Region lenders need a centralised pool of credit data to assess risk-profiles without invading privacy. Anju Govil speaks to the key players to find out how credit reporting will work in the region and what benefits it would bring.
Globally, credit reporting is steadily becoming an integral part of all economies. In mature markets, credit reporting allows a broad section of the population to gain access to credit. In new credit markets, it fosters transparency and reduces over-exposure and overheating, leading to a more stable economy.
Financial liberalisation and a more stable macroeconomic environment have always been associated with an increase in credit growth. Between 1996 and 2005, developing countries saw credit to the private sector increase by 62 per cent on an average. Closer to home, as lenders in the regional market begin to enter the retail credit market, the need for credit information and for streamlining lending is bringing credit bureaus under the spotlight.
Yet, while 80 per cent of the countries worldwide have either a credit bureau or public registries in the region, only three out of the six GCC countries have established a credit bureau and most of them are in the early stages of operation. "There have been several initiatives in the UAE which have tried to jump-start the credit bureaus here. I don't believe that any of these have gone into the implementation stage as yet," confirms Azmat Taufique, senior regional manager, MENA, International Finance Corporation.
According to Taufique, part of the challenge is to pull all the emirates onto a common platform. "Besides, a lot is happening in the country in terms of company law and other important legislations, making it difficult for this issue to gain priority," he says. In the UAE, the central bank has a registry, but that has a narrower function and, in its current form, it is difficult for it to be an alternative to a credit bureau.
Credit bureaus provide information on all accounts that the borrower may have had, all accounts in good standing, accounts that are past due, negative account history plus enquiries made on the borrower in the past year. Credit reports also provide information on collections made on outstanding accounts and any available public records such as court judgments and bankruptcy rulings.
Having access to a comprehensive borrower profile, lenders get a holistic view of each customer and are better placed to make a more appropriate decision. Debt management, customer service, sales and customer management optimisation are some issues that can do better with independent credit bureaus.
On the other hand, restricted credit reporting countries with no credit bureaus are known to offer expensive, collateral-led credit with limited loan features. The major negative impact of this situation is on such consumers that are financially vulnerable. Further, credit bureaus often include information not just from traditional lenders such as banks and credit card companies, but also other providers of credit such as retailers, suppliers, telecom and utility companies thus providing more reliable and accurate data to customers.
For instance, a World Bank report titled Doing Business in 2006 said that roughly 60 per cent of private credit bureaus included information from retailers and merchants, and at least 43 per cent included information from utility providers in their databases. In contrast, the survey on public credit registries (PCRs) revealed that a very small percentage looked towards retailers or merchants for credit information and no PCR included information from utility providers.
In emerging markets where information is scarce, such non-traditional sources can provide invaluable information. In the US, the inclusion of information from non-bank lenders into a credit-scoring model allows banks to reduce default rates by 38 per cent with a target approval rate of 60 per cent. Further, small lenders benefit more than large lenders from sharing information.
Surprisingly, the ones set up have met with considerable success. Already, in a recent World Bank report, SIMAH (Saudi Arabia's credit bureau) was selected as one of the top five reformers over the past two years that had a significant impact on the credit information index of the country. "This is not a mean achievement considering SIMAH is still in a very early stage of developing new products and service whereas the other countries [in the Top Five listing] - India, Nicaragua, Romania and Belgium have had a major development in the credit information market in the past two years," says Nabil Al-Mubarak, general manager, SIMAH.
SIMAH's marketing campaign on credit bureaus generated around 500 daily calls from consumers either checking their credit reports or wanting a quick update for their profile. Similarly, in Kuwait, Ci-Net users
carried out 487,034 enquiries during the period April, 2005 to March 2006. Ci-Net database contained 2,763,213 counts, with a total balance of $16.1 billion (KD4,925,077,672) as of April 1, 2006. Looking regionally, the Turkish credit bureau handled 29.3 million enquiries in 2005.
Reasons for this early success are obvious. It has been proven that data sharing across different industries facilitates access to credit for borrowers and reduces the overall bad debt ratio. "Usually, a credit bureau will reduce bad-rate by between 20 and 30 per cent," says Roberto Giannantoni, credit bureau and fraud services director, EMEA, Experian-Scorex. His organisation, with 19 live national credit bureau solutions, has already supplied solutions to Kuwait and Saudi Arabia and is in the process of delivering solutions to Iran and Pakistan.
The lower bad-debt ratio, in turn, allows for reduced capital provisioning to cover bad-debt losses, releasing more capital for growth activities. However, the limited availability of information makes the ownership of these bureaus a critical variable. In most European markets, the bureau is operated by private business. This is not the case in the region. In Kuwait, for instance, Ci-Net, the local bureau, is owned by the banks and other financial institutions. Its board of directors consists of 12 members, nine of whom represent commercial banks while the rest represent financial companies.
"While international experience demonstrates that independent bureaus are best fit to satisfy customers' needs, the reality is that without the support of key lenders, the bureau may not be able to attract a sufficient number of providers of information, as well as users to begin operations. As a result, in some countries, when the first credit bureau is established, a practical approach is for the lenders to become bureau owners to build trust and enable information exchange," says Taufique.
"As per my opinion, I do not prefer to standardise the business where they are being owned by lenders or private bodies. Based on the structure set-up of credit bureaus around the world, you will find that all credit bureaus were initiated either by central banks or by other banks," argues Al-Mubarak. One reason for this approach could be that huge investments were needed to set up a credit bureau. Also, the sensitive nature of the business since it deals with personal information makes trust an implicit success factor.
"In the case where a bureau has been successfully operating for a period of time, it may be in the users' interest to dilute their shareholding," reiterates Taufique. The credit bureau owners would then be commercially motivated to broaden their customer base, as well as to introduce new products and services.
Another approach is to let private credit bureaus and public registries complement each other.
Public registries maintain public records and could use the credit bureau's data to validate information they have as it brings data from many other sources. Equally, credit bureaus benefit from public registries and can, for instance, gather additional information on, say, business borrowers, like balance sheets or company registration data. It is also common to collect information from public registries recording identity document data, telephone directories or postal files to run verification process and reduce fraud activity.
Consequently, private credit bureau and public registers can co-exist easily as long as operating companies distinguish their respective roles. "Private credit bureaus are dynamic businesses offering a set of value-added services with restricted subscriber access while public registers fulfil the need to store just a set of publicly available raw data," says Giannantoni. Globally, private credit bureaus operate in 67 countries; public credit registries operate in 70 countries and they co-exist in 30 countries. However, all bureaus operating in the region presently are bank-owned bureaus, which seems to be the most appropriate solution at the moment.
In Saudi Arabia, a decision has been taken against having a public registry. The SIMAH will handle all data requirements and will provide SAMA (Saudi Arabia Monetary Agency) with all the data needed for their supervision/inspection activities and also for statistical purposes.
Assessing the commercial viability of the regional market, private credit bureau operators support partnerships with the local banks and financial institutions to spread the culture. "We believe that international experience has to be combined with local expertise and we are very much in favour of this business model," says Giannantoni.
Given the nascent stage of developing of regional credit bureaus, talk of a centralised GCC bureau might appear premature at first instance. "A more realistic approach would probably be to scale up each country's operations while at the same time maintaining dialogue among the countries to ensure the possibility of the future information exchange, through harmonising data formats and adopting a code of conduct (CoC) accepted by all bureaus in the region," says Taufique.
Opinions vary. "Our view is that an independent bureau in each market is a more practical approach as it addresses the specific legal or regulatory requirements of each market," says Giannantoni. "At Ci-Net, we think that linking to other bureaus in the region will have significant and productive results," adds Eyad Omar Al-Serri, general manager, Ci-Net, Kuwait.
A GCC-wide solution would almost certainly need cross-border data transfer and this might be complex, not from a technology point of view, but more from complying with rules and regulations. Not to say that this could not be addressed by ensuring proper and explicit consent from data subjects, as well as adopting a GCC-wide regional regulation similar to the one in force in the European Union. "It will be done in the future but not right now. First, there should be operational credit bureaus in the GCC and regulations in place," says Al-Mubarak.
The real issue is not just to meet international standards in terms of credit bureau ownership and regulatory framework. The challenge is to ensure a continuous evolution of the credit bureau service, perhaps through the development of value-added products (VAPs) that make credit bureaus useful on all the credit cycle phases (marketing, acquisition, portfolio management and collections).
VAPs such as credit scoring and fraud analytics turn the data into powerful intelligence, empowering the lenders to make much better decisions regarding their customers. Other value-added services that can be offered as the bureau database matures include authentication, verification, consumer monitoring and management. Extension of the member base could also lead to enhanced offerings. Kuwait's Ci-Net is planning to add companies with the nature of granting subscription facilities for their customers, such as cable subscription and Internet subscription. It is also hoping to allow some companies prevented by the current law from joining Ci-Net, ie. mobile telecommunication companies and real estate owners.
However, the incentive to offer these services depends on the commercial viability of regional credit bureaus. "There should be a significant movement of borrowers who participate in several credit markets or lenders who operate on a regional basis with a centralised or co-ordinated credit policy," says Taufique, talking about profitability of these bureaus.
As a starting point, reporting and access should be open to both financial institutions and non-bank creditors such as retailers, telecom companies, debt collectors and utility companies. While evolution in connectivity and data management has meant that lenders today can be confident that customer data is complete and correct, the success of credit bureaus depends on enabling legislation that recognises the rights of all the participants in the credit bureau, as well as lays down their respective obligations.
The main objective of the legislation enabling credit reporting is to balance the ability of institutions to exchange credit information in the normal course of business on the one side and protecting individual's rights for privacy on the other side. These could be in the shape of broader data protection laws or through a specific credit bureau or credit reporting law. The US, Thailand, Russia, Kazakhstan, Peru and Ukraine have adopted the latter approach.
Bank secrecy provisions in the law or contractual confidentiality provisions are often cited as an impediment to the development of the credit bureau. In accordance with these provisions, banks are not allowed to disclose information related to the account and transactions of its client to a third party. Analysis of 84 countries in the world shows that in 62 countries with explicit bank secrecy provisions, there were 39 private credit bureaus operating - or 63 per cent.
"If the credit bureau is not regulated and supervised, it may cause problems to the legal system more than managing the risk which is its purpose," warns Al-Mubarak. For instance, the ownership of data loaded into the Ci-Net database belongs to subscribers who have the right to fix, amend, update and remove the data.
For data protection, regulators usually look at the definition of data that the credit bureau will be allowed to collect and share; retention period for both credit lines and application data, purpose of data sharing and consumer education and support.
However, the legal framework still needs to be reviewed to address some of the areas that have a major impact on the effective working of the credit reporting. These include credit reporting laws, particularly in data protection, data usage and consumer rights. "We need to make sure that there is a robust legal framework in place to protect both lender and consumer rights," says Giannantoni.
"As far as I know, there is no direct regulation in the region. If there is no legal framework currently in place, the minimum solution is for them to have the CoC," clarifies Al-Mubarak. According to him, there would soon be a new law in Saudi Arabia to regulate the credit bureaus. Currently, a CoC is being used to regulate the credit bureau business in the country which is supervised by the central bank, SAMA. The SIMAH is the only licensed and regulated credit bureau in the Kingdom.
While legal and regulatory approaches vary in countries, it is generally accepted that explicit borrower consent is sufficient to enable a bank to share information. The debate may now be focusing on what format should consent take and whether a bank or a bureau is supposed to store the consent. Data collection implies access to identity information along with credit accounts available with banks and other lenders from various sectors in the market. "It was a challenge to invite all companies to join Ci-Net," admits Al-Serri.
"The banks might be concerned about sharing information about their clients with other banks and this may work as a deterrent," explains Taufique. But experience has shown that in most places, setting up of a credit bureau has led to expansion of business rather than being a constraint. Optimum usage, in this scenario, could initially be achieved by making credit bureau services mandatory for certain sectors. As per a recent credit card law issued in Turkey, all card issuers must use the local credit bureau for each new credit card issuance and each limit revision.
"One of the functions of the SIMAH is to conduct the compliance and audit process on a daily basis and the SIMAH has an independent department for this functionality," informs Al-Mubarak. As for compliance, although it comes with education on how credit bureaus work and benefit the potential lenders, compliance policies and other rules to govern data exchange and consumer consent need to be put in place. Addressing the data protection and consumer rights issues would mean that stakeholders understand how the legal framework fits with the credit bureaus.
Lack of clarity and agreement among the stakeholders as to what would be the most appropriate way to address the issue usually creates impediments for the establishment of the credit bureau. "In several countries such as Russia, Kazakhstan and Ukraine, credit bureaus were not set up until a clarifying legislation was passed," informs Taufique. Similarly, in countries like Kenya, Tanzania and Georgia, debate continues on what would be the most appropriate way to share credit information and the only agreement in place is that having a clear legal framework would help resolve the problem.
Finally, the credit bureaus need to be developed by investing early without looking at the rate of return.
"Credit bureau business is a long-term investment which explains why it is only being established now in the GCC as compared to other businesses," said Al-Mubarak.
Clearly, regional governments have to work through most of these issues and the final operating model would depend on the outcome of discussions with all relevant stakeholders. Regional co-operation would benefit the bureaus in the region a lot and may eventually enable regional credit information exchange. "Within a matter of a year or two, each of the GCC countries will have a credit bureau and it will be important for them to standardise the way in which they process the data," cautions Taufique.
"We should start from the point on what has been achieved elsewhere, with clear considerations on the local issues support," says Al-Mubarak. The Ci-Net faced a lot of challenges when developing the bureau to meet regional standards, ie. adding Islamic products, linking the database with an external civil information database and Arabisation of the system.
Nevertheless, all stakeholders see a huge potential for regional credit bureaus in the Gulf over the next two years. Most players are banking on the quick benefits that lenders will reap and, in turn, are offering continued involvement in creating, evolving and using such an important business solution. Experian-Scorex is already investigating establishing its operations in the Gulf to better service clients locally, even as the local industry is waiting for a legal framework to be enacted before it takes to participating in a credit bureau in the UAE. How near that future is, is hard to predict.
© Gulf Business 2006
