Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit

Guarantees for Small and Medium Enterprises

Chapter 4 Credit Bureau Creation and Development in the Philippines

4.1. Credit Bureau and the Credit Information Database Credit bureaus are essential to the development of the financial system. Credit bureaus are defined as an institution that collects information from creditors and available public sources on a borrower’s credit history (IFC, 2006). Although private credit bureaus have been in existence in the Philippines, there is still the absence of a centralized credit information system that deters the further development of the country’s financial system. This lack of a comprehensive and specific database makes individual and corporate credit inaccessible and costly. It also puts financial institutions to excessive and unnecessary credit risks with this deficiency of credit information. On the 31st of October 2008, the Credit Information System Act (CISA) of 2008 was signed into law. Also known as Republic Act (RA) No. 9510, CISA is part of the Bangko Sentral ng Pilipinas’ (BSP) aim of promoting greater adherence to the enhanced standards on transparency, accountability and fairness (BSP, 2008). Under the CISA, the credit information system that will be established will directly focus on the need for reliable credit information concerning the credit status and reputation of borrowers. However, it is very important to note that there is an existing credit information system in the Philippines, though fragmented, unorganized, and seemingly underdeveloped. This crucial irony of sorts brings forth the systemic reality of the Philippine financial system and its pitch to become mature and developed. The structure of this chapter initially flows from the analysis of the legal and regulatory framework of existing credit bureaus and other credit-related agencies and how these credit entities would hypothetically fare under the CISA. This will be undertaken through the flow of credit information framework, both without CISA and under CISA. Some relevant implications will be discussed on the creation of the Central Credit Information Corporation (CCIC) under CISA and its eventualities on existing credit bureaus and other credit-related agencies. The legal and regulatory framework of CISA itself will be discussed and analyzed, and the evaluation of the CISA, as a good enabling legislation for credit bureau and credit information database creation and development, will be presented. The infrastructure needed for a successful implementation of the CISA will be tackled next and how current technology is implemented for building an efficient credit information database including model credit bureaus and international best practices to boost future steps. Finally, the results of a mini-survey will be presented on the current perception and views on credit bureaus and credit information database by banks and other credit-related institutions in the Philippine financial system. Conclusion and some recommendations will be presented regarding credit bureau creation and development in the Philippines at the end.

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Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

4.1.1. Legal and Regulatory Framework of Existing Credit Bureaus and Other Credit- Related Agencies in the Philippines Although legal framework and regulations vary around the world for credit reporting, Miller and Mylenko (n.d.) mentions that there are several laws in a country which would be important to credit bureaus and their existence. Among them are the following: 1) regulations concerning bank secrecy; 2) data protection law; 3) consumer protection; 4) fair credit granting and consumer credit regulations; and, 5) provisions regarding privacy and personal or corporate secret in existing laws. Moreover, it is important to look at the scope of the existing laws because it spells the success of particular laws pertaining to the creation of credit bureaus and the encouragement of proper credit reporting. To see the current set of regulations and laws that govern the credit bureaus in the Philippines, Table 1 outlines each area cited by Miller and Mylenko (n.d.) for assessment of the legal and regulatory frameworks. Each area will set out each existing Philippine law that has been enacted and implemented so far.

Table 4.1: Legal Framework Afforded to Existing Credit Bureaus and Other Credit-Related Agencies in the Philippines Legal Framework for Credit Reporting Existing Philippine Laws 1) Regulations Concerning Bank Secrecy There are existing Philippine laws that govern bank secrecy which literature says has greatly impeded the effectiveness of credit bureaus and other credit-related entities all over the world. In the Philippines, these are the most important ones that need to be cited: a. Presidential Decree (P.D.) No. 1941 or the P.D. “Recognizing and Supporting the Credit Information Bureau, Inc.” – This particular P.D. was created under the regime of the former President Ferdinand E. Marcos back in 1984. This decree has been put out to support the Credit Information Exchange System initiated under the Letter of Instructions No. 1107 ordering the then Central Bank to put up the said system. However, President Marcos had to initiate P.D. No. 1941 in order to fortify the mandate of the Credit Information Bureau, Inc. (CIBI). P.D. No. 1941 states that “all banking and other financial institutions may, at its discretion, make available to the CIBI information relative to the funds or properties in the custody of said institutions,…and any other data or information” for CIBI to carry out its function as “a competent
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and suitable credit bureau” to implement the national policy of the promotion of the development and maintenance of rational and efficient credit processes in the Philippine financial system. Almost twenty-five (25) years later, CIBI only caters to less than ten thousand (10,000) clients and customers. The discretionary nature of its ability to get necessary and relevant credit information to be a competent and suitable credit bureau has played a huge role in its stunted growth. Thus, the scope of the P.D. was limited, and spelled its failure to include numerous institutions participating in credit reporting. Furthermore, the enactment of the succeeding laws on secrecy impeded its potential and necessity. b. The General Banking Law of 2000 or Republic Act (R.A.) No. 8791 – This law covers other forms of investments in the financial system. Section 55, prohibits, “unless there is an order of a court of competent jurisdiction, the disclosure by any director, official, employee or agent of any bank any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations or any other entity” (Primer on the Bank Secrecy Law, n.d.). This particular portion of the law, thus, cautions banks to disclose any information relative to funds or assets under its care that belongs to private entities. In turn, this has limited the activities of credit bureaus and other credit-related firms in the Philippines. But, it would be important to point out that an existing credit bureau, the BAP-Credit Bureau, Inc., with its major source of credit information are its member banks. It has undue advantage with its main clients as its own members in the association. This allows the said credit bureau assure the secrecy of credit information with its affiliation with almost all the banks in the Philippine financial system. However, the said credit bureau is not biased toward SMEs because its database does not have a separate classification for such firms. This
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actually accentuates the bias against SMEs of major banks in the Philippines. c. The Law on Secrecy of Bank Deposits or R.A. No. 1405 – This particular law “declares that all types of deposits in banking institutions including investments in bonds issued by the Philippine government and its political subdivisions and instrumentalities are considered of absolutely confidential nature” (Philippine Deposit Insurance Corporation, n.d.). Deposits may not be examined by any person, government official, bureau or office. Any violation will be meted with certain penalties accorded under the said Law. This law augments the difficulty of existing credit bureaus and other credit-related agencies in accessing important and essential credit information for the success of their operations as the conduit of reliable and competent credit information. d. The Credit Information System Act (CISA) of 2008 – This law has been recently signed and is waiting for the set of implementing rules and guidelines. An important part of this law is that it amends the secrecy laws outlined above in order to compel banks, financial institutions, and other credit-related agencies to centralize credit information. This law will be detailed in the succeeding discussions. 2) Data Protection Laws Data protection laws allow information exchange among all types of creditors (Miller and Mylenko, n.d.). At the moment, there are no Philippine data protection laws enacted and signed into law. Under the CISA, banks have been assured that there would be little risk that credit information sharing would give undue advantage to their competitors. However, there is no particular law currently that addresses the need to protect data in the Philippines. There is a pending bill in the Senate of the Philippines (Senate Bill No. 1371) entitled “Personal Data Protection Act of 2007” which

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aims to prohibit the “misappropriation of personal information in database and collections of information, providing a mechanism for protection against theft, and for other purposes”. Thus, personal data protection in the Philippines, as of today, is left to consumers themselves and to the ones managing and controlling personal data bases. 3) Consumer Protection Laws There is R.A. No. 7394 or “The Consumer Act of the Philippines of 1991” that governs the consumer rights of persons in the Philippines. Specifically, the law delves into “Consumer Credit Transaction” which deals with the development of “fair and economically sound consumer credit practices”. The goal of this chapter in the said law is “to protect the consumer from lack of awareness of the true cost of credit to the user”. The State, according to the law, will assure the full disclosure of the cost of credit. There is no other law, except CISA so far, specifically protects the customers/consumers in data base collection and management especially dealing with credit bureaus and other creditrelated agencies in the Philippines.

4) Fair Credit Granting and Consumer Credit There are is no specific law governing fair credit Regulations granting in the Philippines, except for what already has been discussed. Consumer credit regulations are explicit in the Consumer Act of the Philippines. But, as mentioned earlier, there are no particular references to credit bureau regulation and development. 5) Provisions on Privacy and Personal or Privacy and personal or corporate secrecy would Corporate Secrets again return to existing bank secrecy laws which have impeded the development of credit bureaus and other credit-related agencies in the Philippines. CISA, however, amends secrecy laws to compel banks to centralize credit information collection. It seems that credit bureaus and other existing credit-related agencies are indeed impeded by secrecy laws and the lack of other regulations that will manage and grow the operations of the said institutions. P.D. No. 1941 did not deliver what it was supposed to because of political and economic
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upheavals during its inception in early 1980s. Furthermore, its supported institution, the CIBI did not become the “competent and suitable credit bureau” it was intended to be with its weak appeal to the credit and financial system as a whole. On the other hand, the set-up of the BAP-Credit Bureau Inc. showed the strength of an association of financial institutions servicing and protecting itself from credit risks in the financial system. With existing banking secrecy laws, it has managed to create a better database than other existing credit-related agencies that have long existed before. Finally, Dun & Bradstreet Philippines, Inc. seems to be a fairly good model for a small private credit-related agency. In terms of regulation, there is no specific government agency that is in charge of credit bureaus and the credit information system in the Philippines. The Securities and Exchange Commission (SEC), as the regulator of all businesses, is the default government agency in control. However, it must be pointed out that with CIBI, prior to 1997, was under the helm of BSP. BAP-Credit Bureau, Inc., on the other hand, is indirectly under the BSP since it is an association of the banks regulated by the BSP. In general, there is no specific public entity that regulates the existing credit bureaus and other credit-related agencies in the Philippines. On the topic of credit risk management, Basel 2, in the Philippines, under its new capital adequacy standards will allow banks to “appropriately disclose pertinent information” among others that will hopefully contribute to the greater resiliency of the Philippine banking system increasing its credit and lending activities in the long-run (Tetangco, 2007). This particular assumption is with or without the CISA. Therefore, this further strengthens the resolve of the financial system altogether as concerned and relevant government agencies, with the Securities and Exchange Commission (SEC) as the lead, come up with the implementing rules and regulations of the CISA in the next coming months. Nevertheless, this does not assure the further creation and development of existing credit bureaus and other credit-related agencies.

4.1.2. The Credit Information Systems Act (CISA) of 2008 The CISA of 2008 is part of the BSP’s objective of the promotion of greater adherence to enhanced standards of transparency, accountability and fairness. It was signed into law by President Gloria Macapagal-Arroyo last October 2008 after four years that the country has been greatly involved in the creation and passage of this said law. To facilitate the understanding of the current credit information system in the Philippines, the flow of credit information will be the main framework of analysis. This means that the existing system and its regulation and legal framework will be described through a diagram before CISA and another diagram under the CISA. Figure 4.1 shows the flow of credit information under the existing credit information system in the Philippines. Following the flow of credit data, it all starts with the main sources of credit information from both borrowers (individuals and firms) and other borrowers (transactors/customers). It should be noted that SMEs are not clearly classified in the sources of credit data.

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Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

Figure 4.1: The Flow of Credit Information Before CISA
Banks and Other Government Lending Institutions

Sources of Credit Information 1) Borrowers 2) Other Borrowers (Transactors/Customers)

Other Entities that Provide Credit (such as cooperatives, microfinance institutions, etc.)

Private credit bureaus and other credit-related agencies (BAP-CBI, CIBI, Dun & Bradstreet Philippines, etc.)

Other Sources of Useful Credit Information (such as utility companies)

Credit information, both positive and negative, then goes to banks and/or other government lending institutions, other entities that provide credit like cooperatives, micro-finance institutions (although this is not clearly pointed out by the other private credit-related agencies), and other sources of useful credit information. Credit data then proceeds to the existing private credit bureaus and other credit-related firms that revert back the necessary credit information to banks and other credit-providing institutions in the financial system. Figure 4.2: The Flow of Credit Information Under CISA
Borrower Identification System Banks and Other Government Lending Institutions

Sources of Credit Information 1) Borrowers 2) Other Borrowers (Transactors/Customers)

Other Entities that Provide Credit (such as cooperatives, microfinance institutions, etc.)

Central Credit Information Corporation

Other Sources of Useful Credit Information (such as utility companies)

Accessing Entities (such as banks, government lending institutions, etc. to include private credit bureaus and private credit-rating agencies)

The CISA was signed into law because the State believes that the absence of a centralized information system is a huge restriction to the development of the country’s young yet small financial system. The main argument for the CISA is that the “lack of a comprehensive and detailed database
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Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

makes borrowing costly and inaccessible to small borrowers, and exposes the financial institutions to excessive and unnecessary risks. Figure 4.2 illustrates the flow of credit information under the CISA. Two (2) main sources of credit information will be the: 1) borrowers; and, 2) other transactors and customers of credit services. Credit information, both positive and negative, will then be coursed through three (3) entities namely: 1) banks and government lending institutions; 2) other entities that provide credit such as cooperatives, micro-finance institutions and other similar institutions; and, 3) other sources of useful credit information such as utility firms. All of the credit information will be required to be submitted to the CCIC which will employ a borrower identification system that will facilitate the consolidation of credit information on a certain borrower. The CCIC will gather both positive and negative information on a borrower’s creditworthiness. The borrowers will therefore have the opportunity and venue to dispute what they may deem as inaccurate credit information about them (as shown by line from the “sources of credit information” to the “Central Credit Information Corporation). Therefore, the flow of credit information, in terms of quality and accuracy, will be Once credit information is collected and processed through the CCIC, it will distribute through accessing entities, who can be likewise the primary providers of credit information such as banks, government lending institutions, etc. The processed information may likewise be provided to special accessing entities, which include the existing private credit bureaus and private credit-rating agencies. Under this ideal set-up where the flow of credit information starts from all types of borrowers, which may include SMEs, these SMEs would therefore not be alienated from the main financial system in terms of the ease of access to necessary credit for expansion and, therefore, growth of these particular firms. If institutions participating in credit reporting would be encouraged to be allencompassing, the success of credit management and ease of credit will be easily attained. The scope of the law should include all institutions (as many as possible) involved in beefing up the credit information system under the CISA.

4.1.3. Legal and Regulatory Framework Implications of the CISA Bank secrecy provisions in existing laws are said to be often the major impediments to the development of a credit bureau. The CISA, in effect, amends Philippine secrecy laws, such as RA No. 1405 (Law on the Secrecy of Bank Deposits), RA No. 6426 (The Foreign Currency Deposit Act), and RA No. 8791 (The General Banking Law of 2000). Section 4 of the CISA seeks to establish the “Credit Information System” (CIS). The CIS will be established under the Central Credit Information Corporation (CCIC), sixty percent (60%) owned by the National Government (with the Securities and Exchange Commission as the lead government institution) with the remaining forty percent (40%) to be owned and held by qualified investors including industry association of banks, quasi-banks, and other credit-related associations. The main objective of this theme in the legislation is to enable credit reporting balance the ability of institutions to exchange credit information in the normal course of business while at the same time protecting the rights to privacy. IFC (2006) cited two general approaches to credit reporting: 1) use
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Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

of broad data protection laws; and, 2) use of specific credit bureau or credit reporting laws. European countries have adopted the former, while a lot of emerging markets have applied the latter. The succeeding discussions delves into the CISA, by citing its specific provisions, and evaluating how this new law will generally affect existing credit bureaus and credit-related agencies. Under the flow of credit information, it can be observed that existing credit bureaus and other creditrelated agencies can still thrive by accessing their own information from the CCIC. However, this set-up will only work on a proper environment where all of the stakeholders’ interests will be satisfied. Thus, a middle-ground should be settled to see the efficiency and eventual effectiveness of the CISA.

4.1.3.1. The Need to Establish a “Comprehensive and Centralized Credit Information System The creation of the CCIC under the CISA is the recognition of the need for a comprehensive and centralized credit information system. The enactment of CISA into a law, in effect, repeals completely Presidential Decree No. 1941 entitled “Recognizing and Supporting the Credit Information Bureau” penned in 1984 by former President Ferdinand Marcos (cited in Table 4.1). The eventual establishment of the CCIC mandates that “banks, quasi-banks, their subsidiaries and affiliates, life insurance companies, credit card companies and other entities that provide credit facilities” will be required to submit basic credit data and update such information on a regular basis (Section 4.a). Thus, existing credit bureaus and credit-rating agencies currently collecting data and receiving data from credit facilities in the financial system will be directly competing with the CCIC. Moreover, CISA will bolster further the State’s resolve to, through the BSP, develop the financial market of the Philippines, and its enactment into a law would not have come at a better time and would be critical in boosting the credit system in this time of global financial and confidence crisis in financial markets.

4.1.3.2. Institutions Participating in Credit Reporting (Open System) Section 4.a clearly mentions the CCIC will “require” all credit and credit-related entities in the financial system. The CCIC, in Section 4.b, further may include “other” credit services providers in the “compulsory” participation in the credit information system. Once again, the institutions to be tapped through CCIC are the same institutions that existing credit bureaus and, at the same time, credit-rating agencies have been getting basic credit data from. The IFC (2006) points out that a benchmark for good-enabling laws for the creation of credit bureaus and the like is having an “open system” allowing credit reporting of all banks and non-bank institutions. This now makes the credit system all-encompassing with regard to the scope of the law. Economic research has shown that the international best practice of the inclusion of all possible entities in the system greatly contributes to the credit system’s success where all information flows from all possible stakeholders (Miller and Mylenko, n.d.).
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There are two (2) primary sources of credit information will be the 1) borrowers and 2) other transactors/customers (refer to Figure 4.2). Credit information shall be coursed through three (3) entities: 1) the banks and government lending institutions; 2) other entities that provide credit such as cooperatives, micro-finance institutions and other similar institutions; and 3) other sources of useful credit information such as utility companies. The information is collected through the CCIC, and they will process this information and distribute it through the “accessing entities,” who are likewise the primary providers of credit information (i.e., the banks and other entities earlier mentioned). Credit information may likewise be provided to special accessing entities, which include the private credit bureaus and private credit rating agencies. These entities can source information from the CCIC and may use the information for creating credit reports and ratings and may add whatever value to the report as required by their customers (BSP, 2008).

4.1.3.3. Limitations on the Time Period Information is Kept and Distributed Section 4.h (of the CISA) mandates that “negative information on a borrower as contained in the credit history files of borrowers” should stay in the CICC database not more than three (3) years from and after the said negative information was rectified. This particular section of the said law creates additional incentives for the borrower to greatly improve credit repayment behavior and allows a borrower to “clean up” the record. Furthermore, economic research shows that recent nature of credit repayment record is relevant in predicting credit default. It therefore gives lenders that forward advantage in anticipation of future credit defaults by borrowers (Miller and Mylenko, n.d.).

4.1.3.4. Data Processing Systems and Data Safety Section 5.i states that the CCIC “shall acquire and use state-of-the-art technology and facilities in its operations to ensure its continuing competence and capability to provide up to date negative and positive credit information”. This will also allow the CCIC “to relay credit information electronically” including to ensure the “accuracy of collected, stored and disseminated credit information”. Developments in technology and healthy competition in the industry are two of the main drivers of the development of data processing according to Miller and Mylenko (n.d.). Under the abovementioned section of the CISA, there will be a “borrower’s identification system for the purpose of consolidating credit information”. Thus, this further ensures that data are safe and continuously rectified to be accurate (a discussion on the type of technology to be used for eventual success follow in the succeeding pages). Section 6 clearly mentions the CCIC and authorized entities shall hold the credit information in strict confidentiality and shall use the said information “only for the declared purpose of establishing the creditworthiness of the borrower”. Thus, data safety can be assumed. This, however, should be taken
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with caution on the basis of transparency and full accountability of the State especially at this early stage of the creation of the CCIC.

4.1.3.5. Consumer Protection According to Miller and Mylenko (n.d.), credit reporting and data protection laws internationally are in large part self-enforcing. Section 6.n of CISA states that “the borrower has the right to know the causes of refusal of the application for credit facilities or services from a financial institution that uses basic credit data as basis or ground for such refusal”. This particular notice of refusal of credit is one of the most effective methods for maintaining the quality and accuracy of information in the database. Furthermore, Section 6.o indicates that the borrower has a right of ready and immediate access to the credit information pertinent to the borrower. This specific feature of the CISA further enhances the quality of information provided through rectification and verification processes. Guarding against the misuse of data is one of the most important hallmarks of a successful credit bureau development. CISA, in Section 6, again, discusses the “confidentiality of credit information”. All the submitting entities, the accessing entities, the outsource entities, the special accessing entities and the duly authorized non-accessing entities are mandated to hold credit information under strict confidentiality. There will be an accreditation process for the specific accessing entities to have the privilege of accessing data. However, violation of the confidentiality clause will render the suspension or revocation the accreditation privilege. At the end of the day, data provided to the credit database of the CCIC should be well protected compared to existing credit bureaus and credit-rating agencies. A “borrower identification system”, in Section 4.o, will be established to facilitate the consolidation of credit information on a borrower (see Figure 4.2 for reference). This body will gather both positive and negative information on the borrower’s creditworthiness. The borrowers will thus have a right to know the credit information about them and shall be given the venue and opportunity to dispute what they may deem as inaccurate information (BSP, 2008). With all of the different aspects on the CISA or RA No. 9510 discussed, the CISA seems to be a good enabling legislation for the establishment of a centralized and comprehensive credit bureau in the Philippines. It has been four years in the making according to the BSP. However, as mentioned earlier, the corresponding implementing rules and guidelines of the CISA are yet to be drafted and framed by the various stakeholders of credit expansion and financial market development in the Philippines. Based on IFC (2006) standards for evaluating pertinent laws regarding credit reporting, the CISA meets the minimum requirements of a sufficient law to govern credit bureau creation and development in the Philippines. However, it must be clearly noted again that as of today, no implementing rules and guidelines have been put out yet by the drafters of the CISA. Much remains to be seen whether the CISA will be successful at addressing the “lack of comprehensiveness and credibility of credit-related information” as according to the Bangko Sentral ng Pilipinas Governor Amando Tetangco, Jr. when asked about the prospects of CISA.
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4.2. Infrastructure Needed for the Creation of an Effective Credit Information System The CCIC, through the CISA, “shall acquire and use state-of-the-art technology and facilities in its operations” as provided for in Section 5.i. The purpose of the needed infrastructure is to largely ensure the continuing competence and capability of the CCIC to provide timely positive and negative credit information. Furthermore, it is also enable CCIC to transmit reliable credit information and insure the quality of collected, stored and disseminated credit information. Since the credit bureau industry is so called data-driven, the importance of the right infrastructure and the selection of the technology-provider are very much highlighted. IFC (2006) points out the maintenance of absolute security over sensitive personal information coupled with its appropriate treatment are very crucial. Thus, the identification of the suitable technology and software that will help govern the credit information system is brought to fore. IFC (2006) identified three (3) important functions to be performed by credit bureaus related to the functional requirements of credit bureau appropriate-technology:

4.2.1. Collect, Validate and Merge Data The CCIC will be collecting data from various sources. Thus, basic data can be received in different forms depending on the reporting entity. The infrastructure should readily and easily address this particular problem. Validation shall be the sole responsibility of the CCIC. Accordingly, the CCIC platform must include the necessary automated processes to check for complete, conformed, and quality data. After the data has been verified, the system should merge the data into the database of the CCIC.

4.2.2. Generate and Distribute Reports Capability to be accessed with ease is a very important character of the future CCIC system. Typical modes of access are the following: 1) On-line access; 2) Dial-up or Web access; and, 3) Batch access. The first two (2) types of access rely on either “host-to-host” access or Internet access. The third depends on DVD, CD, magnetic tape or electronic delivery. This usually is used for large client portfolios.

4.2.3. Provide Data Security and Back-up As mentioned earlier, security of data is on top of the list for most credit bureaus. Therefore, the system to be chosen should be very secure. Some of the security features of the system should be the following: 1) Strict access through proper identification and authentication; 2) Proper protection from hackers; 3) Clear delineation of authority among network administrators; 4) Automated data updates; and, 5) Periodic testing of back-up hardware and some recovery procedures.
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The cost of the appropriate technology, according to one existing credit bureau in the industry, can run up to about USD$1.5 million. Under the CISA, CCIC is authorized to procure the necessary hardware and software to carry out its mandate.

4.3. Specific Best Practices on Credit Bureaus and Creation of Credit Information Systems Best practices are very important to help improve and develop the Philippine credit and financial markets. Below are a few successful credit bureaus, both private and public, from around the world. The Philippine model should emulate the strengths and minimize the weaknesses of these credit bureaus cited. The set-up should be emphasized here whether a central credit bureau should be shared equally by both private and public institutions or should be largely-owned by government or largely-owned by the private sector. Table 4.4: Model Credit Bureaus and Best Practices
Specific Credit Bureaus 1) CompuScan (South Africa) Highlighted Best Practices - Started as a provider of credit bureau services to microlenders in South Africa - Incorporated both positive and negative credit information and can be accessed easily through the Internet - Other value-added services were the selling point of CompuScan’s success - Regional credit bureau that effectively brings down costs - Provides services to Guatemala, Honduras, El Salvador, Costa Rica and Nicaragua - TUCA has raised awareness and highlighted importance of private credit bureaus - Jointly owned by ten (10) banks - In absence of a legislative framework to support the establishment of a credit bureau, Saudi Arabia’s central bank and participating banks agreed on a Code of Conduct until the appropriate legislation was approved - Major telecommunications providers will be joining the network soon

2) TransUnion Central America (TUCA)

3) SIMAH (Saudi Arabia)

Source: International Finance Corporation, 2006.

On an international note, a recent World Bank study, that has included fifty-one (51) countries; it concluded that a credit bureau resulted in crucial improvements in the overall performance of the respective financial sectors. The study has shown that the creation of credit bureaus is followed by a noteworthy increase in the quantity of borrowing, particularly to previously excluded sectors like the micro, small and medium enterprises. Furthermore, there has been a significant increase of lending probability of a small firm 28 percent to 40 percent. In addition, Brazil’s noted complete reporting of credit information has lowered the country’s default rates from 3.37 percent to 1.84 percent. It is expected by the BSP that a centralized credit bureau will reduce non-performing loans in the future (BSP, 2008).
Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

Miller and Mylenko (n.d.) pointed out various best practices that can be adopted from successful stories around the world about credit reporting. Some of the best practices pertain to the following: 1) Passing of specific laws regarding the regulation of credit reporting entities – U.S., Peru, Israel, Mexico, Sweden, Thailand, Korea, etc. are some of the countries into regulating credit reporting entities. On the other hand, data protection laws are prioritized by Australia, New Zealand, Hong Kong, Taiwan, Argentina, and almost all European countries. These particular nations recognize the importance of the focus on regulating data management rather than credit reporting agencies as institutions. The Philippines need to further strengthen current legislation, i.e., the CISA with specific data protection laws to protect all stakeholders in the financial system. 2) Competition-driven data processing systems and data safety - Most countries rely on industry self-regulation for protecting data. In other countries, a data protection regulator are created and given mandate to protect information being collected and distributed. High technology and competition within the industry also contributes to the efficiency of credit reporting. 3) Defining purposes for disclosure of credit reports – The definition of a set of legitimate purposes is a major factor in ensuring privacy and only authorized access to the data. It can be that credit reports be used for employment purposes. Purposes for disclosure, however, should be defined well. Disclosure, under the CISA, should be addressed in the implementing rules and regulations. 4) Consent on credit report disclosure – Germany, Thailand, and Australia laws demand that a consent of an individual to authorize issuance of a credit report by a credit registry. However, international best practice proposes that access by tax authorities to the database should be limited. 5) Notice of refusal of credit as protection to consumers – Credit reporting and data protection laws world-wide are said to be self-enforcing. Viewing own records by customers should be in-place and proper notification of refusal of credit should also be established. International best practice indicates probable success with these important aspects of credit reporting in place. Nothing specific in the law will inform consumers of refusal of credit under the CISA. 6) Information on who has accessed the credit report – Reporting by individuals or firms that has accessed their credit data through the mechanisms in the data base will greatly deter the mishandling or unauthorized access of credit information.
Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

7) Non-judicial mechanism for dispute resolution – In case of erroneous data, procedures to correct and contest such should be properly included in legislation; CISA will allow this nonjudicial mechanism to facilitate accuracy and reliability of credit information ready to be efficiently used and processed by the financial system to carry out its functions with ease. 8) Consumer outreach and education – Regulators should take advantage of the opportunity to re-introduce credit reporting as positive rather than negative in the mindset of customers and/or consumers. If handled right, the enabling legislation will definitely help reorient people of the right attitude about credit that will eventually lead to the development of the financial system as a whole; The CISA mandates the CCIC to properly disseminate information about the benefits and costs of credit reporting to stakeholders in the financial system and educate everyone on the benefits of credit and active participation in the growth and maturity of the financial markets in the Philippines. These international best practices have been partly discussed in the previous parts of the paper. The important aspect to consider at this point is the opportunity that the Philippines has with the new legislation, i.e., the CISA of 2008. So far, almost all of the international best practices have been seemingly incorporated. But, as earlier commented, much is yet to be seen and much is expected about the full implementation of the CISA and the establishment of the CCIC.

4.4. Perception on Credit Bureau Creation and Development in the Philippines Selected Philippine banks were surveyed regarding the general perception on credit bureau creation and its development in the country. All the banks who returned the survey questionnaire expressed general optimism about the banking system’s benefit from the CISA. Almost all the banks, as well, expressed that existing credit bureaus do help minimize the information gap between borrowerclients and lending firms. In general, the creation of more credit bureaus will be greatly beneficial in terms of providing an enabling business environment for all stakeholders in the Philippines’ credit information system. This general optimism about expanding credit bureaus, however, should be viewed with much caution with the seemingly inadequate existing credit reporting laws in providing an enabling business environment. It must also be noted that the survey revealed the perception about existing consumer and corporate data protection laws to be lacking. This also includes the apparent insufficiency of existing privacy and secrecy laws. Although a lot of those surveyed banks agreed that laws regarding credit and its management, a number seem to disagree as well. On the side of existing private credit bureaus and private credit-rating agencies, there seems to be apprehension on the part of private credit bureaus that have existed for quite some time now. This apparent caution comes from the direct competition that the CIC will provide once its starts operations. However, this fear of competition may be only in the short-run if current private credit bureaus and credit-rating agencies fail to competently adjust to the facilitation and ease of credit information transfer provided for by a central credit information entity.
Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

In considering a model country in terms of credit bureau operations, a number of the surveyed banks chose Singapore among the ASEAN countries and Japan for East Asian nations. The feasibility of establishing a regional credit information database for the ASEAN seems to look forward to the longterm according to the surveyed Philippine banks. Harmonization of the credit information processes and necessary laws was said to be a huge prerequisite.

3.5 Conclusions and Recommendations Credit bureau creation and development in the Philippines needs the healthy partnership of government and the private sector, the regulator and the customer, respectively. It seems that the Philippine experience so far merits the close working of the State and the financial and credit system that needs to be developed further especially that there is a greater threat that lurks which is the recent global financial crisis that threatens the bigger financial system of the world. Note that the existing legal and regulatory framework of credit bureaus is weak and leaves stakeholders so much to be done. As mentioned earlier, there should be a strategic partnership built between the regulators and the private sector in the creation and development of credit bureaus and other related entities. With the legislation and enactment of the CISA of 2008, the government, private sector, and other various stakeholders are set-up to improve and address current weaknesses of legal and regulatory framework issues of existing credit bureaus and other existing credit-related firms. Specifically, these are the recommendations moving forward: 1) The ideal set-up for the CCIC would be a 50-50 ownership by government and the private sector (this is based on the relative success of BAP-Credit Bureau Inc. and Dun & Bradstreet Philippines, Inc., and the need for a healthy partnership of the State and the private businesses and firms). However, it must be noted that the current law mandates the initial 60-40 ownership set-up for the CCIC by the government under the lead of the Securities and Exchange Commission (SEC), but the National Government shall continue to hold such larger ownership for a period not to exceed five (5) years from the start of CCIC’s operations; 2) In Figure 4.2 where the flow of credit information under the CISA is illustrated, it should be noted that SME financing can be given focus here. If government is serious in helping SMEs access the needed financing for expansion and growth, there should be a special focus on SMEs by the CISA; 3) Technology is high on the list for the success of the CISA and the CCIC. An effective and reliable infrastructure should be in place. Without appropriate and efficient technology for database management, success will not be attained. However, it should be carefully stressed that the price tag will be steep;

Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

4) With regional integration as the ultimate goal, international best practices should be carefully adopted, and it seems that the main features of the CISA were likened and adopted according to much of world-wide successful stories; 5) To strengthen and acknowledge public-private partnership in the creation and development of credit bureaus and credit information systems in the Philippines, existing credit bureaus and credit-related entities should be allowed to thrive and continue doing business with growth in mind in the long-run. This can only happen if the SEC will have an all-encompassing mindset in finding consensus in drafting of the implementing rules and regulations of the CISA; and, 6) Government should work from the values of transparency and openness especially at the beginning of the CCIC. Special interest groups and political favors from all sectors should not be tolerated.

Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

Development of the Philippine Credit Information Database and Credit Guarantee System: Information Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

References: “A Primer on the Credit Information System Act”. 2008. Bangko Sentral ng Pilipinas, Philippines. “Credit Bureau Knowledge Guide”. 2006. International Finance Corporation-World Bank Group, Washington, DC, USA. “Credit Information System Act”. Republic Act No. 9510, 2008. Senate of the Philippines and the House of Representatives, Philippines. Interview with Mr. Manuel R. Batallones, Manager, BAP-Credit Bureau, Inc. 2008. Miller, M. and N. Mylenko. N.d. “Legal and Regulatory Framework for Credit Reporting: An International Experience”, OPD, World Bank, USA. Philippine Deposit Insurance Corporation: http://www.pdic.gov.ph/index.php?nid1=11&nid2=4&rid=2 Primer on the Banking Secrecy Law: http://www.abogadomo.com/primer_bsp.html Survey of Banks and Other Credit-Related Agencies, 2008. De La Salle University-CBERD. Tetangco, Jr., Amando M. 2007. “Opening Remarks at the 8th Environmental Scanning Exercise: Basel II and Risk Management”, Central Bank of the Philippines, Manila. “The Consumer Act of the Philippines”. Republic Act No. 7394, 1991. Senate of the Philippines and the House of Representatives, Philippines.

Center for Business and Economic Research and Development (CBERD) De La Salle University, Manila

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