the pilot segment for a program aimed at the utilization of debit cards linked to the public employees’ salary. Examples in other countries (e.g. “conta salario” or salary account in Brazil) have shown extraordinary results.
•Shift from a cash oriented to an electronic payment system may save 0.5%-1% of GDP.
15. Foster creation of licensed real estate appraisers
• The introduction of credit reporting, will reduce the need for collateral. However guarantees will continue to be required for certain typologies of credit (e.g. mortgages).
• Unreliability and difficulty in ascertaining property has been quoted as a major obstacle to grant credit
• Thus it would be important to support the creation of an Association of Real Estate appraiser, responding to requirements specified by the banks/DAB and produce reliable real estate estimates, setting reliable, respected evaluation standards for the industry.
• This would benefit borrowers as well, since banks would be more confident about lending.
Recommendations (miscellaneous)
16. Introduce simple
credit products that
foster financial
utilization among
lower segments of
customers
• Simple and cheap financial products that are changing the credit utilization scenario, and
supporting the inclusion of customers previously considered non-bankable, have been
introduced in other markets.
• “Consigned Credit” is an example - In this case a personal loan is granted to a salaried
employee who opens an account (for instance a Salary Account) with a bank. The monthly
installment is deducted directly from the salary and paid by the employer to the bank.
Since risk for the bank is minimal rate of interest is lower, and eligibility higher.
Consigned credit is an effective, initial tool to introduce credit while reducing risk in a
developing market. It is frequently used in many countries (Morocco, Algeria, Brazil, etc.).
17. Rationalize ATM
networks
• Banks are setting proprietary ATM network not connected among them.
• This represents a high cost for the industry which, normally, is passed onto the final
customers, and inhibits larger and friendlier usage of plastic money.
• There are opportunities for improving the efficiency of the ATM network.
• Though competition is often adopted as a reason for separate networks, a shared / open
network would substantially reduce the cost, make debit cards more affordable for
customers and more diffused.
The Credit Reporting Working Group CREDIT REPORTING WORKING GROUP
Goals
• CRWG aims at supporting the establishment of an efficient federal credit reporting system in the Iraq
• Is an official forum to design and propose strategies concerning the expansion of the credit reporting industry
• Initiates dialogues with other industry sectors/government agencies that have relevance for credit reporting
• It is both the vehicle to promote innovation and a sounding board for legal/regulatory framework revision
• Creates task-forces to solve issues related to a sound development of credit reporting systems.
Tasks The CRWG:
• fosters cooperation between market participants and regulators in the credit reporting area.
• promotes common initiatives towards the implementation of the credit reporting systems infrastructure
• plays a key role in preparing strategic documents for the overall regional/national credit reporting systems.
• plays a key role in facilitating the sharing of information.
• plays a key role in approving priorities/schedules of the new projects to be launched and financed.
• is responsible for promoting knowledge, awareness education of credit reporting systems.
• promotes regional and international cooperation among all organizations active in credit reporting.
Methodology • The CRWG is led by the CBI that creates a Secretariat and chairs it.
• The CRWG gives representation to all the stakeholders of credit reporting systems.
• It may includes consumer protection agency, public data sources, governmental agencies, experts, other SPVs
• The CRWG appoints task-forces on credit reporting systems subjects.
• The task-forces prepare ad hoc reports on credit reporting issues to be circulated.
• Reports have no regulatory nature or power, but they become the key reference for the necessary reforms
• Task-forces report to the CRWG Secretariat.
Organization
al structure
• The CRWG should have a lean structure (secretariat, chairperson) and simple rules to govern its activities.
• Members of the CRWG are senior professionals with a true and effective understanding of credit risk / credit reporting
• They report directly to the top management of their respective institutions.
• The CRWG is also comprised by external experts, if available.
• The CRWG composition should be coherent with the goal of having useful / open-minded discussion in the meetings,
and allow an effective utilization of the task-forces.
• The CRWG might seek, if necessary, assistance from international entities / experts
Finally…
“Yes, we have put up a first class Private Credit Bureau ourselves !”
“Ok, then we’re agreed to repaint the server and change
the lubricant to the LAN then, but the resolution to
allow positive information is rejected.”
…find a good, well reputed technological partner,
Where is it easier to get credit and why
+ve & -ve info on loans
distributed
Borrowers have rights
to inspect their data
Info from multiple
sources
Historical credit info
All types of assets
used as collateral
Unified collateral
registry
Out of court
enforcement of rights
Suggested next steps
ACTION PLAN - PHASE I (PCR)
Activities
Responsibility
1 - Full assessment of the credit information sharing status in Iraq
- Recommendations report drafting for the CBI / authorities
- Presentations of recommendations / credit reporting strategy definition
-IFC
2 - Legal study (made by local lawyer supported by IFC)
- Objective: analysis of IFC suggested legal solution in the light of the
existing legislation that may impact credit information sharing
- Report preparation
- Drafting of best practice regulation or law
-IFC
-Local legal firm
3 - RFP - drafting and customization to CBI environment
- Official publication of RFP
- Proposals submitted by technical providers for PCR development
-IFC (drafting)
-CBI customization / publication
-4 - Selection of technical provider based on responses to RFP
- Short listing of two candidates
- Site visits
-CBI
-IFC (guidance and support )
5 - Credit reporting study tour (1 -2 foreign countries) with PCR/PCB experience
CBI delegation to visit other systems ( both PCB and PCR) guided by IFC
- Deep dive into utilization of data for Supervision and credit underwriting
-IFC (organization)
-CBI (participation)
6 - Credit Bureau workshop for lenders, policymakers, authorities
(IFC to organize a one day workshop with the presence of international
speakers regulators, bankers, PCBs from countries with information sharing
best practices). Venue to be decided.
-CBI (local logistics)
-IFC (organization)
…a few tips for the PCB stakeholders & regulators…
√ 11. Draft a regulation for PCB operations and enforce a Code of Conduct (including reciprocity principle)
√ 10. Build consumers’ financial literacy (importance of credit history, consequences of a bad history)
9. Foster lenders’ awareness on credit bureau power and benefits
√ 8. Encourage the introduction of advanced credit risk management tools
√ 7. Support the creation of a national I.D. system
√ √ 6. Urge lenders to introduce borrowers’ consent with immediate effect
√ 5. Prepare a standard consent clause to be integrated in the credit application
√ 4. Implement mandatory borrowers' consent PCB (borrowers’ protection and larger sharing possibility)
√ 3. Make sharing and inquiries to the PCB mandatory
√ 2. Implement international RFP to lure skilled providers to invest (at least 51%)
√ 1. Develop a complete PCR (all loans – no threshold)
REG STK TASKS
√ 12. Make sure consumers' rights are clearly spelled and known
√ 13. Envisage to close the Public Registry to lenders’ inquiries
√
√
√
√
√
Consent is a shortcut to start, but ad-hoc legislation in the
medium term is advisable to give solid norms, better
borrowers’ rights, protection, governance, and security rules.
4. If consent is sufficient, why
many countries adopt apposite
legislation or regulations?
NO - though a specific PCB law remains always the best
solution, different alternatives can be adopted.
YES - Power of consent is almost absolute. 72% of
countries report that banks share credit data with private
firms outside the industry, simply with borrower’s consent.
YES - Switzerland, with the most rigid secrecy has operated
a PCB for more than 40 years only with borrowers’ consent.
Saudi Arabia started in the same way, Taiwan, etc.
1. Because of Bank Secrecy
does credit reporting require
ad-hoc laws to be started?
2. Can borrowers’ consent to
share data overrule Bank
Secrecy?
3. If yes can a PCB be started
only with borrowers’ consent
without ad-hoc law?
Issue # 1 - Banks Secrecy: facts and fallacies!
• Consumers legal right to access data in 94% of countries
• Consumers’ legal right to view the list of their credit report
requestors in 60% of countries
• Usually PCBs grant better borrowers’ rights than PCRs
Borrowers’ rights, or… the weakest point
60%
94%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Law guarantees access to list of parties
requesting borrower information
Law guarantees that borrowers can inspect
their data
% o
f PC
Bs
resp
ondin
g
aff
irm
ati
vely
Rights of borrowers worldwide
Source: Doing Business 2010
BORROWERS’s RIGHT TO ACCESS AND CHALLENGE DATA (*)
1 COUNTRY PCB PCR
2 AFGHANISTAN YES YES
3 ALGERIA NO
4 DJIBOUTI NO
5 EGYPT YES NO
6 IRAN YES
7 IRAQ
8 JORDAN NO
9 KUWAIT NO
10 LEBANON YES
11 LIBYA n/a n/a
11 MOROCCO YES NO
12 OMAN NO
13 QATAR NO
14 SAUDI YES
15 SYRIA NO
16 TUNISIA YES
17 UAE YES NO
18 WB&G NO
19 YEMEN YES
• In MENA most PCBs grant rights to access / challenge data
• Less so PCRs: only 5 out of 19 PCR have such legislation
• Borrowers’ consent not everywhere, often limited to
sharing with PCRs only, or not systematically taken.
(*)Doing Business database 2010)
66
•Credit in Bolivia (1999-2004) - Banks huge decrease (credit mostly with collateral)
- Microcredit rocketed (without collateral)
BANKS ASOFIN
116.289142.572
167.426
213.778
270.399
184.295208.858
233.689257.902
318.361
414.815
84.836
0
50.000
100.000
150.000
200.000
250.000
300.000
350.000
400.000
450.000
31/12/99 31/12/00 31/12/01 31/12/02 31/12/03 31/12/04
DEPOSITOS
CARTERA
MICROFINANCE
11,58
8,30
5,62
6,69
9,41
11,58
6,91
4,55
11,55
3,6
2,97
16,25
14,50
17,9417,14
6,56
0,00
3,00
6,00
9,00
12,00
15,00
18,00
Dic-99 Dic-00 Dic-01 Dic-02 Dic-03 Dic-04
ASOFIN(2) ASOFIN(3) BANCA(1)
1999-2004 Non Performing Loans in Bolivia (by lending sector)
BANKS
MICROCREDIT
Problem # 2 – Collateral
a real problem or an alibi ?
Consumers interest rates in Minas Gerais ( 2001 - 2006)
0%
100%
200%
300%
400%
500%
% in
terest
rate
Credit cards 235% 240% 237% 232% 258% 258%
Financial inst. 333% 448% 335% 274% 378% 452%
2001 2002 2003 2004 2005 2006
• The Brazilian Example:
• Consumer credit interest rates are sky high
• For example in 2007 (*)
• Personal loans: 260%
• Credit cards: 488%
• Lowest rate during 2001-2007: 232%
• Even as of July 2011 rate was 238% (**)
• Only negative data is shared with PCBs (***)
• Therefore rates are not individually risk based
(*) Including fees + late interest (ANUCC’s data)
(**) Source Fecomercio (Chambers of Commerce).Credit cards interest rates in Sao Paulo’s financial hub averaged 238% in July 2011. Carrying a balance of $1,000 for a year results in a $3,380 tab. (http://hosted.ap.org/dynamic/stories/L/LT_BRAZIL_CREDIT_CRUNCH?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2011-07-11-16-11-30) (July 2011)
(***) New law under approval allows positive sharing
Retail credit profitability can be MUCH HIGHER...
• 4 countries hit by huge MFI crisis from 2007 - 2008 (Pakistan, Morocco, Bosnia H. and Nicaragua)
• Huge rise of volumes, cross-lending and over-indebtedness
• PAR >30 dd rocketed ( in some specific MFIs over 25%)
• No country had yet effective PCBs for MFI.
• Only Nicaragua had one but separate (regulated / non- reg.)
• Shared data is key to increase lenders’ business, reduce NPL, control over indebtedness
• Data is fundamental! And Completeness of database as well!
• Not advisable to establish separate PCBs or vertical silos that do not “talk” to each other
• High risk in assessing credit without having clients’ complete risk profile
Source: CGAP “Growth and Vulnerabilities in Microfinance” Chen, Rasmussen, Reille – Feb 2010
Problem # 3 – NPL and PAR Giving credit it’s easy… but responsible credit…
2. Accounts information
Type of Credit
Type of account (installment)
Bank
Account number
Date opened
Loan amount
Tenures
Score
Collateral
Type of applicant
Other
1. Personal information
ID
Name
Address
Telephone
Mobile
Employment
D.O.B / P.O.B
Father /mother’s name
Other
3. Payment performance
information
Account status ( current)
Balance
Payment history ( 12 -24 m)
Current arrears
Historical arrears
Time in arrears
Worst arrears
Date closed
Score
Summary of accounts
Other
4. Public information, collections unpaid checks,
financial courts judgments, other…
All negative and positive credit information is shared by all lending sectors
Public information, utilities, voters roll, mobile telephones, etc. are part of the equation
All this information merged, cleaned, processed forms a credit report
Let’s change hat… and start reading the report
5. Other information built from the shared data, like:,
previous searches, bureau scores, etc.
population coverageMENA? Still very low
Source: Doing Business 2011
Lack of private
credit reporting
infrastructure
zero coverage
•A large number of
countries with <1% or zero
coverage
• Jordan, Algeria, Yemen,
Djibouti, Quatar, Iraq,
Syria are countries with
<1% or 0% private and
public coverage
Reformers: Saudi Arabia jumped 15 spots, Iran 24 from last year (DB09)
MENA Country Rankings (DB11)
Source: Doing Business 2011
“GETTING CREDIT” country rankings (out of 183)
•In 2006 in Morocco credit was limited, collateralized and selective
•In spite of this, extremely high rejection rates
•Nevertheless an outrageous bad debt rate, particularly for consumer credit
•The most affluent customers represented the poorest risk
•While the “best” customers (medium class/income) were penalized
How can regulators help: Morocco
the problem
•A credit system to be reinvented:
In addition 3 separate PCB projects!!!!
Morocco: status as of June 2012
• Some figures ( as of June 2011):
• 38 users inquire
• N of contrats in database: 5,550,964 :
• N.of active cntracts 4,122,043
• Outstanding Volume: MAD 523 Bn
• Individuals: 3,277,087
• Companies: 107,694
• Started CPU- to CPU (30%)
• Next steps: • Telcos inclusion
• Second license in 2012
43%
35%
22%
BANQUES
S.FINANCEMENT
MICROCREDIT
• MFIs users: • 11 users (90% of the market)
• N. of contracts contributed: 1, 207,559
• N.of clients contributed: 1,056,779
• Outstanding volume: MAD 3,60 BN
• Credit report price: between $ 0.20 –
0.40 according to size
12 587 17 894
27 823 29 652
32 835 36 922
32 043 27 721
31 995
36 176 34 383
37 110 36 892
40 523
59 667
66 551
73 131
-
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
volume mensuel
About consent
• Borrowers or Subjects of information should be aware that PCB collect data about them
• Consent allow borrowers full control over the own data and if sharing is convenient or not
• The consent model generally: • rationalizes the confidentiality concerns of the subject of information
• gives him/her complete information about the usage, storage, utilization of data
• generally supersedes the bank secrecy
• permits lenders to share customer information with third parties
• Consent: • must be informed, full, open, written ( or electronic where possible)
• generally included in the credit application, near the signature
• should require active engagement of the borrower if electronic
• is given for a specific, limited purpose (e.g. credit granting)
• collection, veracity, compliance, storage is responsibility of the lender
• In some countries consent is requested for both sharing data with and inquiring to a PCBs
• In other countries where sharing is mandatory consent is required for inquiries.
• In other countries is neither requested for sharing nor for inquiries ( e.g. notification)
• Generally, a standard Code of Conduct accompanies the consent utilization.
• Consent may take different forms
• Basically the most common options are: • opt-in clause: explicit will to share information expressed by the customer;
• opt-out clause: tacit, undeclared approval, valid unless the customer voices his/her refusal;
• separate clause: generally on a separate document
Consent clause
•Some examples of consent clause are: “…I/we hereby authorize and consent to the Bank receiving and exchanging any
financial information which it may have in its possession about me/us with any
financial institutions, Credit Bureau or other person or Corporation with whom I/we
may have or propose to have financial dealings from time to time...”
“…I consent to (lenders’ name) and its agents obtaining a report of my credit
records and using the information from that report in determining whether to grant a
loan to me. I understand that I will be notified in writing of the results of the credit
check with respect to my loan application…”
4. The “...written consent of the client subject-of-
information” would allows information sharing: • with third parties agencies approved by CBI (PCBs)
• entities non-regulated by CBI
5. As a consequence information sharing between
regulated, non-regulated lenders, and PCBs
could also be started without further legislation
6. The powers given by BL 94 to CBI also allow
to avoid the approval of new legislation
7. A CBI’s regulation would suffice to improve the
current legal framework based on best practice
BL 94
+
CBI Law
+
CONSENT
Banking Law No. 94 the shortcut to establish information sharing
PCB for all entities
(with consent)
PCB for banks
(no consent)
PCR for CBI / banks
(no consent)
Prima-facie, according to existing legislation establishment of credit reporting in Iraq
could happen as a simple consequence of the application of the BL n.94, and CBI Law
1. A PCR operated by CBI could be immediately established without further legislation / norms to:
• Allow CBI a punctual supervision of the systemic risk and lending industry
• Support reliable and responsible lenders’ underwriting
2. A partial PCB among banks could be established
Example: financial education / borrowers’ rights
Cost requirements to inspect data
Source: Doing Business 2011, total # of responses 81
The frequent option:
• Once a year the report
can be requested by
borrowers to the PCB (or
lender, or both) for free.
• More then once on
payable basis
Source: CRIF .
•European based PCB - operations/clients in Europe, Asia, Africa , America (1,200 staffs)
•Also decision system / scoring provider
The figures of an operating PCB
•Operation considered: Italy (57 Mil people)
• Italian database size •Over 35 Mil borrowers
•Over 60 Mil accounts
• Over1 Billion records
•1,468 megabytes
•Inquiry volumes (2009):
•Over 22 Mil on-line inquiries
•Over 50 Mil batch inquiries
•Over 600 Mil records batch updates
•0ver 330,000 reports requested by borrowers
•Of which nearly 3% required correction
•And 0.85% disputed
• Performance
• 95% inquiries answered in less than 2 seconds
•System availability 24 X 7 X 365
•99% performance along the year.
My professional history
•Italian – 55 years old
•With IFC since 2004
•Currently based in Rabat, previous 4 years in Brazil
•Position: Credit Bureau and Retail Risk Management Advisor
•Current responsibility: fostering credit reporting in
• the MENA region
• the French/ Portuguese speaking countries in Africa
•29 + years of career in the “credit industry” up to CEO position
•Directly - banks and fin. companies (Deutsche Bank; U.C.B.; Unicredit, Fiat Finance India)
•Indirectly - scoring, credit bureaus dev., risk management (Experian, TransUnion, FICO)
•Residential / working experience: India - USA - France - Brazil - Morocco and Italy
In how many countries do PCBs collect data from utility providers?
Source: Doing Business 2010
Afghanistan
Argentina
Australia
Bosnia and Herzegovina
Botswana
Brazil
Bulgaria
Canada
Chile
Colombia
Costa Rica
Denmark
Dominican Republic
Estonia
Fiji
Germany
Guatemala
Jordan
Kenya
Lithuania
Malaysia
Mexico
Namibia
New Zealand
Nicaragua
Panama
Puerto Rico
South Africa
Swaziland
Trinidad and Tobago
United Kingdom
Uruguay
Who owns and operates PCBs?
Source: Doing Business 2010
• Best PCBs are 100% owned by a fistful
of international technical providers
(e.g CRIF, Compuscan, D &B, Experian,
Transunion , etc.)
• A share of PCBs is owned by technical
providers + financial institutions together
• Another less frequent and less powerful
model is ownership by industry
associations
• Government ownership of PCBs is rare
and not advisable (Armenia, Sri Lanka)
Private
owned by banks/FIs
/other credit providers,
36%Private
not-owned by banks/Fis
/other credit providers,
51%
Industry Associations/Chambers of
Commerce, 6%
Government owned, 6%
International status: PCBs and PCRs
8
3
• Background:
• Until 2005 Nicaragua had neither a PCB nor a specific legal framework
• Banking Supervisor (SIBOIF) established PCB with a simple regulation rather than a law
• This solution is quicker and hassle free but has same contents and same legal effect of a law
• Sharing of positive and negative information is allowed
• Regulated and non-regulated entities can share data directly with private CBs
• Guidelines and contents:
• Challenging licensing requirements
• Borrowers’ consent is required to share data and inquiry the CBs
• Data sharing between lenders and PCBs is voluntary
• Information must be kept for 5 years
• The SIBOIF may request at any moment whatever information from any CBs
• Consumer’s rights to see (free once a year) dispute, correct own information
• Penalties: fines, temporary suspension of license, license withdrawal
•Not necessarily a law is required to start PCBs: a Central Bank regulation may be sufficient
The shortcut: Central bank regulation Example: Nicaragua
3
1
2
3 1. Collect at least monthly all credit data
(positive and negative) on all consumer
credit, micro, SME loans from all lenders
• generally regulated by specific legislation (though not always) • licensed and/or supervised by central authorities (often the Central Bank) • operated by leading international reputed providers or good local ventures • required to comply with data privacy norms and borrower’s rights to access / correct data
2. Process the data, include other data (e.g.
public) and add value to the data
through technology and experience
3. Sell the processed information back to
the lenders (users) as credit reports
and other services (e.g. bureau scores)
Private Credit Bureaus: commercial, private, for-profit, organizations that are:
What is a Private Credit Bureau?
The positive impact of Banking Law No. 94 on on information sharing
1. The Iraqi banking law clearly makes reference to the Jordanian Banking Law 28/2000The CBI law further
establishes wide and absolute power for CBI to issue any regulations ( art 4/3-5 and 40)
2. It fosters credit reporting in a clear, unambiguous manner • Banks can be engaged in the activity of credit reference services ( Art 27.J)
• Banks must store complete account/demographic information for 7 years (Art. 38)
• Banks can create PCBs and share data (among them only) in order to make prudent decisions (Art 39)
• CBI can define procedures and rules, therefore embodying the role of supervisor of PCBs as well (Art 39)
• The permissible purpose is restricted to credit - banks having relations with clients only ( Art 39)
3. Art. 49 unambiguously establishes / enforces bank secrecy by quoting that:
4. However it opens the possibility to share data through consumers’ consent (art 49):
- “…banks shall be prohibited without the written approval of the relevant customer…”
5. Furthermore consent is not required ( Art 51) • “…provisions of Art. 49-50 shall not apply to… i) information an documents requested by the CBI in connection with its
duties under this law or the CBI Law… ii) the disclosure of information on customers’ indebtedness for determining the
soundness of granting credit, iii) Bad checks, iii) iv) any other transaction deemed necessary by the CBI due to its
relevance to the soundness of bankis, CBI, or any other agencies approved by CBI ( e.g. PCB)…“
6. Also, the B.L. (art 41) gives CBI the authority to establish a PCR
7. And mandates banks to supply data (reinforced by Art 41 of the CBI Law). • “… each bank shall furnish the CBI…with information concerning… banking facilities, credit plans, liabilities, granted to
bank’s clients…” . No consent required, and no obstacles to the creation of a PCR
Credit reporting in MENA 5 years ago…
TUNISIA
ALGERIA
MOROCCO
EGYPT SAUDI
ARABIA
REP . OF
YEMEN
OMAN
U.A.E
ISLAMIC
REP . OF
IRAN
IRAQ
KUW AIT
SYRIA
.
JORDAN
LEBANON
West Bank
& Gaza
QATAR
LIBY A BAHRAIN
PRIVATE CREDIT BUREAUS IN MENA ( 2005)
PCB EXISTING IN PROCESS OF DEVELOPING NOT EXISTING
AFGHANISTAN
PAKISTAN
Utilities data is key though not always allowed Why is this data so important?
Collateral Credit Bureau
???
• Credit and the Catch-22 situation: “Credit must be obtained to build a credit history but… without
a credit history no credit can be obtained!”
2. THE PROJECT:
• Project started by the local administration of region in the South of Italy
• Objective: increase credit access for non bankable applicants and/or without a credit history (
“thin file or no file).
• The Water Company (public utility) has given historical data on water bills payments
• Sample window: data with bills payments from 2006 to 2008
• Population analyzed : 154,000 payers - 112,000 with a credit history in the Private Credit Bureau
- 42,000 without credit history in the Private Credit Bureau
1. THE CHALLENGE:
• can a good payment track on water
(and utilities) bills be considered as
good as credit data to build a creditc
history and scores for “unbankable”,
informal economy, MSME, and individual
customers without credit history?
Case Study – the power of public utilities data
Water-score: Italy 2010
• The answer is yes, the scoring model developed on water payment data allows a robust
risk assessment of those clients that pay their water bills regularly and punctually
The results
SCORE Media
% en
cl asse Classe
Bad Rate
odds
514.932 <= -- <=938.917 881.067 7.15% 1 12.27%
938 .917 < -- <=970.647 959.753 9.69% 2 4.15%
970.647 < -- <=977.784 976.107 16.10% 3 2.47%
977.784 < -- <=982.541 981.626 19.02% 4 1.78%
982.541 < -- <=985.418 984.718 10.26% 5 1.50%
985.418 < -- <=986.880 986.838 30.92% 6 1.11%
986.880 < -- <=990.488 988.987 6.85% 7 0.48%
In particular,
among the 42,000
with no credit
history, roughly
37,000 customers
(83% of them) can
become eligible
for credit, with a
good score
• If appropriately fine tuned the model can easily be extended to other utilities / or municipalities
• In conclusion, a potential 'good' customer that finds it difficult to access credit through
traditional channels and traditional information, could vastly benefit from the utilization of
alternative data
91
How can regulators help: Palestine the background
STAGES ACTION
1995 – No information sharing in PMA Online Real Time System 24/7
1996 - Create credit risk unit inside PMA
Negative and positive data (collected &
distributed)
2006 - Start development Credit registry
Zero based threshold
2008 - Launch on-line public registry
All types of credits
2009 - Microfinance institutions connected to
the system
Guarantors included
2010 - Bounced checks added on-line
All types of collateral
2010 - Credit Bureau Scores launched
Compliance with Basel and PMA requirements