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ii
Table of Contents
Preface v
Introduction 1
5 Case Studies 61
Annex 1: Maps 67
iii
Preface comprising the members of the IFC Global Credit
Bureau Program team: Tony Lythgoe, Oscar
In 2001, the International Finance Corporation Madeddu, Colin Raymond, Shalini Sankaranarayan,
(IFC) launched the Global Credit Bureau Program. Peter Sheerin, and Stefano Stoppani. The work was
Since the launch of the program, the IFC has sup- carried out under the general direction of Peer
ported the development of credit bureaus in over Stein. The authors would like to thank colleagues
40 countries through technical assistance and in the World Bank Group for their continuous sup-
investment, including support to the regional cred- port of the Global Credit Bureau Program work
it bureau in Central America and the first private and preparation of this Guide.We are also grateful
credit bureau in Egypt, work on the legal and reg- for the generous contributions of the credit
ulatory framework in Kenya and Panama, and bureaus around the world that made possible the
ongoing assistance towards the development of a development and publication of this Guide. We
private bureau in Vietnam. The IFC, together with would particularly like to acknowledge the design,
the World Bank, began monitoring the credit layout, and production support of Aichin Lim Jones
reporting environment in over 100 countries, and and editorial assistance of Madeline Nevins.
the results are included and disseminated through
the Doing Business report. We would like to acknowledge the support
of our donors, without whom the Global Credit
The content of this Credit Bureau Bureau Program’s activities would not have been
Knowledge Guide reflects the IFC’s experience possible. Specifically we would like to thank the
with credit bureau markets, and its purpose is to Italian government for its support of our activities
provide a comprehensive overview of the develop- in Eastern Europe and Latin America and the
ment of credit bureaus. IFC’s experience in Caribbean; the government of the Netherlands for
emerging markets indicates that global knowledge its support of our activities in Africa; the
on credit bureaus is fragmented, much like the Norwegian government for overall program
credit information sharing environment itself in support and support of our activities in Africa; the
most emerging market countries.The objective of Australian government for its support of our activ-
this guide is, therefore, to disseminate best ities in Vietnam; the government of New Zealand
practices in credit bureau development and fur- for its support of our activities in Pakistan and
ther contribute to the development of credit Indonesia; and Visa International for global
bureaus in emerging markets. program support.
The Credit Bureau Knowledge Guide was We hope this Guide will prove both informa-
prepared by a team led by Nataliya Mylenko and tive and useful.
v
Introduction
Introduction
Credit bureaus are essential elements of the finan- such as the Rotating Savings and Credit
cial infrastructure that facilitate access to finance. Associations or Tontines in Africa.The credit union
Today, less than 25 percent of the people living in movement that originated in the 19th century and
developing countries have access to formal finan- has since spread around the world is probably one
cial services, compared to up to 90 percent in of the most prominent examples of the power of
developed markets. Financial sector development these mutual financial self-help groups.The rise of
unleashes the productive power of enterprises credit unions and the revival of banks’ social
and facilitates inclusion of the informal sector in commitment towards their communities inspired
the formal economy. Access to savings and credit the rise of microfinance in developing countries
in rural areas allows farmers to smooth consump- over the past two decades. The approach to
tion and often survive the unpredictable risks of lending, however, has remained traditional: making
droughts and natural disasters. Obtaining a loan to decisions, based on subjective judgments, about a
send children to school helps a family create bet- borrower’s propensity to repay supported by
ter lives for their children and reduces the need for alternative risk-mitigating mechanisms such as
harmful child labor. Having long-term financing to group guarantees.
build a proper home is the direct result of a
complex interplay of different financial intermedi- A true revolution in lending occurred with
aries within the right financial infrastructure and the introduction of modern financial technologies,
regulatory framework. and this revolution has made access to credit
almost ubiquitous in developed markets.The tech-
Banks play a central role in extending finan- nologies allowed banks to move from the tradi-
cial services within an economy. In most markets, tional approach where credit is granted based on
commercial banks began by focusing on large subjective judgment to more automated processes
companies and select retail clients. Initially, their based on quantitative models. As a result, lenders
organizational structure made it too costly to serve are able to deliver financial services at significant-
smaller business clients and the mass markets. ly reduced costs and expand credit to broader seg-
Accordingly, it has been primarily through infor- ments of the economy, thus further democratizing
mal financial services and non-bank credit that at financial services. In particular, the introduction of
least some of the needs of smaller entrepreneurs credit scoring in the fifties in the United States—
and communities have been and are being met. coupled with the automation of workflow and
These include money-lenders, supplier credit, and credit underwriting—played a key role in the
many forms of mutual financial self-help groups, rapid rise of consumer lending. Credit bureaus are
1
CREDIT BUREAU KNOWLEDGE GUIDE
critical in helping lenders make faster and more difficult market to serve because of the traditional
accurate credit decisions. Credit histories not only high-cost approach of judgmental credit evalua-
provide necessary input for credit underwriting, tion. Wells Fargo pioneered the adaptation of
but also allow borrowers to take their credit histo- consumer lending technologies to small business
ry from one financial institution to another, there- lending in the nineties in the United States.
by making lending markets more competitive and, Although no dedicated small business credit
in the end, more affordable. reporting existed in the United States until a few
years ago, consumer credit histories of the owner
The first chapter of this Guide provides the of a business proved highly predictive of the
basis for understanding the operations of credit credit performance of that business. The innova-
bureaus. It draws on the most recent empirical tions in small business lending have since been
research conducted by the World Bank on the adopted widely in developed countries and have
industry trends and the effects of using credit also begun to find their way into developing
information on availability of financing and countries. Microfinance institutions, which have
improved risk management. relatively high operating costs, have seen this inno-
vation as an opportunity to reduce cost and
Although the first credit bureaus may be become more competitive. As traditional retail
traced back to the early eighteen hundreds in lenders have started poaching their clients in
London, modern credit bureaus have rapidly some markets, such as Bolivia, it has also become
evolved only since the fifties fueled by improve- more important for microfinance lenders to join
ments in technology and expansion of credit. and support credit bureau initiatives.
Among the developing and emerging markets,
Latin America has some of the oldest credit Reporting on small and microbusiness seg-
bureaus in the world, but not until the nineties did ments of the economy, have been neglected by
credit bureaus take off in most other developing both consumer and commercial credit bureaus in
and emerging markets. Between 1990 and 2005, the past. Even in the United States, it took time for
the total number of private credit bureaus has an industry consortium to launch small business
more than doubled. In Asia, many emerging credit reporting in 2002. Several developing mar-
markets turned towards credit reporting after the ket credit bureaus, such as in Thailand, India, and
financial crisis in the nineties. New credit bureaus more recently Turkey and the Kingdom of Saudi
have emerged at a rapid rate in Eastern Europe Arabia (KSA), have already incorporated provision
over the past five years, with many of the projects of small business credit reporting into their busi-
that started in the nineties eventually coming to ness plans to avoid the mistakes of their more
fruition.The Middle East and North African region developed counterparts.
has only recently seen a growing interest in credit
reporting, with new developments underway in The second chapter of the Guide summarizes
Morocco, Egypt, and Pakistan. Sub-Saharan Africa, the experience of the IFC credit bureau expert
except for South Africa which is home to one of team in the development of private credit bureaus
the oldest existing credit bureaus, is still lagging in countries around the world. The chapter pres-
behind, but many reform-minded countries are ents analyses of the various approaches to the
taking the lead to support their development in development of the bureau and discusses the tech-
line with reforms for greater access to financing. nology, financial, and staffing issues a developing
bureau must address.
Chapter 1 also discusses the roles played by
consumer and commercial credit bureaus to Development of a credit bureau takes a long
support lending to small businesses. With the rise time, and requires a long-term commitment of all
in retail banking, small business lending has stakeholders. The entire process of setting up a
become the latest frontier in innovation. credit bureau, from initial discussions to public
Historically, small business borrowers represent a education and work on the legal and regulatory
2
Introduction
3
CREDIT BUREAU KNOWLEDGE GUIDE
have his or her credit history disclosed to any Rounding out the theoretical discussions and
lender he or she may approach to obtain credit. practical guidelines are five case studies about
The law should enable a credit bureau to facilitate credit bureaus that have been established or are
information-sharing while at the same time being established in recent years in different parts
ensuring data security and protection of data of the world: an example of a successful credit
subject’s rights. bureau serving microlenders in South Africa; a
regional credit bureau in Central America, which is
Credit bureaus are an important element in a promising solution for smaller markets where
promoting responsible lending. With the con- lenders operate on a regional basis; a credit bureau
sumer lending crisis in Hong Kong (China) and in the KSA that demonstrates the importance of
South Korea just a few years ago, reckless credit the long-term commitment of the stakeholders to
card lending in the absence of credit bureaus with the bureau setup; the first credit bureau in Egypt,
positive information led to the over indebtedness which demonstrates how a private credit bureau
of individuals and subsequent rise in personal can be set up in a relatively short time when all
bankruptcies. Since then, Hong Kong (China) stakeholder interests are aligned and the project
introduced positive credit reporting in order to has the strong backing of the authorities; and a
reduce the risk of this happening again. As other Vietnamese bureau that shows the importance of
markets struggle with predatory and reckless lend- a comprehensive policy for the development of
ing, credit bureaus can play a central role in allow- the private credit bureau and highlights the impor-
ing lenders to evaluate indebtedness of clients and tance of public sector support.
setting prudent and responsible lending limits.
4
Basics of Credit Reporting
Basics of
Credit Reporting 1
1.1 Definition of a Credit Lenders address this problem by investigating a
borrower’s ability to repay and/or by requiring col-
Bureau lateral to cover the loss in case of a default.
Requiring collateral is often problematic, especial-
A credit bureau is an institution that collects infor-
ly in developing countries and particularly in the
mation from creditors and available public sources
case of new firms, micro-entrepreneurs, and small
on a borrower’s credit history. The bureau com-
and medium-size enterprises (SMEs), which often
piles information on individuals and/or small
lack significant assets for use as collateral. In addi-
firms, such as information on credit repayment
tion, the costs to lenders of seizing and liquidating
records, court judgments, and bankruptcies, and
assets that were used as collateral can be signifi-
then creates a comprehensive credit report that is
cant and the process can take a long time.
sold to creditors.
According to a World Bank survey,1 in most devel-
oping countries it takes one to two years to
Credit bureaus differ from credit rating agen-
enforce a contract and costs around 20-40 percent
cies, such as Standard & Poors (S&P), Moody’s, and
of the cost of the debt. In extreme cases, for exam-
Fitch, which collect financial information on large
ple in the Congo, it takes on average three years to
companies; conduct detailed analyses of opera-
enforce a contract and may cost up to 250 times
tions, finances, and governance of such compa-
the cost of the debt.
nies; and then issue credit ratings. Credit bureaus
focus on smaller creditors, mostly concentrate on
Hiring investigators to check borrowers’ back-
credit repayment records, and rely on statistical
grounds is costly. Conducting in-depth background
analyses of large samples of borrowers and not on
checks, while justifiable for larger loans, is not pos-
in-depth analysis of individual companies.
sible for small loans. The unavailability of informa-
tion at a low cost restricts the ability of lenders to
Credit bureaus are essential to the success of
expand and profitably run retail lending operations.
credit markets. They serve as indispensable tools
used by financial institutions to support their retail
Monitoring and screening borrower behavior
lending business. Credit bureaus help address the
offers an alternative strategy to reduce the prob-
fundamental problem in financial markets known
lem of asymmetric information. Past behavior is an
as “asymmetric information,” which means that the
extremely reliable predictor of future behavior. For
borrower knows the odds of repaying his or her
example, many countries commonly grant credit
debts much better than the lender does.The inabil-
ity of the lender to accurately assess the credit
1
worthiness of the borrower contributes to higher World Bank. 2005. Doing Business in 2005: Removing Obstacles to Growth.
default rates and affects the profitability of the Washington, D.C.: World Bank, International Finance Corporation and Oxford
financial institution. University Press.
5
CREDIT BUREAU KNOWLEDGE GUIDE
to a firm only after the firm has had an account 1.2 Consumer versus
with the bank for at least six months to a year,
which allows the bank to observe the firm’s cash
Commercial Reporting
flow. Another alternative, the group lending The private credit bureau industry is divided into
approach, mostly used by microfinance institu- two categories: consumer credit bureaus and
tions, allows lenders to provide loans to individual commercial credit bureaus (see Figure 1). Small
borrowers who, through participation in the businesses can be covered by either side.
group, have developed a credit history with the
institution. Only then does the lender extend indi- The business model of consumer credit report-
vidual loans. In these examples the credit history ing consists of (a) receiving information for free,
of the borrower, sometimes referred to as “reputa- primarily from creditors and public sources and
tional collateral,” enables an individual or a firm to then matching, cross-checking, and merging such
gain access to financing. data; (b) analyzing and interpreting the data; and
(c) selling it back to the lenders. Historically, this
Credit bureaus also rely on monitoring and model was applied to consumer reporting but
screening of borrower behavior. Lenders share now increasingly bureaus also include information
information accumulated through their lending on small-size loans to firms.
operations with a credit bureau, which then dis-
seminates it to other credit providers.This allows Commercial credit reporting, on the other
them to better assess credit risks based on a given hand, relies less on reporting from lenders, and
borrower’s past payment behavior. Lenders, there- more on company information available both
fore, can make better informed lending decisions. through public sources and direct investigations,
6
Basics of Credit Reporting
as well as payment behavior reported by suppliers. The credit bureaus merge and cross-check the
One of the best known commercial credit report- data to produce a credit report for each individual
ing firms is Dun & Bradstreet. As mentioned earli- borrower.This report constitutes a comprehensive
er, one has to distinguish this service from the serv- borrower profile and is then sold to lenders. These
ices provided by credit rating agencies such as individual credit reports generally contain person-
Moody’s, S&P, and Fitch. al borrower information and information on bor-
rower credit accounts.The personal section usual-
1.2.1 Consumer Credit ly captures the borrower’s name; identification
Bureaus number, such as social security (if any); date of
birth; former names; current and previous address-
Consumer credit bureaus collect information in a es; other forms of identification; employment his-
standardized format from several types of lenders, tory; alerts, such as ID theft or security freezes; and
such as banks, credit card companies, retail date of information update (see Figure 3). The
lenders, other non-bank financial institutions, and credit summary section contains information on
utility companies. The World Bank survey, for all credit accounts (both open and closed) that the
example, reported that roughly 60 percent of pri- borrower may have had, all accounts in good
vate credit bureaus included information from standing, past due accounts, negative account his-
retailers and merchants, and at least 43 percent tory, and all inquiries made about the borrower for
included information from utility providers in at least the past 12 months.
their databases (see Figure 2).2
2
World Bank. 2005. Doing Business Database on Private Credit Bureaus.
7
CREDIT BUREAU KNOWLEDGE GUIDE
Types of Information
Borrower credit history is often recorded in tems. Lenders pay the credit bureau for credit
terms of the number of missed payments provided reports in the form of a subscription fee, a fee-per-
in a format similar to the one in Figure 4.The cred- query with significant volume discounts, or a com-
it report also provides information on collections bination of both.The price of a credit report may
made on outstanding accounts and any available range from a few cents to US$5 or more depend-
public records, such as court judgments and bank- ing on the size of the lender, scope of information,
ruptcy rulings. The report usually outlines con- and the country. Investigative reports prepared by
sumer rights and procedures for filing disputes. commercial reporting firms, on the other hand,
Finally, in many countries credit reports include a have significantly more detail on businesses and
credit score. cost anywhere between US$10-75 depending on
the size of the lender, scope of information, and
the country.
8
Basics of Credit Reporting
9
CREDIT BUREAU KNOWLEDGE GUIDE
Partial government ownership of credit bureaus several other banks are members of the bureau, it
is rare, and only a few countries follow this model. is possible that shareholding banks may influence
For instance, in Sri Lanka, the Credit Information the pricing policy in a manner that penalizes non-
Bureau is a public-private partnership in which shareholder members. One way to mitigate such
the central bank holds a 49 percent equity stake.8 problems is to limit ownership of individual
The central bank, however, plans to eventually lenders in a credit bureau.
divest itself of its shares in the bureau. In other
examples in this category, state-owned banks In summary, this approach has several down-
rather than government entities became majority sides when compared to the independent opera-
shareholders. In India for example, the State Bank tor option, but it is often the only feasible
of India and the Housing Development Finance approach to gaining lenders’ trust. Recently, large
Corporation Ltd. (40 percent each) were majority international credit bureaus have expanded into
owners of CIBIL when it was first established emerging markets, and in many cases the new
along with Dun & Bradstreet and TransUnion (10 bureaus have the international bureau as well as
percent each).9 Over time, other banks joined as local banks as shareholders as in Mexico, Russia,
shareholders. Kazakhstan, and several other countries. It is also
possible that as lenders gain trust in the opera-
Independent credit bureaus with no ownership tions of the bureau they may divest themselves of
by lenders, such as Equifax and TransUnion in the their ownership shares as was the case in Hong
United States, are sometimes viewed as more effi- Kong (China) and the Dominican Republic.
cient structures for operating a credit bureau.
Credit reporting is the core business of such com- The credit reporting business is characterized
panies, and the shareholders’ main objective is to by network externalities and economies of scale
maximize the value of the credit bureau by that could potentially classify a credit bureau as a
expanding its operations and providing new serv- natural monopoly. On-going debate on the optimal
ices. Such an approach, however, is often not feasi- number of credit bureaus in a market has not pro-
ble when establishing a credit bureau in countries duced any consensus thus far. On the one hand, a
where credit bureaus do not yet exist. In most single registry combining aggregated information
cases, lenders are reluctant to share information across the entire system and including both bank
with an independent credit bureau because of a and non-bank credit information would provide
lack of trust. lenders with the most complete set of informa-
tion, including comprehensive inquiry informa-
A common solution, therefore, is to establish a tion. On the other hand, the lack of competition
credit bureau with ownership by banks and/or eliminates incentives for such a bureau to improve
other lenders. Brazil, Germany, Italy, Romania, data quality, provide value-added services, and
Turkey, and several other countries adopted this lower prices.
approach. The downside of this approach is that
lenders, even as shareholders of a credit bureau, Small markets are unlikely to support more than
may not always choose credit bureau growth as a one credit bureau, but many large countries have a
top priority. For example, existing members may very competitive credit information industry with
be reluctant to allow new lenders to participate in two or more bureaus actively competing. For
the bureau because newcomers, while unable to example, three major credit bureaus operate cur-
contribute significant amounts of information,
benefit greatly from information on existing
clients.The fact that lenders own the bureau may 8
World Bank. 2004. Credit Bureau Development in South Asia, Finance & Private
also make them less likely to use the services of an Sector Development, South Asia Region.. Washington, D.C.: Washington D.C.
9
independent bureau, thus increasing barriers to Credit Information Bureau (India) Ltd. (CIBIL) web site available at:
entry in the credit information provider market. In http://www.cibil.com/web/promoters.htm
cases when only a few banks are shareholders but
10
Basics of Credit Reporting
rently in the U.S. market.This industry structure is Commercial credit bureaus are usually more
the result of consolidation in the financial services prevalent than non-commercial credit bureaus.
industry over the past 15 to 20 years.While many Experience with non-commercial bureaus indi-
banks contribute data and obtain reports from cates that they are generally less innovative, lack
more than one credit bureau, the information con- the ability to deliver top-quality services, and tend
tained in each report is not identical. To address to be bogged down with bureaucratic procedures
this problem, another set of firms—aggregators— (see Table 1).While lenders’ associations or cham-
entered the market to provide comprehensive bers of commerce may be a good platform to
aggregated reports. In South Africa, three credit begin the discussions on the need for sharing
bureaus all contain information from the same set information and to build the consensus among the
of banks but compete on the quality of informa- potential bureau members, the bureau itself
tion and provision of value-added services. Other should be a commercial entity. See Chapter 2,
countries with a competitive credit information Developing Credit Bureaus in Emerging Markets,
industry include Italy, Chile, and Ecuador among for a more detailed discussion of credit bureau
others. On the other hand, Germany, Austria, and business models.
most smaller European countries have only one
major credit bureau. Commercial, with
11
CREDIT BUREAU KNOWLEDGE GUIDE
1.4 Types and Scope of one.This borrowing was unsustainable and result-
ed in a large number of credit card defaults. For
Collected Information example, in Hong Kong (China), where banks
Credit history information can be broadly divided shared only negative credit information, on aver-
into two categories: age debtors who went bankrupt owed 42 times
their monthly income in unsecured debt whereas
Negative information: credit history only con- debtors in the United States, where banks supplied
tains information on defaults. The information all available information to the bureau, had unse-
may include amounts outstanding at default and cured debts 21 times their monthly income.10
the date of last payment. When the debt is Since the credit card crisis, Hong Kong’s (China)
repaid, information on delinquencies is deleted bureaus have now migrated to a positive and neg-
from the database.These types of databases are ative credit reporting system.
also often referred to as black lists. Among all
consumer credit bureaus, 32 percent provide In South Korea between 1998 and 2003, credit
negative only information. card issuance rose from a little over 40 million
credit cards to approximately 90 million cards.
Positive (and negative) or full-file information: Between 2002 and 2003 alone, delinquency ratios
credit history contains information on all open on credit cards rose from 12.8 percent to 43.3 per-
and closed credit accounts, including the cent. Following the crash of the credit card mar-
amount approved, as well as the information on ket, credit delinquents accounted for a staggering
repayment. If a borrower has defaulted on pay- 16.7 percent of the economically active popula-
ments, but eventually paid it off, the default tion at the end of 2003. Personal delinquency was
information remains on file and is not deleted a serious social issue because delinquents were
for a defined period of time. Among all con- concentrated among youth, women, and lower
sumer credit bureaus, 68 percent provide both income population—the most fragile sector of the
negative and positive information. economy. This crisis could have been avoided if
the lenders had had access to a credit bureau that
A report that includes positive information provided positive and negative information, which
allows the lender to more accurately assess the would have helped them be more conservative in
creditworthiness of a borrower. A database with their lending practices.
negative-only information, excludes high-risk bor-
rowers that have accumulated significant debt According to the World Bank survey, approxi-
exposure without yet defaulting on any loans. In mately 68 percent of all private credit bureaus pro-
such instances, even a small shock to the borrow- vided both positive and negative information on
er’s income could lead to cascading defaults on all individuals, and roughly 50 percent provided both
of the accounts. positive and negative information on firms.11 The
fact that several countries, including such finan-
In recent years, Hong Kong (China) and South cially advanced markets as Brazil, do not have pos-
Korea have experienced a period of major itive information poses a significant threat to the
increase in retail credit defaults, in an unfortunate sustainable growth of retail and SME credit in
combination of reckless lending and unavailability these countries.
of positive information. While both had negative
information registries, positive information was
not shared. As competition in the credit card mar-
ket increased and banks marketed credit cards
more aggressively, many consumers accumulated 10
Bailey, A., Suzi Chun and Jeffrey Wong. August 11, 2003. “Wanted: Asian cred-
several credit cards. Borrowers would typically it bureaus.” The Bangkok Post. Available at: http://www.bangkokpost.net/
open one credit card account and then another mckinsey/McKinsey110803.html.
11
one to pay off the debt accumulated on the first World Bank. 2005. Doing Business Database on Private Credit Bureaus.
12
Basics of Credit Reporting
Recent research studies have quantified the default rate for Argentine banks and a 45 percent
impact of positive information on default and cred- decrease in default rates for Brazilian banks (see
it approval rates. One study simulated default rates Figure 7). Having positive information improves
on loans resulting from lending decisions, using a the ability of lenders to separate good borrowers
credit scoring model with only negative informa- from bad ones and thus reduces their costs associ-
tion and one with both negative and positive infor- ated with defaults. For a bank with a US$100 mil-
mation.The simulations were based on data in one lion loan portfolio, this translates into average sav-
of the largest U.S. credit bureaus.12 ings of US$830,000 in Argentina and US$1.5 mil-
lion in Brazil.
Many lenders use credit bureau information to
generate credit scores, which are statistical esti- Figure 7: Effects on Default Rates of Including Positive
mates of the probability of default of a borrower Information (Argentina and Brazil)
based on characteristics available in the credit
bureau. Higher credit scores indicate higher
expected probability of repayment and can be
used to set credit approval rules and procedures.
The study generated credit scores using negative
only and then both negative and positive informa-
tion. Borrowers were then ranked by credit scores
and those with the highest scores (60 percent)
approved for credit. According to the study, the
resulting default rate from lending to borrowers
based solely on negative information was 3.35 per-
cent. If, both positive and negative information had
been used, the default rate would have dropped to
1.9 percent, a 43 percent decrease in default rates
(see Figure 6).
Including positive information also allows
Figure 6: Effect on Default Rates of Including Positive banks and other lenders to lend more or supply
Information (simulation using U.S. data) more credit while keeping default rates at the
same level. Using the simulations with the U.S. data
mentioned above and keeping the target default
rate at three percent, the inclusion of positive
information almost doubles the percentage of bor-
rowers approved from approximately 40 percent
to 75 percent, indicating the importance of posi-
tive information for improving access to credit
(see Figure 8).14
12
Barron, J.M. and Michael Staten. 2003. The Value of Comprehensive Credit
Reports: Lessons from the US Experience. Available at: http://www.privacyal-
liance.org/resources/staten.pdf. Figures show the simulated credit defaults
13
assuming an acceptance rate of 60 percent.
Powell, A., Nataliya Mylenko, Margaret Miller and Giovanni Majnoni. November
Another study conducted the same exercise
13
2004. Improving Credit Information, Bank Regulation and Supervision: On the
using data from Brazil and Argentina and found Role and Design of Public Credit Registries. World Bank Policy Research Working
similar results. Inclusion of positive information
14
Paper 3443. Washington, D.C.: World Bank.
would have produced a 22 percent decrease in the Barron et. al., op cit.
13
CREDIT BUREAU KNOWLEDGE GUIDE
Figure 8: Effect on Approvals of Including Positive Information Information sharing brings benefits to both
small and large institutions.The study, using infor-
mation from Argentina,16 found that while small
lenders do benefit more than large lenders from
sharing information, large banks still experience a
significant drop in defaults if positive information
is used. Although the results may vary from coun-
try to country and from lender to lender, both
anecdotal and available empirical evidence sug-
gests that information sharing and use of credit
scoring allow both large and small banks to signif-
icantly reduce default rates and/or increase lend-
ing volumes (see Figure 10).
Credit bureaus often include information not Figure 10: Effect on Default Rates of Increasing Number of
only from traditional lenders, such as banks and Information Sources
credit card companies, but also from other credit
providers, such as retailers, suppliers, and telecom
and utility companies. In emerging markets where
information is scarce, such non-traditional sources
can provide invaluable information. The study
mentioned above15 found that in the United States,
including information from non-bank lenders into
a credit scoring model allows lenders with a target
approval rate of 60 percent to reduce default rates
by 38 percent. If the default rate is used as a target,
the bank would be able to approve 11 percent
more clients before reaching the target three per-
cent default rate (see Figure 9). Overall, the simula-
tions show that sharing positive information
among the broader category of lenders would In summary, credit bureau reports that have the
allow significant operational improvements either highest predictive power combine both positive
through the lower costs of default or increased and negative information from both banks and
lending volumes to new categories of borrowers. non-bank lenders. Bureaus or credit registries frag-
mented by industry that provide negative informa-
Figure 9: Effect of Including Positive Information on Approvals tion only deliver reports that have less predictive
Among Retailers and Other Lenders power and often result in inaccurate credit risk
assessment (see Figure 11).
15
16
Ibid.
Powell, A. et al., op. cit.
14
Basics of Credit Reporting
Figure 11: Effect of Types and Sources of Information on This growth was driven by two main factors:
Predictive Power
High growth of retail credit in emerging mar-
kets. Between 1985 and 1995, unfavorable
macroeconomic environments and structural
restrictions in credit markets in developing
countries constrained credit growth. Over this
period, the private credit to GDP ratio for the
developing markets increased by 46 percent.17
Financial liberalization and a more stable macro-
economic environment were associated with an
increase in credit growth, and the period
between 1996 and 2004 saw credit to the pri-
vate sector increase by 62 percent.18 As lenders
began to enter the retail credit market, the need
for credit information and for streamlining lend-
1.5 Industry Overview and ing processes resulted in the establishment of
International Trends credit bureaus. This phenomenon was particu-
larly pronounced in Eastern Europe, where the
The private credit bureau industry has experienced number of private credit bureaus grew from five
unprecedented growth over the past five years, in 2002 to 12 in 2006.
especially in emerging markets (see Figure 12).
Developments in information technology. The
Figure 12: Growth of Private Credit Bureaus credit bureau industry is data-driven. Recent
improvements in database management software
and decreasing costs of storing and processing
data,as well as decreasing costs of hardware,have
reduced the start-up costs of a credit bureau.
17
World Bank’s World Development Indicators as of July 2006. Data based on
Annex 1 provides maps showing private credit domestic credit to private sector as a percent of GDP for low-income, lower-mid-
bureaus by region and by type of reporting (posi- dle income, and upper-middle income countries. Includes 101 countries.
18
tive and negative-only). Ibid. Includes 128 countries.
15
CREDIT BUREAU KNOWLEDGE GUIDE
tion (31.2 percent) compared to all other regions In Asia and Eastern Europe, many countries have
(see Figure 13). All private bureaus in the region recently established bureaus but experienced
provided data electronically either via the Internet delays in populating databases and issuing reports,
or via modem and phone lines.19 Bureaus in most which in part explains the low coverage ratio. In
countries in Latin America include both positive Eastern Europe, the situation is changing fast and
and negative information with a few exceptions. In even as this publication goes to print Russia and
Brazil, for example, the credit bureau provides neg- Ukraine are in the process of operationalizing
ative-only information. Although Brazil’s credit their credit bureaus and plan to issue credit
bureau system is one of the oldest in the world reports by the end of 2006.
and highly sophisticated, it is unable to provide
lenders with positive information. Reforms are Another factor contributing to the low coverage
under discussion that would provide the neces- ratios in these regions is that the credit-active pop-
sary legal and regulatory framework for sharing ulation still only constitutes a small portion of the
positive information among private credit total population. As credit growth continues, how-
bureaus.The development of a credit bureau that ever, the scope of credit bureau coverage is
provides positive information in Brazil, however, expected to expand as well.
will require not only legal changes but also a broad
buy-in from lenders and a willingness to share pos- In addition to the coverage ratio, the World
itive information. Bank’s Doing Business Survey also computes a
credit information index for more than 120 coun-
Figure 13: Average Private Bureau Coverage tries.The index measures credit information avail-
ability based on six key factors that measure
scope, access, and quality of available credit infor-
mation (see Figure 14).
16
Basics of Credit Reporting
The index attributes scores to countries and Using this indicator, the Latin American region
regions on a scale of 1 to 6, with 6 being the high- again scores higher than all other regions with an
est. For each of the following six features, a coun- average of 4.5. The Sub-Saharan African region
try or region receives one point and the points are scores the lowest on this scale with a 1.5, followed
added to arrive at the total score: closely by the South Asia and East Asia & Pacific
regions with 1.8 each. While bureaus in East Asia
Both positive and negative credit information have a higher coverage ratio, their collection of
(for example on payment history, number and negative-only information contributes to their low
kind of accounts, number and frequency of late score on the Credit Information Index.
payments, and any collections or bankruptcies)
is distributed. The development of credit bureaus in many
Data on both firms and individuals are distrib- emerging markets often means engaging one of
uted. the main international credit bureau operators.As
Data from retailers, trade creditors, and/or utili- a result, several major players dominate the credit
ties as well as financial institutions are distrib- information industry globally. The three major
uted. international credit bureau providers today are
More than five years of historical data is pre- Experian, TransUnion, and Equifax. Their main
served. operations are concentrated in the high-income
Data on loans above one percent of income per Organization of Economic Co-operation and
capita are distributed. Development (OECD) countries, but all three have
By law, consumers have the right to access their actively expanded into emerging markets in
data. recent years. At least one of these three major
17
CREDIT BUREAU KNOWLEDGE GUIDE
international credit bureaus operates in 16 coun- lowed the French example and established PCRs
tries in the Latin American & Caribbean region. after the creation of the West African Monetary
The “big three” also have operations in six coun- Union in 1962. Several Middle Eastern and North
tries in Sub-Saharan Africa, five in East Asia and African nations adopted PCRs in the 1950s and
South Asia, and four in the Europe & Central Asia.20 1960s: Egypt (1957), Tunisia (1958), Morocco
(1966), and Jordan (1966). Among the Eastern
In recent years, several new credit bureaus with European and Central Asian republics, Turkey was
international operations have emerged including the first country to establish a PCR in 1951.
CRIF, an Italian-based firm with a focus on the
Eastern European markets; Creditinfo, an Icelandic The Latin America region has the highest num-
credit information provider with operations in ber of PCRs. In this region, 15 countries have
Eastern European and Central Asian countries; established PCRs, including all of the largest
D&B SAME with a target market in the Middle East economies such as Argentina, Brazil, Chile, and
and Africa; CompuScan, CRB, and XDS in two or Colombia. Mexico established Latin America’s first
more African countries; and Baycorp Advantage PCR in 1964, with the primary aim to regulate poli-
based in Australia and New Zealand with a previ- cies regarding the allocation of credit by sector at
ous focus on Asian markets.The entry of the new that time. A few Latin American countries estab-
operators is a welcome development as more lished PCRs in the 1970s and 1980s, but most
competition will result in a better product offering PCRs were set up in the 1990s, following the finan-
and lower prices for the countries shopping for a cial crises that swept the region.
credit bureau provider.
Since most public registries are set up with the
1.6 Public Credit Registries primary purpose of bank supervision, they usually
only include loans above a certain minimum
A public credit registry is defined as a database amount. Of the 57 PCRs included in the World
managed by the public sector, usually by the cen- Bank survey, 40 had minimum loan requirements
tral bank or the bank supervisor, that collects infor- for inclusion of a company or individual in the
mation on the creditworthiness of borrowers (per- PCR. About 60 percent of PCRs had loan cutoffs
sons or businesses) from supervised financial insti- that were at least twice the average Gross National
tutions, makes such information available to finan- Income (GNI) per capita, thus excluding most
cial institutions, and is used primarily for supervi- retail and small business loans.
sory purposes.
PCRs have lower coverage in general when
Participation in a Public Credit Registry (PCR) is compared with private credit bureaus, which is
mandatory for supervised financial institutions. not surprising given their focus on larger loans and
Although the primary reason for establishing a PCR supervised institutions. According to the World
is to support banking supervision functions and Bank survey, the average coverage ratio of PCRs in
monitor systemic risks, many PCRs provide credit developing countries was at 3.6 percent of the
reports to lenders as part of their operations. active population, while private bureau coverage
was at 16.0 percent.21
According to a World Bank survey in 2004, there
were 57 PCRs operating globally.Figure 15 illustrates
the growth in PCRs from before 1964 to 2002.
18
Basics of Credit Reporting
Figure 15: Growth of Public Credit Registries22 In countries with no cutoff requirements (i.e.,
minimum loan requirements), PCRs provide credit
reports to banks and perform functions similar to
those of private credit bureaus.The scope of PCR
data, however, is limited to fewer data items and
excludes information from non-banks. Figure 16
indicates that PCRs rely largely on banks and finan-
cial corporations for information. Less than four
percent of all PCRs included information from
retailers, merchants, and other non-bank creditors.
22
23
World Bank. 2004. Doing Business Database on Public Credit Registries.
24
World Bank 2004. Doing Business Database on Public Credit Registries. Information was unavailable for two of the 57 PCRs surveyed.
World Bank. 2004. Doing Business Database on Public Credit Registries.
19
CREDIT BUREAU KNOWLEDGE GUIDE
Moreover, creditors who rely on public registries institutions to share information through private
will be unable to benefit from value-added servic- credit bureaus. Another approach, successfully
es, such as bureau credit scores, which allow them implemented in Ecuador, requires that all regulat-
to maximize the value of credit information. ed financial institutions report credit data to the
central bank registry. The PCR, however, is not
Not all countries have a strong free market tra- allowed to sell the credit reports to lenders;
dition, and in many cases the involvement of the instead they must make the reports available to
public sector is essential for the establishment of a the private credit bureaus that are operating in the
viable private credit information industry.The gov- country. Private bureaus combine this information
ernment plays a critical role in creating an appro- with other data and compete on the quality of
priate legal and regulatory framework for private service.These examples demonstrate the success-
credit bureaus. Recently several countries, includ- ful collaboration of the public and private sector
ing Russia, Singapore, Kazakhstan, and Mexico, to develop a sustainable credit reporting industry.
issued laws and regulations encouraging financial
20
Developing Credit Bureaus in Emerging Markets
Developing Credit
Bureaus in Emerging
Markets 2
2.1 Prerequisites for Credit trust of their competitors, and consumers must be
assured of the security of their information.
Bureau Development
To establish a successful credit bureau in an Consequently, the initial phase of building a
emerging market, the founders must: credit bureau where such an institution does not
exist should focus on building awareness among
Change perceptions of and build awareness in lenders and their clients, the general public, gov-
the community. ernment officials, policy makers, regulators, and
Ensure commercial viability. other potential participants in the credit bureau.
Establish an appropriate legal and regulatory
framework. Tools that can be used to change perceptions
Identify appropriate technology and software. and build awareness of the benefits of information
Ensure adequate data availability. sharing include the following:
Specify staffing needs.
Media. Coverage of conferences and roundta-
bles as well as publication of articles on the role
Change Perceptions and Build of credit information with expert opinions and
Awareness reflections on the local debate is useful to pro-
mote credit bureau development. For example,
In emerging markets, the public is likely to resist several conferences on the role of credit infor-
the concept of sharing information, particularly mation were held in Russia and were well cov-
financial information. For political reasons, author- ered in the press. As a result, awareness among
ities unfamiliar or uncomfortable with sharing the public on the need to build a credit history
financial information may also be resistant to this and consent to submitting one’s credit records
concept. In such economies fragmentation, com- to a credit bureau was improved significantly.
petition, and secrecy characterize the financial sec-
tor, and lenders fear that by sharing positive infor- Internet. A credit bureau’s web site should con-
mation, their competitors will learn about and tain information for consumers that explains the
steal their good customers. These perceptions importance of building a positive credit history.
need to be changed. The site must also explain the various channels
available to consumers to report and rectify
For a credit bureau to flourish and gain accept- errors in their credit reports.
ance among its users and subscribers in these Proactive consumer education. The Credit
economies where credit is scarce, the public needs Bureau of Singapore offers one example of this
to be educated about the benefits of credit and type of consumer education. Its senior execu-
credit sharing, lenders must overcome their dis- tives give presentations to diverse groups of bor-
21
CREDIT BUREAU KNOWLEDGE GUIDE
rowers. These meetings have succeeded in public needs to understand the dangers of buying
broadening understanding of the activities of into various lender schemes and being overly
the bureau and explaining consumers’ rights. indebted.
Roundtables and conferences. Several examples
exist of the efficacy of this type of awareness Campaigns targeted to financial and non-finan -
building. In Kazakhstan, for example, a large con- cial institutions should:
ference was organized with high-level participa-
tion from the central bank, lenders, and speak- Address concerns about sharing of information
ers from several successful credit bureaus in the and the fear of losing market share due to such
region. The conference was used to jumpstart information-sharing.
the initial phases in establishing a credit bureau Explain the different measures that could be
and to secure high level buy-in.As a result, nec- enforced to prevent competitor institutions
essary legal changes and consensus building from poaching customers.
among lenders took place smoothly and within
Emphasize the need for cooperation among a
a reasonable time frame. Similar events, in
country’s banking, financial, and non-financial
Vietnam, Russia, Kenya, and several other coun-
institutions for the credit bureau to succeed.
tries were instrumental in promoting the estab-
lishment of credit bureaus. Assure lenders of the confidentiality of all
information provided and discuss the obliga-
Issues to be addressed in these awareness build- tions of lenders to treat confidential information
ing activities differ according to the audience. appropriately.
Campaigns targeted to the general public Explain the importance of sharing positive
should: information.
Encourage broad participation by bank and non-
Explain the role and nature of credit informa- bank lenders in the credit bureau.
tion-sharing to mitigate general concerns about
Promote the introduction of updated credit con-
sharing of personal information.
trol policies and procedures taking into account
Inform about the function of a credit bureau the information in the credit bureau.
and its obligations to respect the privacy of con-
Highlight the need to educate staff about the
sumer data.
credit bureau.
Discuss the obligations of a credit bureau to pro-
tect all personal information and its duty to treat For the target audience of government officials,
all such information as confidential. policy makers, and regulators, the campaign
should:
Discuss the measures that a credit bureau will
take to ensure the security of consumer data Hold high-level meetings among various govern-
and the way mistakes are to be corrected. ment officials, policy makers, and regulators to
Discuss how authorities and regulators will explain the importance of a credit bureau and
work in conjunction with the credit bureau to the sharing of credit information.
create an environment conducive for sharing Explain their role and the need for laws con-
credit information on a secure basis. ducive to credit information- sharing.
Emphasize the importance of borrower consent Stress the importance of information sharing for
to enable data sharing. financial stability and expansion of credit.
In addition to educating the public about credit Outline the value of obtaining access to third
bureaus, the campaign must educate the public on party databases, particularly official registers
using credit responsibly. In markets, where mem- such as the National ID or Company Registra-
bers of the public are not very credit savvy, the tion databases.
22
Developing Credit Bureaus in Emerging Markets
Highlight the need for appropriate privacy and in the form of credit reports. In a second phase,
data protection legislation. the bureaus then leverage the value of the data
by offering value-added products, such as credit
Ensure Commercial Viability scoring, portfolio monitoring, fraud alerts, and
the like.
A credit bureau needs to be commercially viable, Appropriate pricing and investment decisions.
regardless of the market in which it operates, and The bureau must conduct market assessment
emerging markets are no exception to this rule. In studies and forecast demand that will enable it
addition to ensuring the sustainability and success to price its reports accordingly. Pricing is one of
of the credit bureau, commercial viability rein- the key factors in bureau sustainability, and cru-
forces the faith and changed perceptions of the cial investment decisions such as software
public and all those involved in the operations of acquisitions should be aligned with the bureau’s
the credit bureau. pricing strategy to avoid heavy losses.
A commercially viable credit bureau requires Shareholder commitment. Establishing a credit
the following: bureau, especially bank-owned bureaus, takes a
long time and requires strong shareholder com-
Sizeable economically active population. mitment. Several examples exist of credit
Economies of scale underpinning the operations bureaus that have struggled commercially due
of a credit bureau require a sufficiently large to the lack of “total commitment” from the finan-
population base that uses credit for a credit cial community. Some bureaus struggle for years
bureau to be commercially viable.The size of the trying to build up membership. Local banking
economically active population dictates the level communities, notwithstanding their initial com-
of sophistication and complexity of the credit mitment to support the credit bureau, often fail
bureau system to be implemented. Without a to adhere to their commitment in the bureau’s
large borrower base, the bureau will have to early days. Other types of lenders may hold back
charge high fees for its credit reports, which may until the banks join, thus adding to the problem.
reduce the demand from lenders. Credit bureaus Ensuring strong commitment of the key share-
in emerging markets might face this challenge in holders is essential because a bureau may not
their initial years of operation if the population breakeven for three to five years, and it can sus-
does not use credit heavily. Developed countries tain heavy losses in the early years.
with small populations, such as Iceland (popula- Streamlined organizational structure. In its ini-
tion 300,000) and New Zealand (population 4 tial stages, a bureau must pay particular atten-
million), operate small but profitable credit tion to its organizational structure and its human
bureaus. In New Zealand, where the economical- and capital investments (see Specify Staffing
ly active population is estimated at two million, Needs below), and adopt a streamlined structure
the credit bureau receives about four and a half from the start to maintain profitability.
million queries a year.
In emerging markets, however, the economically Establish an Appropriate Legal
active population may be too small to generate
sufficient demand from lenders. In this case, the
and Regulatory Framework
bureau may consider a regional solution. Without the appropriate legislation and regula-
TransUnion Central America (TUCA), for exam- tions to enable the sharing of data and informa-
ple, operates a regional solution covering five tion, a credit bureau is, for all practical purposes,
countries.This approach lowers the fixed cost of ineffective. For instance, in Uzbekistan, a credit
starting a bureau and is particularly attractive bureau that was registered in 2000 was unable to
when lenders also operate regionally. operate because it lacked the legal authority to
Provision of value-added services. Most bureaus share data. In Slovakia, existence of laws restricting
begin operations by providing lender raw data the collection of historical data delayed the
23
CREDIT BUREAU KNOWLEDGE GUIDE
bureau’s launch. Many other countries faced simi- tems. Technologies available in emerging markets
lar challenges. may not be sufficiently sophisticated to meet mod-
ern credit information-sharing needs. Some of the
For credit bureaus in emerging markets, the infrastructure requirements are quite basic and are
enabling legislation must: generally taken for granted in more sophisticated
markets. In many developing countries, however,
Establish the rights and obligations of the credit essential infrastructure support, such as a reliable
bureau, its users, the organizations that supply electricity supply and adequate Internet and tele-
information to the bureau, and of public at large. phone connectivity, do not always exist and may
Treat all stakeholders equally and favor no one require additional investments.
stakeholder over others. The law should allow
information-sharing among bank and non-bank In addition to infrastructure requirements, the
lenders. success of a bureau’s operations depends on the
ability to extract credit performance data from
Provide clear guidelines on the kinds of data financial institutions and other lenders and deliver
that can be collected. Data accumulation can be credit reports in a format that is easy to use by one
simplified if the legislation does not restrict the and all. Experience shows that financial institu-
type of information that a credit bureau can tions in emerging markets are transitioning from
gather as long as it is relevant, accurate, and traditional relationship lending models to more
meets certain quality standards (for example, as volume-driven and standardized retail lending
in the U.S. Fair Credit Reporting Act and EU Data businesses. In most cases, banks have not yet reor-
Protection legislation). ganized their processes to fit this new business
Indicate how long data can be retained. In par- model.This has major implications in terms of:
ticular, it must address the need to store and
share positive information, whereby all informa- Availability and validity of historical
tion on a particular client is saved, instead of information.
erasing negative records once debts have been Ability to automatically report data on asset
repaid, which significantly undermines the pre- portfolios.
dictive power of data. Historical data are great Flexibility of legacy systems to adapt to the
indicators of a borrower’s future behavior and is input/output requirements of a credit bureau.
invaluable in making lending decisions. Availability/prioritization of IT resources that
could be channeled to support adaptations
A more detailed discussion of legal and regula- required for the new credit bureau.
tory issues is provided in Chapter 4. Existence of standardized formats or language
used within the systems.
Identify Appropriate Technology
In many cases, banks do not have adequate core
and Software systems to store data on customers and their pay-
The overriding duty of both a credit bureau and its ment histories. In countries as diverse as Russia,
members is to maintain absolute security over sen- India, and Egypt, extracting data in a format
sitive personal information and to treat it appro- acceptable to the respective credit bureau was a
priately at all times. Failure to maintain this corner- major challenge and required substantial IT
stone function is a major breach of trust.As a trust- resources to access old legacy systems. It has
ed third party, a credit bureau must have the most proved much easier to extract credit card records,
appropriate technology and software to provide as these tend to be hosted on systems that are
an adequate level of service while maintaining the more modern and store data in a much more logi-
security of the data. cal format. Large, local, often state-owned or
recently privatized banks with large branch net-
To function efficiently, a credit bureau must works face a major challenge because records may
invest in appropriate software and technical sys- be paper-based and credit functions decentralized.
24
Developing Credit Bureaus in Emerging Markets
For bureaus in such situations, the most practical maintained by the government agency that issues
solution is often to start with credit portfolios that them. Foreign residents that are not eligible for a
have better quality information, with banks that national ID, can use a passport number instead
are able to provide such information, and with for identification but this approach poses
more recent data, then gradually build up the challenges because passports must be renewed
bureau to include more lenders and more portfo- on a regular basis and, as a consequence, the
lio types. Often, however, the cost of uploading passports numbers change.
credit history data that are two or more years old
may be too high compared with the benefit, given National IDs can cause issues if they are record-
the varying levels of accuracy of lender files. ed incorrectly. For example, in Malaysia, when
Bank Negara, the Central Bank of Malaysia, estab-
In such environments, credit bureaus function lished a credit bureau in the early 1990s, the
less efficiently than their Western counterparts assumption was that all Malaysian nationals had a
and offer fewer products and services to their cus- unique national ID number. After all borrower
tomers. For example, in Fiji, with a population of records had been centralized within one database,
only one million, the bureau provides only nega- it was discovered that duplicate IDs existed for the
tive data on borrowers because banks and other same person because previously various state
financial institutions are unwilling to commit time provinces had held the power to issue IDs.
and resources to provide comprehensive positive Malaysia is not alone in the challenges that it faces
data to the credit bureau, due to the small market in establishing unique identifiers. Many countries
size and lack of market sophistication. Conse- encounter similar problems. These issues can be
quently, the Fiji bureau is limited to confirming overcome if authorities set digital protocols that
whether an individual is on the local body elec- can be used to validate the numeric configuration
toral roll and recording any previous applications of an ID. In the Kingdom of Saudi Arabia (KSA), for
for credit in the credit report. example, a joint effort among lenders, borrowers,
and the authorities in this regard has been
Ensure Adequate Data Availability particularly successful. It is important to note that
in all cases the establishment of the bureau helped
It is absolutely essential that banks and other authorities and lenders to identify the problem
lenders store customer information in a format and start to solve it.
that allows the credit bureau to easily extract the
information and upload it to its own system to In jurisdictions without national IDs that are
further match and merge with other data. In most verifiable and suitable to use in the match-and-
emerging markets, financial institutions had merge process, most bureaus use sophisticated
developed their own unique database structures matching algorithms to correctly match and merge
well before a credit bureau was ever contemplated separate records belonging to the same individual.
and, as a consequence, do not share standard These matching algorithms traditionally use a com-
data formats. bination of name, address, and date of birth. New
Zealand and Germany, for example, use such
Identifying information, such as a unique ID sophisticated matching solutions because legisla-
number, name, address, and date of birth, is essen- tion actually prevents the recording of unique
tial to enable the merging of credit records for a identifiers. The ability to use such algorithms is
given borrower to form a complete credit history significantly restricted, however, in emerging
of that borrower. markets where other crucial information, besides
unique IDs, such as names, addresses, and dates of
Countries that have a national ID system enjoy birth are unreliable.
an advantage over those that do not, but only if
the IDs are correctly recorded within databases In addition to the issue of unique identifiers,
and can be verified against the registry consumers’ names and addresses may be stored in
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CREDIT BUREAU KNOWLEDGE GUIDE
various formats and styles. For instance, an institu- member institutions, sort and aggregate these data
tion may choose to store data in single strings into personal credit histories, and disseminate this
rather than in a structured database, some with the information to members at their request. In addi-
surname first, others with only initials, and some tion to performing these functions, credit bureau
with only the surname. Consumers also contribute staff must be trained to use the available credit
to the confusion by using different names, particu- information to conduct credit analyses. Staff
larly where names may be anglicized or a nick- should be current on market trends and needs and
name used (e.g., William may be known as Bill, be able to provide bureau users with advice and
and/ or Will). customized products that incorporate the most
updated information and use the latest technolo-
Addresses are equally challenging. In the KSA, gy. Bureau employees must also be trained to sort
for example, residential addresses are not used and out irrelevant information from all the information
several unrelated families may share a single post they compile from various sources. Data alone
box. And in India, many banks record borrower have limited value—data need to be aggregated,
addresses as “care of” a bank branch. analyzed, and converted into useful and reliable
information on which critical lending decisions
Dates of birth can also be an issue, particularly can be based.
where the data are stored in disparate databases
and in inconsistent formats. In some cultures, the Integrity is an absolute prerequisite for all
exact date of an individual’s birth may not be as bureau staff because on a daily basis they will
important as it is in Western society. Records may receive requests from consumers to amend
give the date of birth as born in “the year of the records on the basis of friendships or relation-
great flood,” which from a bureau’s point of view ships, or simply to access the bureau’s database
is somewhat difficult to use as part of a match-and- without the consumers’ consent. Resisting such
merge logic.Another frequent problem with dates requests is particularly difficult in close-knit com-
of birth, and possibly with all other identifiers, is munities where bestowing favors is the norm and
incorrect data entry: customers may appear to be denying requests is contrary to the norm. All
hundreds of years old or, in some cases, not even bureaus should establish strong rules that dictate
born. Incorporating simple validation rules into immediate dismissal of personnel should they fail
both the lenders’ and credit bureaus’ input systems to resist such requests.
can help overcome such inconsistencies.
2.2 Business Models for
These issues, while posing challenges for
bureau operators, should not prevent a credit
Credit Bureau Operations
bureau from starting operations. Experience The implementation of a private credit bureau
shows that establishing a credit bureau serves as a requires a business model where all key players
trigger for financial institutions to start recording have clearly defined roles (see Figure 17). Each
and managing information in a more systematic country develops its own approach in establishing
manner, which in turn improves their own ability and operating a credit bureau to fit its cultural,
to measure risks. Postponing the establishment of economic, political, and regulatory environment. It
a credit bureau until banks have perfect informa- is possible, however, to identify several distinct
tion may only hasten financial crises as banks business models for setting up a private credit
increase lending without adequate information bureau, based on the principle of reciprocity,
and risk management tools. which lies at the core of any credit bureau’s busi-
ness. In brief, this principle may be summarized as
Specify Staffing Needs follows - members of a bureau can obtain credit
reports only if they provide data to the bureau.All
A credit bureau’s function and its employees’ the models described below are based on this
duties are to obtain account history data from principle and vary primarily in ownership and
management structures.
26
Developing Credit Bureaus in Emerging Markets
Figure 17: Key Credit Bureau Stakeholders Private individuals/entities. Individuals or organ-
izations that provide venture capital and individ-
ual entrepreneurs may also become partners in
the credit bureau as is the case of Datacheck in
Pakistan, CompuScan in South Africa, CRB in
Kenya, and many others.
Banks and other financial institutions. They can Data Subjects (Consumers/SMEs) consist of the
become shareholders individually or as a group borrowers on whom the credit bureau collects
through, for example, a banking and disseminates credit information. They are the
association. The Association of Banks in subjects on whom lenders wish to assess the risks
Singapore, for instance, owns a share in of default and non-payment before approving any
Singapore’s credit bureau. Other countries in new loans or advancing further credit.
which a group of banks own credit bureaus
include Serbia, Turkey, Romania, Ukraine, Regulator is responsible for setting the guide-
Kazakhstan, and the KSA. lines, rules, and regulations under which the cred-
it bureau, its users, and consumers will operate. In
Technical partner. This category refers to a quali- many jurisdictions, the regulator is also the
fied credit bureau operator, such as Experian, enforcement authority and has the right to issue a
TransUnion, Equifax, Dun & Bradstreet, CRIF, license to the bureau and penalize the bureau in
Creditinfo, and others.The technical partner may case of severe violations. Once the credit bureau is
become a minority shareholder, as in Kazakhstan, established and users are sharing information, the
Russia, and Mexico, or a majority shareholder, as regulator’s role is to ensure ongoing compliance
in Singapore and the Czech Republic. with the regulations by all parties.
Government. In some countries, government enti- A private credit bureau’s ownership and gover-
ties,such as the Central Bank in Sri Lanka,or public nance structure is important as all participants
sector financial institutions,as in India and Thailand, must have confidence and trust in the bureau.This
become major shareholders in the credit bureau. trust in turn motivates banks to contribute their
27
CREDIT BUREAU KNOWLEDGE GUIDE
data and helps the bureau develop more rapidly shareholder, the possibility of conflict of interest
and effectively. Two major models for a private exists between its supervisory function and its
credit bureau in terms of ownership structure and role as a credit bureau shareholder.
operations include the following:
Several countries use a version of this model.
Creditors own and operate the bureau. Many bureaus in Europe, for example in Germany,
Creditors do now own and do not operate the Austria, and Switzerland, started with non-bank
bureau. Independent operator. creditors as shareholders and eventually expanded
ownership to include banks. Some of these
Model 1. Creditors Own and bureaus were originally non-profit entities but
Operate the Bureau eventually were reorganized into commercial
companies. These bureaus operate on technical
Many markets around the world follow this model. platforms developed in-house.
Lenders, most often banks, establish a credit
bureau where they are the main shareholders of As technology develops and related costs
the credit bureau. In most credit bureaus using this decrease, more recently established credit bureaus
model, shareholding is fragmented and may have chosen to engage a technical partner instead
include several banks as well as government enti- of developing the credit bureau platform in-house.
ties, international financial institutions such as the In some cases the technical partner becomes a
IFC, independent private investors, and a technical minority shareholder. Examples include Mexico,
partner as a minority shareholder. where TransUnion is a shareholder along with sev-
eral banks, and Kazakhstan’s First Credit Bureau,
A credit bureau may operate either with the which includes Creditinfo as a technical partner
support of a technical partner as in Mexico, and a minority shareholder. The Indian credit
Kazakhstan, Russia, and many other countries, or bureau is a joint venture where Dun & Bradstreet
with in-house developed systems as in Germany, and TransUnion each hold a 10 percent share and
Austria, and Brazil. lenders hold the rest.
The main benefit for bureaus that use this A variation of this model may include a struc-
model is that it allows for a faster startup com- ture, where lenders become shareholders in a hold-
pared to a model without lenders as shareholders. ing company that, in turn, owns a share in a credit
Agreement among banks to become shareholders bureau along with the technical partner. This
of the bureau implies a strong commitment to approach was used in setting up a credit bureau in
share data and ensures the sustainability of the Singapore. The shareholders of the Credit Bureau
bureau. Participation of a government authority Singapore include the Association of Banks in
may also add credibility to the venture. Including a Singapore, local Singaporean entrepreneurs, and
technical partner as a shareholder allows the cred- the technical partner Baycorp Advantage.
it bureau to better align its incentives and guaran-
tees a long-term commitment. Model 2. Creditors Do Not Own
and Do Not Operate the Bureau.
A major downside of this model is that a possi-
ble conflict of interest may exist between the
Independent Operator
objectives of individual creditor shareholders and This model is also referred to as an independent
the bureau: some banks, for example, may strongly bureau because lenders do not own the company.
object to the inclusion of new entrants in the Major international credit bureaus follow this
bureau. Larger shareholders may also influence the model, including TransUnion, Experian, Equifax,
pricing policy so that it favors some members over and Baycorp Advantage in Australia and New
others and is not entirely based on commercial Zealand.While this model is not so widespread in
considerations. If a government entity becomes a emerging markets, some examples do exist includ-
28
Developing Credit Bureaus in Emerging Markets
ing Datacheck in Pakistan, CRB in Kenya, the Consumer Credit Association (CCA) and the
CompuScan and XDS in South Africa, Credit South African Banking Council (SABC).The associ-
Registry Corporation in Nigeria, and TUCA in ation and the council operate as closed user
Central America. groups and can determine who can become a
member and access data. The association and the
The main advantage of such a model is that it is council retain ownership of data, meaning that the
a purely commercial entity with strong incentives credit bureaus collect, process, and distribute data,
to innovate and provide high-quality service to its but on behalf of and with permission of the asso-
customers, especially if the market of credit infor- ciation and council.
mation providers is competitive. Conflicts of inter-
ests are absent because ownership and operations 2.3 Practical Considerations
are separate and relationships with members and
users are driven by commercial interests.
for Setting up a Credit Bureau
Although this Guide attempts to present a stan-
Attracting lenders and convincing them to share dard approach to establishing a credit bureau, the
information are the main challenges facing such actual process of establishing a bureau may differ
bureaus. Due to economies of scale, lenders only substantially from the proposed approach because
have an incentive to share information when they no two countries are alike in terms of demograph-
are certain that other lenders will join the credit ics, regulations, legislation, and needs.
bureau and share their information. This is the
main obstacle in countries with no credit bureaus An independent provider or an entity, such as a
or where a bank-owned bureau already exists, as banking association, that is interested in establish-
independent providers struggle to attract credi- ing a credit bureau has to consider the following:
tors. Another potential challenge relevant to new
independent bureaus is the lack of capital, which Market Assessment and Strategy
may hinder the development of new products. Financial Projections
Technology Needs and Technical Partner
Major international credit bureaus are mostly Organizational Structure and Staffing
independent operators. However, the lenders’ fail-
ure to coordinate among themselves may hinder Market Assessment and Strategy
the success of this model in some emerging mar-
kets. Consequently, in many countries when the Market assessment and strategy development for a
first credit bureau is established, the only feasible credit bureau can generally be divided into three
approach is for lenders to become bureau owners phases — Phase 1: Assess Prospects, Phase 2:
so as to build trust and initiate the process of infor- Conduct a Feasibility Study, Phase 3: Develop a
mation exchange. In cases where a bureau has Business Plan. Depending on the market environ-
been successfully operating for a period of time, it ment, there will be a certain degree of overlap and
may be in the lender-owners’ interest to dilute variation in these phases.
their shareholding. The credit bureau’s owners
would then be commercially motivated to broaden Phase 1: Assess Prospects
their customer base as well as to introduce new
products and services as was the case in Hong This phase involves conducting an initial assess-
Kong (China). ment of the demand for and feasibility of develop-
ing a credit bureau.
A structure combining the elements of the two
models is operating in South Africa. Experian and Making a decision to set up a credit bureau
TransUnion, as independent operators, both col- requires consideration of the following market
lect and distribute credit payment information for characteristics:
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CREDIT BUREAU KNOWLEDGE GUIDE
The next step is to conduct consultations with A useful framework for conducting a market
all key stakeholders including: analysis is to conduct demand and supply
assessments.
Financial authorities such as the central bank,
bank supervisory authority, and especially repre- The demand-side analysis looks at:
sentatives of the public credit registry if one
exists. Depth of the credit market in terms of number
Legislative bodies including commissions work- and types of products offered and volume of
ing on credit bureau laws. clients served.
Government bodies when relevant, including Historical rate of growth of the credit market.
members of the ministries of finance and com- Major players (financial and non-financial) in the
merce and other relevant ministries. credit industry.
Licensing bodies including, where they exist,
The supply-side analysis answers the following
regulatory agencies that oversee credit bureaus.
Lenders/financiers, including regulated banks, questions:
non-bank financial institutions, microfinance
institutions, leasing companies, and other credi- Is the demand for credit information satisfied by
tors such as utility and telecom companies. the existing providers?
All existing data providers, including legal firms Are there credit bureaus already operating in
familiar with credit information-sharing issues. the country and, if so, what market do they
serve?
Phase 2: Conduct a Feasibility Study Is there a public credit registry, and does it
include or have plans to include information on
A feasibility study is an in-depth analysis of the mar- retail borrowers?
ket and stakeholders to determine whether credit What are the existing sources of public informa-
bureau establishment is feasible and in what form. tion that the bureau can rely on? (Examples can
include electoral rolls, telephone registers, court
The components of the study are as follows: judgments, bounced check lists, vehicle registra-
tion registries, collateral registration registries,
Market analysis and the like.)
Technical scoping study
30
Developing Credit Bureaus in Emerging Markets
Technical scoping study. The objective of a Do lenders have the technological capacity to
technical scoping study, a critical part of the feasi- share the information?
bility study, is to assess the technical capacity and Are the authorities supportive?
readiness of the lenders to participate in the What level of technical and communication
bureau. It is used to define the technical specifica- infrastructure exists in the country, and will it be
tions of the future bureau. Conduct of this study able to support the needs of the credit bureau?
involves sending detailed questionnaires on the What is the potential business model for the
nature and formats of available information to all bureau?
potential participants and following up with meet- Are consumer rights issues being addressed?
ings with all lenders to discuss the results of the
survey.The focus here is on issues such as: Legal and regulatory assessment. This compo-
nent requires meetings with regulators and quali-
Types of consumer and SME credit products fied legal experts to assess the legal landscape in
offered. the country in question. Following are the main
Level and growth rates of retail and SME credit, issues on which providers should focus while talk-
by product. ing to regulatory agencies:
Current and expected number of credits issued
to inform projections about the potential vol- Is information sharing allowed and, if not, what
ume of inquiries. are the limitations?
Availability of electronically stored historical What is the existing legislation relevant to infor-
information. mation sharing and the proposed credit bureau?
Borrower consent to disclose information to a Who are the enforcement authorities for the
credit bureau. laws relevant to information sharing?
Availability of unique ID numbers for individuals What new rules/regulations are being pro-
and firms. posed?
Level of sophistication of lenders’ internal infor- What are the implications of the legal frame-
mation management systems. work for the credit bureau’s operations?
Technology and infrastructure constraints. How organized are consumer groups,and how likely
Level of awareness among lenders on issues are they to oppose information-sharing plans?
related to credit reporting. Experience shows that in many emerging mar-
Lender willingness to share negative and posi-
kets, the legal environment for the operation of
tive information.
credit bureaus is not clearly defined. In such cases,
Comprehensive analysis of these issues is used a formal legal opinion from a qualified, local legal
to develop the technical specifications for the counsel should be obtained to inform decision
bureau as well as help lenders make the changes makers, from a legal and regulatory viewpoint, on
needed in their lending processes to enable them the feasibility of establishing a credit bureau in
to join the bureau. that particular market.
Stakeholder analysis. This component of the fea- Phase 3: Develop a Business Plan
sibility study addresses issues related to possible
stakeholders of the credit bureau. It asks questions If the results of the feasibility study indicate that a
such as: viable credit bureau can be established, the next
step consists of drawing up a viable business plan.
Is there a broad consensus among lenders on When an independent company plans to enter the
the usefulness of credit information-sharing? credit bureau market, the process is straightforward
Who are the potential members/users of the and includes preparation of a business plan that
bureau? builds on the findings of the feasibility study and
Are lenders willing to share positive and nega- requires securing financing, and obtaining commit-
tive information? ment from lenders to participate in the bureau.
31
CREDIT BUREAU KNOWLEDGE GUIDE
Contracts/Agreements
Users Suppliers
32
Developing Credit Bureaus in Emerging Markets
33
CREDIT BUREAU KNOWLEDGE GUIDE
if the information relates to a new borrower, cre- integrity and reputation and contributes to its suc-
ate a new credit file in the database. cess.The bureau must make sure that it has prop-
er physical as well as system security in place to
Generate and distribute reports protect the sensitive information it holds. The
bureau’s physical office must only be accessible by
The system must also have the capability to allow authorized personnel who have been previously
subscribers to access the bureau’s credit reports. screened. Information theft is as much a physical
Typical modes of access include the following: threat as a system threat, where printed reports or
computer diskettes/CDs can be picked up by a
On-line access. The most popular on-line access passing unauthorized person.
is system-to-system (host-to-host), whereby the
client’s system is connected to the bureau via a The system’s security features should include:
high-speed leased line. Interaction with the
credit bureau is performed entirely by the Strict control of access to the database via mech-
client’s system with no human interaction. A anisms for identifying and authenticating users.
host-to-host connectivity solution may be
Protection against hackers.
required for even a start-up bureau, as some cus-
tomers with large volumes of data would want Clear delineation of authority among network
to integrate their back office system with credit administrators.
data to eliminate data duplication and to stream-
Procedures for backing up data.
line internal workflow.
Automated data updates.
Dialup or web access: In this case, access to the
credit bureau is routed either via an Internet Provisions for recovering information in the
browser or other PC software.Once connected to event of a disaster or total system failure (e.g.,
the bureau, the client provides necessary authen- use of a secure site for storing data where every-
tication information (user name, password, etc.) thing needed to restart the system is available in
to validate access to the credit bureau.This mode case of a disaster).
of access is preferred among users who are not Continual updating of all items stored in the
technically ready or who make limited inquiries recovery site.
to the credit bureau and for whom cost of a host-
to-host solution cannot be justified. Periodic testing of backup hardware and recov-
ery plans and procedures.
Batch access. This mode of access provides
clients with a cost-effective means of processing Adequate policies and procedures are an inte-
large volumes of requests. Lenders deliver infor- gral part of implementing the bureau’s technology
mation to the bureau via DVD, CD, magnetic system. Bearing in mind that credit bureaus handle
tape or electronically and the bureau should be data that are highly confidential and sensitive, the
able to processes these requests off-hours with bureau staff must sign internal agreements to
a quick turn-around. This mode of delivery is abstain from any misuse or breach of confidential-
usually recommended for processing of risk ity of the bureau information.
monitoring for large client portfolios.
In short, it is ultimately the responsibility of the
Provide data security and backup credit bureau management to put in place a secu-
rity policy and take the following actions:
Security is a high priority for credit bureaus
because they manage highly confidential customer Develop and circulate a security policy that
information. Secure systems protect the data and applies to all bureau staff and any technical con-
reports and in so doing protect the bureau’s tractors with access to data.
34
Developing Credit Bureaus in Emerging Markets
Run regular audit checks to ensure enforcement sensitivity of the data held. Participation of an
and adherence to the policy. international credit bureau operator as a technical
partner in a new credit bureau, therefore, not only
Apply appropriate disciplinary action in the
event of security breaches. can provide the required technology and technical
expertise but also, and more importantly, can lend
Review and update the policy as relevant its reputation, crucial business know-how, and the
changes occur in technology, data protection expertise to continuously develop new value-
legislation, employment law, and the like. added services as the bureau grows and the mar-
Keep members of staff up to date with the policy. ket matures.
Failure to address the issues of security and dis- These added benefits explain why the majority
aster preparedness in the early stages of technolo- of emerging countries that have established
gy development puts bureaus at high risk and cre- lender-owned credit bureaus in the last few years,
ates a technical gap that might negatively affect including Mexico, Czech Republic, Turkey,
their ability to attract lenders to their services. Romania, Kazakhstan, Russia, Ukraine, KSA, and
Egypt have opted for the “buy” option. In some
Technology Acquisition Strategy cases, the terms of the partnership may include
selling a share in the bureau to the technical part-
Once the functional requirements have been spec- ner as in Mexico, Kazakhstan, and Russia; in other
ified and the hardware and software needs identi- cases, the contractual agreement covers only the
fied, the bureau must decide whether to build its sale of the software and support. Even when cred-
technology in-house or to outsource it to a techni- it bureaus have opted to develop the software in-
cal partner. house, they often call upon international technolo-
gy providers when their markets are ready to offer
The emerging combination of micro/mid-range value-added services—such as credit scoring—
and web technology has dramatically changed the that require more than just technology.
credit bureau industry. Until a few years ago, the
industry mostly operated on heavy and costly When selecting a technical partner, the bureau
mainframes. Now credit bureaus use web-based needs to evaluate a potential partner according to
applications and are no longer as expensive to the following criteria:
launch as they once were. The positive impact of
the new technology, with its downward pressure Technical: Does the potential partner have the
on costs and lowering of entry barriers for new capability to implement the system in accor-
players, has made it more convenient for investors dance with the local technical specifications?
and entrepreneurs in emerging and developing Does it have a track record in implementing
countries to “buy” technical platforms from exter- credit bureau systems in similar markets?
nal sources—usually internationally reputable Strategic: Is the potential partner able to commit
technology providers— rather than “build” them to the credit bureau over the long term?
in-house.
Financial: Is the cost of the system in line with
Cost should not be the only driver in the deci- the demand for services?
sion to buy a system. It may not be sufficient to
Figure 19 provides several key criteria that need
have a good local technical infrastructure, well-
to be applied from a technical and strategic point
trained domestic computer programmers and IT
of view.The decision regarding the financial impli-
specialists. Credit bureaus require unique knowl-
cations of choosing a technical solution must be
edge and experience to develop and operate the
made in conjunction with overall financial plan-
system because of their complexity and the high
ning and is discussed in the next section.
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CREDIT BUREAU KNOWLEDGE GUIDE
Technical Strategic
2.3.3 Financial Projections Table 2: Hypothetical Pricing Matrix for Credit Bureaus
Forecasting financial outcomes of establishing the Inquiry volume Price Per Inquiry
bureau requires an assessment of potential rev-
<25000
enue and costs and an identification of the drivers
in each of these categories. 25001 - 50000 1.00
50001 - 100000 0.95
Revenue Projections. The main revenue driver 100001 - 250000 0.85
for the credit bureau business is the number of 250001 - 500000 0.80
credit reports or value-added services sold.
> 500000 0.70
Revenue projections are based on the estimated
demand for credit reports and the pricing of
reports. In most cases, the bureau charges a flat The inquiry-demand estimate is based on the
membership fee plus a charge per inquiry (per survey of potential users.The financial projections
click). Volume discounts usually apply, and it is for revenue should allow for time between the
common to have a pricing matrix depending on launch of a credit bureau’s operations and the
the volume of inquiries and the type of user.Table breakeven point at which it actually achieves its
2 provides a hypothetical pricing matrix based on targeted inquiry volume. It is common to have
the annual inquiry volume per user. The cutoff many technical issues related to connecting a
points for volume discounts are determined based lender to the bureau and integrating the credit
on projected demand and average expected bureau’s information into the lending cycle of the
inquiries. institution. Resolving these issues may take at least
three to six months. The growth rate for the vol-
ume of inquiries is based on the projected credit
growth rate for the economy and the expected
number of new users joining the bureau. It is fea-
sible to have growth rates of 50 percent and above
in the first three to five years of a bureau’s opera-
tions in a country with stable credit growth and
new members joining the bureau.
36
Developing Credit Bureaus in Emerging Markets
Cost Projections. In large part, the costs are driv- License and royalty fees paid to the technical
en by the choice to acquire a credit bureau tech- partner based on the number of inquiries
nology system, also referred to as bureau platform, received by the system in addition to fees to
or to develop one in-house. In both cases, the pos- cover ongoing updates and enhancements to
sible cost range is wide and depends on the level the system, usually at an agreed-upon rate.
of sophistication of the system and the types of
Consultancy fees charged by the technical part-
products it is expected to provide. ner for any service over and above the services
specified in the development and maintenance
Cost projections based on the assumption that agreement.
an existing platform will be acquired must include
the following cost elements: The exact fee structure of the contract will vary
significantly in each case. For example, the license
Development/customization/installation fee for and royalty fees may not be applicable if the tech-
the credit bureau platform (usually paid in nical partner is a shareholder in the bureau.
installments).
Maintenance fee, usually a flat fee paid monthly, Other elements to be addressed in the cost pro-
quarterly, or annually. jections include hardware, such as database and
network servers; network equipment and worksta-
37
CREDIT BUREAU KNOWLEDGE GUIDE
38
Developing Credit Bureaus in Emerging Markets
CEO / MD
Legal/
Compliance Unit
Database Officer
Network
Administrator
IT/Support
Service
Number of existing and potential subscribers. report directly to the Chief Executive Officer
Number of branches/workstations connected to (CEO) who manages the company’s activities and,
the bureau. in turn, reports to the Board of Directors. The
Inquiry volumes. Board, whose members are appointed by the par-
Competitors’ strength. ticipating investors of the bureau, is responsible
Consumer awareness of rights and legislation. for the overall corporate governance. Ideally, the
Projected and actual database size. Board should include one or two members of the
Growth plans for the bureau. executive team (the Managing Director and
Complexity of operations (e.g., need for “off- Operations Director/representative of the techni-
line” checks/updates overnight or on week- cal partner).The Board of Directors nominates one
ends). of its members as Chairman of the Board. Figure
21 presents a traditional organizational chart of an
The main divisions of the operational credit
operational credit bureau. Staffing requirements
bureau are: IT and Operations, Business
and responsibilities for an operational credit
Development and Marketing and, Finance/
bureau are outlined in Table 4.
Administration. Divisional heads in each area
39
CREDIT BUREAU KNOWLEDGE GUIDE
Sales & Marketing Responsible for relationship with existing clients and for new clients
Officers enrollment
Responsible for implementing sales & marketing plan and achieving
business objectives
Advertising, conferences/exhibitions
Market research
Media affairs
dentify new data sources
IT Support / Housekeeping
Technical Service System administration
Subscriber and internal Help Desk
40
Developing Credit Bureaus in Emerging Markets
The bureau should operate a help desk staffed characteristics. The key categories for measure-
with the qualified technical experts. Help desk ment include: quality, quantity, timeliness of prod-
technical experts should assist credit bureau mem- ucts and services delivered, financial performance,
bers who have problems connecting to the sys- and customer satisfaction (see Figure 22).
tem, uploading data, and modifying some of the
their data as well as new lenders that may need Figure 22: Key Performance Indicators of a Credit Bureau
additional help in enabling their internal systems
to “talk” to the bureau.
41
CREDIT BUREAU KNOWLEDGE GUIDE
Number of products offered.This could include Number of rejected files. When accepting the
basic reports, detailed reports, credit scores, data from the supplier, the bureau runs simple
portfolio monitoring, fraud detection, etc. consistency checks on the data in the files. If the
file does not pass this test, is the system rejects
The World Bank Doing Business surveys esti- it and sends it back to the data supplier.Tracking
mates the depth of coverage by private credit the number of rejected files allows the credit
bureaus at country level.The indicator used in this bureau to monitor the quality of data available in
case is the number of borrowers covered by the the market.
system (see Figure 13).
Because bureaus are privately owned, ascertain-
A bureau’s objective is to simultaneously ing the quality of information contained in the
increase its coverage ratio, defined as the number bureau databases is difficult.The only publicly avail-
of borrowers in the system divided by the active able information is self-reported by the bureaus in
population, and the hit ratio. Consideration of only their annual statements. Several studies have been
one of these two measures does not provide an conducted recently in the United States and Europe
adequate understanding of the bureau’s perform- to examine this question. For example, a report by
ance. For example, the hit ratio may be high in a the Consumer Federation of America and the
bureau with a very low coverage ratio. This situa- National Credit Reporting Association contained
tion, often found in markets with underdeveloped analyses of the information in the credit reports
credit markets, indicates that the formal financial issued by the three large U.S. credit bureaus:
system serves a small group of individuals and TransUnion, Equifax, and Experian.The authors ana-
most lenders continue targeting the same group lyzed a random sample of credit reports and found
for new lending. that 82.4 percent of the files contained inconsisten-
cies in the category of the balance on revolving
2) Quality. This category refers to the accuracy, accounts or collections and 96.1 percent of the files
currency, completeness, and consistency of the had inconsistencies in the category of account’s
bureau’s data. Information, the main asset of the credit limit. In 43.1 percent of the files, conflicting
credit bureau, only has value if it is accurate and reports existed for the same accounts on how often
current. Relevant indicators of quality may include: the consumer’s payments had been late by 30 days.
The study estimates that,based on inaccuracies con-
Number of complaints.The bureau must have a tained in credit reports, nearly 40 million people
mechanism to receive and log complaints of the may be mistakenly classified as sub-prime borrow-
borrowers about the accuracy of the informa- ers in the mortgage market.25
tion in their credit reports.
While it is true that credit bureaus manage high-
The percentage of complaints with inaccuracies
due to the actions of the bureau. Many com- ly complex and extremely large databases, thereby
plaints that bureau receives may be unjustified making mistakes inevitable, it is essential that a
or result from mistakes made by the data suppli- bureau implement all necessary procedures to
er and not the bureau. Tracking the number of assess the quality of data and take necessary
complaints that can be attributed to the actions to ensure data consistency and accuracy.
bureau’s actions allows the bureau to improve
the quality of its processes. 3) Timeliness. This category refers to the time it
takes for lenders to receive a credit report. The
Data quality reports. The bureau should run data
quality reports to analyze the completeness and
consistency of the data.Such reports produce tabu-
25
lations of fields such as IDs and addresses, dates of Consumer Federation of America and National Credit Reporting Association.
birth, and other identifying information and allow December 2002. Credit Score Accuracy and Implications for Consumers.
the credit bureau to determine whether there are Available at: http://www.ncrainc.org/documents/CFA%20NCRA%20Credit
duplicate or incomplete files in the system. %20Score%20Report.pdf.
42
Developing Credit Bureaus in Emerging Markets
World Bank’s Doing Business Survey26 indicates have been reported. According to the World
approximately 57 percent of private credit Bank’s 2004 survey, 78 private credit bureaus
bureaus (in a survey of 78 credit bureaus) report- surveyed, approximately 76 percent reported
ed that data requests were met instantaneously. taking less than two weeks to rectify errors.
The majority of credit bureaus met all demands Another eight percent reported taking between
within seven days of receiving a request (see two weeks and one month to correct errors.28
Figure 23).
4) Financial Performance. While return on equi-
ty, profit margins, and operational costs are stan-
Figure 23: Average Time between Request and Release of
dard indicators of financial performance, the
Data bureau may also track more specific indicators,
such as:
43
Developing Value-Added Services in Emerging Markets
Developing
Value-Added Services
in Emerging Markets 3
3.1 Definition and Importance report can be extremely difficult to integrate into
such systems. Many types of value-added service
of Value-Added Services (e.g., application processing systems and behav-
Value-added services comprise a broad class of ioral risk assessment) however, lend themselves
products that more sophisticated credit bureaus perfectly to inclusion within automated systems.
can offer. Such services entail the manipulation,
processing, and analysis of existing raw data to pro- The major benefit of automated decision-mak-
duce tools that can be easily integrated into banks’ ing systems is that they allow users to manage
credit approval and risk management processes. many customer decisions on an exception basis
The range of potential value-added services is rather than having to review each and every case.
quite extensive and includes, but is not limited to: This helps contain the need for employing highly
experienced, and often very expensive, individuals
Marketing services to make mundane or rudimentary decisions and
Credit scoring allows lenders to channel this experience into
Application processing more productive tasks.
Portfolio monitoring
Fraud detection Larger financial institutions that operate in devel-
Collections oped markets typically develop customized value-
adding tools, either using in-house analytical teams
Raw credit data can be very useful in each of or contracting with one of the numerous special-
these areas, however, the lender needs significant ized companies that have emerged to service this
time, resources, and expertise to analyze and inter- market, such as FairIsaac and Experian-Scorex
pret the data.Value-added services use a variety of (Global), PIC Solutions (Africa), and LISIM (Latin
techniques, ranging from simple data aggregation America). Financial institutions in developing mar-
and cross-referencing to complex statistical algo- kets, however, tend to be smaller and either have
rithms, to provide an output that provides the customer databases that are too small for such solu-
lender with a simple interpretation of the informa- tions to be statistically reliable or find it difficult to
tion available (e.g., a risk score). justify the up-front capital cost of development.
Given the volume of decisions often required to In emerging markets, therefore, the credit
manage a typical retail portfolio (e.g., grant/reject bureau can play an important role in making
facility, over-limit authorization, cross sell/up sell, these types of services available to a broader
past due action required), many lenders have audience, by pooling data across a range of cus-
turned to automation as a means of maintaining tomers and spreading the cost of development
efficiency, but raw data in the form of a credit across its user base.
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CREDIT BUREAU KNOWLEDGE GUIDE
Although users still have to pay for these servic- bureau operates,that is,the extent to which the raw
es, typically on a “pay as you go” or “click” basis, data can be used.The trend in developed markets,
they get immediate access to the benefits of however, has been to create a suite of value-adding
improved lending methodologies, more cost-effec- products aligned to what is sometimes referred to
tive processes, and increased operational efficien- as the “customer life cycle” (see Figure 24).
cy that, under other circumstances, would only be
available to larger institutions. The customer life cycle effectively mirrors the
core business functions adopted by most lenders
3.2 International Industry when managing customers: prospecting and mar-
Trends keting, new business acquisition (loan process-
ing), customer relationship management, and col-
The range of value-added services offered by cred- lections.
it bureaus has broadened significantly over the last
20 years. This growth has been fueled both from The credit bureau, typically, builds products or
the demand side—users wanting more and more solutions that help its customers in each of these
sophisticated products—and the supply side— business functions make better or faster decisions
bureaus trying to increase/maintain income mar- by using the predictive nature of bureau data. In
gins in an environment where there is consistent effect, the bureau is re-cycling its databases so that
downward pressure on commodity prices (the users access the files more than just at the point
cost of the raw data). when they make an initial loan inquiry. For exam-
ple, a behavioral scoring system may access a cus-
The scope of the products offered is very much tomer’s credit file monthly to identify updates
a function of the environment in which the credit rather than just once at the point of application.
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Developing Value-Added Services in Emerging Markets
Some value-added services may be no more Stage 1: Initial Deployment. At inception, a new
than enhanced bureau reports, such as a watch-out credit bureau is intrinsically an empty box, a data-
service that pro-actively advises a lender of a base with no data. Although able to back-fill the
change to a customer’s file, and requires little in database with some historical records, such as past
the way of analytical expertise. Having introduced defaults, the bureau does not have access to the
these services at a relatively early stage, most cred- most powerful data sources, such as the credit
it bureaus aim to move up the value chain to add repayment record and the inquiry footprint, which
increasingly more sophisticated tools, such as scor- need to be built up over time.
ing and credit information management software.
These more complex solutions have the dual ben- Stage 2: User Acquisition. Although not neces-
efit of generating greater revenues for the bureau sarily the case in all countries, the trend in many
and also locking in the clients to the bureau serv- emerging markets is for the initial development of
ices, (i.e., making users more reliant on the supply- credit bureaus to take place within the banking
ing bureau and, therefore, less likely to transfer alle- community. The main driver of this approach is
giance to competitive sources of information). that the banks are the major providers of credit
and have one clearly defined supervisory entity.
In developed economies, bureaus tend to use The first step then is to upload the data from the
specialized internal analytical teams to develop initial members, i.e., the lenders.
and maintain these services. In emerging countries
that lack such specialists, bureaus typically rely on Stage 3: Data Diversification. In parallel with
outsourcing development, often to the same ven- Stage 2, the bureau attempts to augment the basic
dors that supply custom services directly to the credit history data with other forms of information
lenders, such as FairIsaac, Experian, or LISIM, who that may be beneficial to users, such as electoral
recently developed generic microfinance bureau rolls, identity records, court judgments, telephone
scoring services for CompuScan in South Africa. numbers, and company registration records. This
The critical issue, however, is not who develops type of data can be particularly useful to members:
the services, but when they can be deployed. it may be predictive of future borrower behavior
or it may make their processes simpler by provid-
The credit bureau databases in most developed ing a portal to a “one-stop data shop”.The data also
countries have had many years to develop, are rich provide a valuable source of information for data
in information, and for the most part offer high mining and modeling.
quality data, thus providing an ideal base for data
mining and data modeling. Stage 4: User Diversification. Even where the
banks take a pro-active role in establishing the
The credit bureau databases in many emerging credit bureau, it is often clear from the outset that,
markets, however, are considerably less developed: at some point in time, the user base should expand
they may have information only from banks and to include non-bank creditors, such as telecommu-
may not have been operational long enough to nications companies, microfinance lenders, and
build the diversity of information sources required the like.
for value-added products. Their inquiry/search
databases, for example, may not contain enough The introduction of new users can have a pro-
historical information. In these circumstances, it found effect on the composition of the bureau
may be difficult, or indeed impossible, to build databases and, therefore, the predictive nature of
some of the more sophisticated solutions, such as the data. In several countries, expanding to include
credit scoring. telecommunications providers has had a signifi-
cant impact on the predictive power of the inquiry
Planning for the development of value-added database as the pattern of telecom payments may
services requires an understanding of the stages be indicative of future defaults on bank credits.
required for a credit bureau to “mature.”
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CREDIT BUREAU KNOWLEDGE GUIDE
Adding new bureau members also has implica- There are two other key factors that a bureau
tions in terms of reciprocity, namely access to the would typically take into consideration when devel-
information on the basis of their level of data con- oping value-added services: Return on Investment
tribution. The rules of reciprocity extend to the (ROI) and users’ capacity to adopt the service.
design and delivery of value-added products. A
bureau score that incorporates positive credit his- Return on Investment. A clear business case
tory information, for example, should not be made must exist for the development of a value-added
available to a member that provides only negative service.The projected revenue from the sales of
information, even if the member never actually the services must cover the investment cost and
sees the positive data. produce positive return.The pricing and market-
ing strategy often includes bundling value-
Stage 5: Database Maturity. Credit bureau data- added services with the sale of core data.
bases change over time as the availability of data
sources and the number/type of users change. The capacity of users to adopt the service.
Databases typically tend to grow in both depth Members will only demand a service if they
and breadth, but not always. Privacy restrictions have the capacity to use the service to improve
can result in changes to the availability of certain some element of their own processes.A bureau
types of information as was seen in the United score, for example, adds no value unless the
Kingdom in 2000 when restrictions were placed lender is able to integrate it into its credit under-
on using electoral roll information. writing process to lower the costs of credit
approval. User-side constraints have a significant
In general, however, the core bureau database bearing, especially in emerging markets, on who
needs a period of time to mature from the above will use the services and in what quantities.
stages of development in order for the data there-
in to be predictive of a future outcome (see sec- Even in developed markets, the uptake of new
tion below on Credit Scoring). bureau products and services is not guaranteed
and typically requires a highly pro-active sales and
The ever-changing nature of the database marketing department/staff to promote the prod-
explains why value-added products and services uct to the market. Experian, for example, launched
require continuous monitoring and fine-tuning. Detect, its industry-leading fraud detection prod-
Estimates based on today’s data may not apply 12 uct, three times in the United Kingdom before the
months from now as the overall economic envi- product received market acceptance.
ronment may change.
In emerging markets, the problem of accept-
Stage 6: Service Expansion. There are no hard ance of value-added products is even more pro-
and fast rules as to when value-added services can nounced. Except for the international banks, many
be introduced. Simple services, such as expanded lenders in emerging markets lack an understand-
credit reports, can be introduced at low cost at a ing of the lending methodologies that can be
relatively early stage, even during Stages 2 and 3. implemented using these services and of the IT
Bureaus typically develop more sophisticated infrastructure needed to deploy them.
products, such as credit scoring, which are usually
more expensive to build and maintain, when the Credit bureaus in emerging markets should not
database and to some extent the user base have underestimate, therefore, the need for outreach
reached a level of maturity where the resulting training, market development, and sales functions
products will be both robust and have a reason- within their organizations. As products become
able shelf life.This is most likely to occur once the more sophisticated and more analytical, bureaus
bureau has reached Stages 3 or 4. It is only when should also recognize the need to have internal
the bureau has reached stage 5, however, that a specialist resources to monitor and maintain the
broad suite of products, such as described in products and, perhaps more importantly, commu-
Figure 24, can be contemplated. nicate the benefits to potential users.
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Developing Value-Added Services in Emerging Markets
Developing value-added services can benefit Credit bureaus typically build scores using three
both the bureaus and their customers and ulti- historical data files that are unique to the credit
mately may improve access to finance for the bureau:
broader community.The opportunities, challenges,
and ensuing benefits, however, will vary consider- Defaults on previous credit transactions.
ably depending on a bureau’s individual circum- Positive payment behavior (trade line data).
stances and the market in which it operates. Previous searches/inquiries.
The following sections describe in detail some In certain circumstances, the models may
of the core value-added products credit bureaus include other types of data, such as:
offer.
Third party data, e.g., court judgments and bank-
ruptcies.
3.3 Products Demographic data, e.g., applicants’ personal
The following list, although not inclusive of all of attributes, such as age.
the value-added products credit bureaus provide, Geodemographic data, aggregated information
at the geographic level.
serves as a guide to the key services typically avail-
able. The accompanying examples indicate how Each of these components could potentially add
these products are deployed in certain markets predictive power to a bureau score, but care must
and may not be applicable to all circumstances. be taken to ensure that the resulting models do not
conflict with a lender’s existing decision-making
3.3.1 Bureau Scores process. For example, a credit score that incorpo-
rates the customer’s age may be incompatible with
A credit score is a number assigned to a borrower a lender’s custom scorecard that also includes age.
based on his ability and capacity to repay debt. Typically, therefore, a credit bureau may choose to
This number falls within a range of scores, and a develop a suite of models rather than just one
higher score indicates a more creditworthy bor- model to accommodate as many different customer
rower.This score is computed from available cred- requirements as possible. Examples follow:
it history information using a statistical model or
mathematical algorithm. Credit scores can be used Positive bureau score for closed user group
in the loan approval process for simple members providing both positive and negative
accept/reject rules or for more sophisticated risk- data and typically used as a plug-in or addition to
based pricing rules and credit limits. in-house custom scores.
Bureau score refers to credit scores developed Negative bureau score for closed user group
on the basis of the credit bureau data and are dif- members providing only negative information.
ferent from the credit scores developed on the Enhanced bureau score incorporating additional
basis of the data supplied by an individual lender. customer demographic data and typically used
Bureau scores are based on the information on a stand-alone basis by lenders with no other
pooled across many creditors as well as public scoring models.
information sources and thus include characteris-
Industry-specific bureau scores using data
tics otherwise unavailable to the individual lender,
derived from specific industry sectors, such as
such as total exposure, number of outstanding
banking or telecommunications.
loans, and previous defaults within the system. All
of these are highly predictive measures of future Public domain bureau score using data available
repayment. in the public domain and, therefore, available to
all customers.
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CREDIT BUREAU KNOWLEDGE GUIDE
Because different users can use the scores for Scoring Model Calibration. The bureau builds
different purposes, the credit bureau typically uses the credit scores from a broad spectrum of cus-
a variety of different distribution channels. In its tomer histories found in its database. The
simplest form, the credit score can be incorporat- derived scores are typically calibrated for an
ed into a credit report, usually with some explana- average portfolio; that is, the distribution of cus-
tion as to what the score means. Alternatively, the tomers across the range of scores reflects what
bureau may supply the score to the users electron- is seen across the whole spectrum of customers
ically so that it can be incorporated into cus- at the bureau.While probability of default at any
tomized scoring solutions or automated software given score should remain constant for all users,
applications.A third and increasingly popular serv- the cumulative good to bad odds will vary from
ice is the use of a regular batch service that portfolio to portfolio depending on the risk pro-
rescores complete portfolios periodically. The file of the applicant base. This can have a pro-
charging structure for each of these services also found effect on the way lenders manage their
varies although most bureaus charge users on a cut-off strategies (the scores at which the lender
per-score or per click basis. chooses to accept or decline applicants). It is
highly recommended, therefore, that individual
When adequate quantities of reliable informa- portfolios be retrospectively tested before the
tion are available, bureau scores can be statistical- models are implemented.
ly derived, typically by using some form of multi-
In emerging markets where either the market is
variate regression analysis.The techniques used to
too small or the credit bureau is insufficiently
develop the models are very similar to those used
mature to have confidence in the data, the bureau
for any other type of customized model develop-
may consider offering models that rely more heav-
ment. There are, however, several unique chal-
ily on customer demographic characteristics than
lenges that can complicate the process of build-
on credit performance data. Although less predic-
ing/deploying bureau models:
tive, these models often provide a useful introduc-
tion to the methodology for lenders with little or
Retrospective Data. A key requirement of the
no previous experience in credit scoring.
analysis is the ability to observe the transition of
a credit file from the point at which an applica-
tion was made, through the observation period, 3.3.2 Software Applications
to the outcome point. This requires that the
bureau be capable of retrospectively recon- A key advantage of credit scoring is the bureau’s
structing a credit file at various points in time. ability to establish a quantifiable measure of risk in
With adequate archiving of the database, recon- what is otherwise a highly subjective process.
struction may not seem like a significant issue. Having a numeric value (a measure of probability
Changes in customer name, address, ID num- of default) for risk is valuable in its own right but
bers, and the like can cause tracking problems, becomes increasingly powerful when integrated
however, if not appropriately addressed. into automated processes and used to pro-actively
manage strategy and a lender’s appetite for risk.
Thin File. The data files may range from
extremely detailed, as when a data subject has a To help facilitate this process, many credit
variety of pre-existing credit facilities with vari- bureaus in mature economies have developed a
ous outcomes, to very thin data, as when the range of software solutions that complement both
bureau has no pre-existing information on the the raw bureau data and the scoring process
applicant. In cases when a bureau has only a lim- adopted by sophisticated lenders.These solutions
ited amount of data on borrower performance are commonly provided either as software applica-
and outcomes, standard statistical multivariate tions—customized to specific user requirements
analysis may not apply and other methods and maintained within the client’s own IT environ-
should be used. ment—or as bureau solutions—more generic in
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Developing Value-Added Services in Emerging Markets
nature and hosted at the bureau.The available solu- (e.g., terms, limits, and product features) and
tions are many and varied, but the following repre- even champion/challenger strategy setting to
sents a summary of the more popular applications. test the lender’s appetite for risk.
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CREDIT BUREAU KNOWLEDGE GUIDE
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Developing Value-Added Services in Emerging Markets
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CREDIT BUREAU KNOWLEDGE GUIDE
54
Legal and Regulatory Framework
Legal and
Regulatory Framework 4
4.1 Key Principles for Credit Europe, to date 14 out of 22 countries have a cred-
it bureau. Most bureaus in the region were estab-
Information-Sharing lished within the last five to seven years and all of
Legislation/Regulation them in countries with bank secrecy provisions.
The legal framework for credit reporting differs Legal and regulatory approaches vary across
from country to country and may include a combi- countries, but explicit borrower consent generally
nation of the following legal acts: suffices to enable a bank to share information.
Debate surrounding the issue usually revolves
Credit Reporting Laws
around the format in which consent should be
Data Protection Laws
submitted and the way banks should store such
Consumer Protection Laws
consent. Passing a credit reporting law or a regula-
Fair Credit Granting and Consumer Credit
tion generally helps resolve these issues. In the
Regulations
absence of such laws, however, a simple agree-
Personal and corporate privacy and secrecy
ment among lenders to collect consent and share
provisions
information will suffice. In Switzerland, for exam-
Bank secrecy provisions in the law or contractu- ple, a credit bureau has been operating since 1974
al confidentiality provisions are often cited as an merely on the basis of borrower consent.29
impediment to the development of a credit bureau.
In accordance with these provisions, banks are not Although bank secrecy and confidentiality provi-
allowed to disclose information related to the sions do not prohibit the sharing of credit informa-
account and transactions of its client to a third tion, lack of clarity and agreement among stake-
party. Analysis of 84 countries in all regions of the holders on the most appropriate way to address
world shows that in 62 countries with explicit such issues usually impedes the establishment of
bank secrecy provisions, roughly 63 percent or 39 credit bureaus. In several countries, such as Russia,
countries had an operating private credit bureau. Kazakhstan, and Ukraine, credit bureaus were not
Figure 25 shows the number of countries with set up until clarifying legislation was passed. In
operating credit bureaus in the countries with other countries, such as Kenya, Tanzania, and
explicit bank secrecy provisions in the law. In high- Georgia, the debate continues on the most appro-
income Organization of Economic Cooperation priate manner in which to share credit information.
and Development (OECD) countries, 11 out of 12
countries with bank secrecy provisions had a pri-
vate bureau. In Latin America, seven out of eight
29
countries operated credit bureaus. In Eastern World Bank. 2005. Doing Business Database on Private Credit Bureaus.
55
CREDIT BUREAU KNOWLEDGE GUIDE
22
Number of Countries
14
12
11
8 8
7
6 6
5
1 1
The main objective of legislation to enable cred- Good enabling legislation incorporates the fol-
it reporting is to balance the ability of institutions lowing characteristics:
to exchange credit information in the normal
Open system. Reporting and access are open to
course of business while simultaneously protect-
both financial institutions and non-bank credi-
ing individuals’ rights to privacy. Two broad
tors, such as retailers, telecom and utility compa-
approaches to the regulation of credit reporting
nies, and debt collectors.
can be identified: 1) use of broad data protection
laws and 2) use of specific credit bureau or credit Permissible purpose. The legislation protects
reporting laws. The European Union and several the rights of individuals and firms to ensure that
other European countries regulate credit report- data are not misused, while permitting the shar-
ing activities under broad data protection laws ing of information. Typically, access to informa-
that cover not only credit bureau activities but also tion is only allowed for a certain identified pur-
any other relationships and transactions related to pose, such as credit approval, portfolio monitor-
data management and exchange. Recently, several ing, debt collection, and employment. Many
emerging markets have followed this approach: countries require borrower consent in order for
Chile passed a data protection law in 1999, and a creditor to access information in a bureau.
Argentina passed a similar law in 2000. Authorized access to information. Only author-
ized parties may access information in the cred-
Regulating credit reporting activities through a it bureau, and information may only be used for
specific credit bureau or credit reporting law is permissible purposes. The legislation may
another approach. Countries that have adopted require borrower consent or notification to
this type of approach include the United States, allow the lender to access information.The leg-
Thailand, Russia, Kazakhstan, Peru, and Ukraine. islation may also require that the names of all
See Annex 2 for further information on existing lenders that have accessed data be a part of the
credit reporting and data protection laws. credit report available to the borrower so as to
ensure that no information is accessed without
borrower consent.
56
Legal and Regulatory Framework
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CREDIT BUREAU KNOWLEDGE GUIDE
laws have been passed recently, the central bringing class action suits in case of systematic
bank, the bank superintendent, or the supervi- violations.This type of enforcement mechanism
sor of a non-bank financial institution can per- is prevalent in the United Kingdom, Hong Kong
form the licensing function. In Russia and some (China),Australia, and South Africa.
European Union countries, the credit bureau is
required to register with the supervisory author- To ensure the smooth implementation of credit
ities but does not need to obtain a license to bureau legislation, it is critical to build the capaci-
operate. Other countries, such as the United ty of the supervisory authority. In several cases,
States, require neither licensing nor registration. implementation of the law was delayed or had a
significant negative impact on existing bureaus
In case of severe violations of data sharing regu- due to the lack of enforcement capacity. For exam-
lations or laws, the supervisory authority can ple, in Russia a credit bureau law was passed in
penalize the bureau in question by revoking its December 2004. The law required all financial
license or registration. In the absence of licens- institutions to submit information, to a registered
ing or registration procedures, any data viola- credit bureau after obtaining borrower consent.A
tions need to be resolved via the country’s court supervisory authority, however, was appointed
system. This approach works well in countries, after much delay and could not develop a registra-
such as the United States, where the judicial sys- tion procedure in time. As a result, the implemen-
tems are well developed and consumers can file tation of the law had to be postponed by more
a class action law suit in case of systemic viola- than one year. Due to the lack of supervisory
tions by credit bureaus. Most emerging coun- capacity, the authority also was unable to provide
tries, however, have weak judicial systems and guidance to financial institutions on compliance
opt for a strong regulatory agency instead. with the law.
Industry self-regulation within an established The basic bureau operation principles include:
legal framework. Here the enforcement authori-
ty’s role is limited to issuing clarifying state- Reciprocity—the requirement that all members
ments, collecting complaints, and in some cases provide data in order to obtain access to the
information in the bureau.
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Legal and Regulatory Framework
Data format—the specification of the format in Examples of CoC provisions related to investiga-
which data are submitted and distributed. tion into disputed information are as follows:
Frequency—the schedule for data submission
and updates. It is customary to have updates on A data subject or a member may notify the
a monthly basis with the exception of default bureau in writing that the completeness or
records, which need to be updated only if there accuracy of any item of information is disputed.
is a change in the status of the credit. The bureau shall investigate such disputed infor-
Quality—the requirement that the information mation and provide response to the information
be accurate, complete, current, and provided on subject within a specified period of time, usual-
time. ly between five and 15 business days.
The bureau must ensure that information
Table 5 identifies the respective rights and obli- regarding a consumer is updated and must veri-
gations of a credit bureau and its members and fy the information with the member that has
data subjects. supplied the information.
The bureau shall correct the information regard-
The CoC also specifies responsibilities of ing the data subject if the complaint is substan-
bureaus and members in the areas of investigation tiated in the course of investigation.
and correction of erroneous information, investiga- For the duration of the investigation, the credit
tion and resolution of complaints, and imposition record in the bureau must indicate that the
of penalties where appropriate. information is under dispute.
Bureau’s rights Record, maintain, collate, synthesize, and/or process information properly
and obligations and accurately.
Protect information against loss and damage.
Protect information against unauthorized access, use, modification, or
disclosure.
Retain and display information for the relevant periods.
Grant access to own credit reports to individuals who offer proof of identity.
Maintain a help desk.
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CREDIT BUREAU KNOWLEDGE GUIDE
With respect to breaches of the code and mech- tee, appointed in consultation with the Board of
anisms for resolving them, the CoC usually speci- the bureau, the members, and the supervisory
fies that any member may submit a complaint of agency for the law governing the activities of the
violation of the CoC by another member. credit bureau, has the right to impose penalties,
Generally, a compliance committee comprising such as suspending access to the registry by a
the members of the bureau and/or independent member that systematically violates the Code.
experts investigates such complaints.This commit-
60
Case Studies
5
Case Studies
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CREDIT BUREAU KNOWLEDGE GUIDE
62
Case Studies
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CREDIT BUREAU KNOWLEDGE GUIDE
64
Case Studies
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CREDIT BUREAU KNOWLEDGE GUIDE
CIC’s technical infrastructure cannot support The SBV approved the strategy plan, and work
the data volumes associated with a comprehen- on the legal and regulatory framework and the
sive consumer credit file. preparation of the business plan for the credit
CIC does not have the requisite experience for bureau began in April 2005.
developing or operating a consumer credit
bureau.
66
Annex 1: Maps
Annex 1:
Maps
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CREDIT BUREAU KNOWLEDGE GUIDE
68
Annex 1: Maps
69
CREDIT BUREAU KNOWLEDGE GUIDE
70
Annex 1: Maps
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CREDIT BUREAU KNOWLEDGE GUIDE
72
Annex 2: Countries with Credit Information Sharing Laws
Annex 2:
Countries with Credit
Information Sharing Laws
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74