Credit Reporting Knowledge Guide 2019

Credit Reporting Knowledge Guide

2019

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© 2019 The World Bank Group

1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved.

This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes.

The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work.

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Table of Contents

ICREDIT REPORTING KNOWLEDGE GUIDE 2019

ACRONYMS AND ABBREVIATIONS V

PREFACE VII

OVERVIEW IX

CHAPTER 1. THE IMPORTANCE OF CREDIT REPORTING SYSTEMS 11.1. The Role of Credit Reporting Systems 1

1.2. The Costs of Asymmetric Information 3

1.3. Key Concepts in Credit Information Sharing 4

1.4. Comprehensive (Positive and Negative) Information Sharing 6

1.5. Full-File Information Sharing 8

CHAPTER 2. CREDIT REPORTING SERVICE PROVIDERS 112.1. Functions of Credit Reporting Service Providers 12

2.2. Ownership Structures 17

2.3. Optimal Market Size 19

CHAPTER 3. THE EVOLUTION AND GROWTH OF CREDIT REPORTING SYSTEMS 253.1. The Evolution of Credit Reporting Systems 25

3.2. Factors Affecting the Growth of Credit Reporting Systems 26

3.3. Competition in the Credit Reporting Industry 31

3.4. Moving Forward: Expected Trends 37

CHAPTER 4. LEGAL AND REGULATORY FRAMEWORK 394.1. Licensing or Registration of CRSPs 41

4.2. Data Collection, Retention, Disclosure, and Security 41

II TABLE OF CONTENTS

4.3. Governance and Risk Management 45

4.4. Consumer Rights 46

4.5. Oversight and Enforcement 48

4.6. Alternative Dispute Resolution Mechanisms 49

4.7. Cross-Border Data Flows 55

CHAPTER 5. DEVELOPING CREDIT REPORTING SYSTEMS IN EMERGING MARKETS 575.1. Assessing Market Conditions 57

5.2. Changing Perceptions and Building Awareness 59

5.3. Ensuring Adequate Data Availability 62

5.4. Ensuring Financial Sustainability 66

5.5. Creating an Appropriate Business Model 66

5.6. Identifying Appropriate Technology Needs 69

5.7. Operational and Practical Considerations 72

CHAPTER 6. DEVELOPING VALUE-ADDED SERVICES 81

6.1. Automated Decision-Making Systems 81

6.2. International Industry Trends in Developing Value-Added Services 82

6.3. Products 84

6.4. The Use of Credit Information Data for Prudential Supervision 91

CHAPTER 7. CASE STUDIES 957.1. Reforming Credit Reporting Systems in Central Asia 95

7.2. The Role of Outreach and Financial Literacy in Mobilizing Credit Reporting System Reforms 98

7.3. Overcoming the Issue of Consent: Guyana’s Credit Bureau 99

7.4. Jamaica’s Experience in Licensing and Regulating Credit Bureaus 100

7.5. Establishing Credit Histories for Low-Income Women in India 103

7.6. Increasing the Coverage of Commercial Credit Reports and Using Alternative Sources of Data to Reach Underserved MSMEs in India 107

7.7. UEMOA: Pioneering a True Cross-Border Credit Information Sharing System 111

7.8. Credit Registry of the Bank of Italy 113

7.9. The AnaCredit Project 114

IIICREDIT REPORTING KNOWLEDGE GUIDE 2019

APPENDIXES 115Appendix 1. Contents of an Individual Credit Report 115

Appendix 2. Contents of a Commercial Credit Report 117

Appendix 3. General Principles for Credit Reporting and the International Committee for Credit Reporting (ICCR) 119

Appendix 4. World Bank Doing Business Surveys 120

Appendix 5. Examples of Specialized ADR service providers dealing with credit disputes 121

Appendix 6. Maps of Credit Registries and Credit Bureaus 123

REFERENCES 131

LIST OF BOXES Box 1.1. The Limitations of Negative-Only Reporting 8

Box 3.1. EFL Psychometrics and Creditinfo Psychometrics (Coremetrix) 29

Box 4.1. Quality of Data 42

Box 4.2. Issues Affecting Consent Regulation 43

Box 4.3. Equifax Data Breach: September 2017 46

Box 4.4. ADR Case Management by the South African Credit Ombud 52

Box 5.1. Errors in Consumers’ Credit Files* 63

Box 5.2. Outsourcing from the Czech Republic 68

LIST OF FIGURES Figure 1.1. Key Stakeholders in Credit Reporting Systems 4

Figure 1.2. Effect on Default Rates of Including Positive Information, United States 7

Figure 1.3. Effects on Default Rates of Including Positive Information, Argentina and Brazil 7

Figure 1.4. Effect on Approvals of Including Positive Information 7

Figure 1.5. Effect of Including Positive Information on Approvals among Retailers and Other Lenders 8

Figure 1.6. Effect on Default Rates of Increasing Number of Information Sources 9

Figure 1.7. Effect of Types and Sources of Information on Predictive Power 9

Figure 2.1. Data Subjects Covered by CRSP 12

Figure 2.2. Sources of Information for Privately Held Credit Bureaus 13

Figure 2.3. Information on Individuals Collected by Credit Bureaus 13

Figure 2.4. Sample History of Payments 14

Figure 2.5. Firm-Level Information Collected by Credit Bureaus 14

IV TABLE OF CONTENTS

Figure 2.6. Sources of Information for Credit Registries 15

Figure 2.7. Ownership Structures of Credit Bureaus 18

Figure 3.1. Growth of Consumer Credit Bureaus 32

Figure 3.2. Credit Bureau Coverage by Region 2017 32

Figure 3.3. Growth of Credit Registries 33

Figure 3.4. Credit Registry Coverage by Region, 2017 33

Figure 3.5. Credit Information Index 34

Figure 5.1. Average Time between Request and Release of Data 65

Figure 5.2. Qualities of a Strong Technical Partner 70

Figure 5.3. Common Delivery Modes for CRSPs 72

Figure 5.4. Key Items in Contracts/Agreements with Users and Data Providers 73

Figure 5.5. Sample Organizational Structure of a CRSP 74

Figure 5.6. Key Performance Indicators of a Credit Reporting Service Provider 77

Figure 6.1. Customer Life Cycle: Offering Value-Added Services 82

Figure 7.1. Trends in Annual Loan Recoveries at Jamaica’s Commercial Banks 102

Figure 7.2. Changes in Total NPLs for Period 2011–2016 for Jamaica 102

Figure 7.3. Commercial Credit Reporting India Project Pillars 108

Figure 7.4. Potential Alternative Data Sources for India’s Underbanked and Unbanked MSMEs 109

LIST of TABLESTable 1.1. Benefits of Comprehensive and Full-File Information Sharing 10

Table 2.1. Comparison of Credit Bureau Ownership Structures 20

Table 2.2. Differences Between the Various Types of CRSPs 21

Table 2.3. Credit Reporting and Collateral Regimes: Linkages and Synergies 23

Table 4.1. Rights and Obligations of CRSPs, Data Providers, Users, and Data Subjects 40

Table 4.2. Frequently Used Dispute Resolution Procedures 50

Table 5.1. Operational Phase Staffing 75

Table 5.2. Hypothetical Pricing Matrix for Credit Reporting Service Providers 76

Table 5.3. Hypothetical Profit and Loss Statement for a Consumer Credit Bureau 78

Table 7.1. Select Indicators for 2013–2016 for Jamaica 101

Table 7.2. Personal Data Points Need to Generate Credit Information Reports 105

Table 7.3. Trend of Credit Report Inquiries 110

Acronyms and Abbreviations

VCREDIT REPORTING KNOWLEDGE GUIDE 2019

ACAFI Azerbaijan and Central Asia Financial Infrastructure

AI artificialintelligence

API applicationprograminterface

AR augmentedreality

B2B business to business

B2G businesstogovernment

BCBS BaselCommitteeofBankingSupervision

BCEAO Banque Centrale des Etats de l’Afrique de l’Ouest

BOG BankofGuyana

BOJ BankofJamaica

CCR centralcreditregister

CIB CreditInformationBureau

CIBIL CreditInformationBureauLtd.(India)

CIC creditinformationcompany

CICRA CreditReportingAct(India)

CII CreditInformationIndex

CIP creditinformationprovider

CIR creditinformationreport

CRA CreditReportingAct(Jamaica)

CRSP creditreportingserviceprovider

EFT electronic funds transfer

EMV Eurocard,Mastercard,Visa(electroniccreditstandard)

VI ACRONYMS AND ABBREVIATIONS

ESCB EuropeanSystemofCentralBanks

F&M FinanceandMarkets(GlobalPractice)

fintech technology-enabledfinancialservices

FSAP FinancialSectorAssessmentProgram

G2G governmenttogovernment

GNI grossnationalincome

ICCR InternationalCommitteeonCreditReporting

IDG IFCDevelopmentGoals

IFC International Finance Corporation

IoT internetofthings

JLG jointliabilitygroup

KYC knowyourcustomer

MFI microfinanceinstitution

MFIN MicrofinanceInstitutionsNetwork

MIS managementinformationsystem

MSME micro,small,andmediumenterprises

NBFC nonbankingfinancialcompany

NCB nationalcentralbank

NIST NationalInstituteofStandardsandTechnology(UnitedStates)

NPL nonperformingloan

P2B person to business

P2G persontogovernment

P2P person to person

RBI ReserveBankofIndia

regtech regulatorytechnology

SHG self-helpgroup

SME smallandmediumenterprise

UEMOA Unionéconomiqueetmonétaireouest-africaine(WestAfricanEconomicand MonetaryUnion)

VAS value-addedservice

WAMU WestAfricanEconomicandMonetaryUnion

VIICREDIT REPORTING KNOWLEDGE GUIDE 2019

Preface

The Global Credit Reporting Program launched bythe International Finance Corporation (IFC) in 2001and later renamed Credit Information Solutions tobetter reflect the nature of its goal, has supported thedevelopment of credit bureaus and public registries inover 90 countries through a combination of analyticalandoperationalwork.Since the launch of the program, the World BankGrouphashelpedtodevelopfavorablecreditreportingenvironments in many countries around the worldand to implement reforms improving these countries’credit information systems. This third edition of theCredit Reporting Knowledge Guide,likethetwoearliereditions, disseminates knowledge on best practices increditreportingdevelopment,basedontheexperiencesoftheWorldBankGroup.Intheyearssincethepreviousedition (2nd ed., 2012), many nations have madegreat strides in credit reporting. In 2015, for example,Kenya and Uganda made large improvements byexpandingborrowercoverage(14.8percentoftheadultpopulation). Similarly, the credit bureaus or registriesin the Lao People’sDemocratic Republic,Mauritania,Rwanda, Uganda, and Vietnam expanded coverage toat least 5 percent of their adult populations. Between2014 and 2015, Afghanistan, the Comoros, Guyana,Lesotho,andtheSeychellesallestablishedanewcreditbureau or registry. Many countries improved theirregulatoryframeworksforcreditreporting:Latvia,TheBahamas and the Organization of English SpeakingCaribbeanStates (OECS), adoptedcreditbureau lawswith the aim of promoting responsible borrowingand lending while protecting the rights of borrowers;Namibia improved access to credit information bylegally guaranteeing borrowers’ rights to inspect their

owndata; andPeru fully implemented its new lawonpersonal data protection, requiring stronger safeguardsin administeringborrowers’ personal data. In addition,overthepastfewyears,nationsinSub-SaharanAfrica,theregionwiththelargestnumberofreforms,focusedon improving the availability of credit information: InRwanda, Zambia, and Zimbabwe, credit scoring wasintroducedasavalue-addedservicetobanksandotherfinancialinstitutionstosupporttheirabilitytoassessthecreditworthinessofpotentialborrowers.TheoriginalCredit Bureau Knowledge Guide(2006)anditssecondedition(2012)elaboratedontheWorldBankGroup’sknowledgegainedoverseveralyearsofrunningthe Global Credit Reporting Program and provided avarietyofstakeholders,primarilyinemergingmarkets,withacomprehensiveinformationresourcetohelpthemdevelop their own credit reporting systems.This thirdedition reflects on the experiences and lessons learnedinthelastsevenyears,withgreateremphasisoncreditreportingforbusinesses,theimpactofnewtechnologiesand data on credit reporting, and the development ofnew products and services catering specifically to theneeds of users and borrowers. In discussing how thecreditreportingarenaisadaptingtoarapidlychangingtechnologicalandfintechenvironment,theGuideseeksto align the adoption of these disruptive technologieswiththecoreBaliFintechagendaaroundenablingfintechwhile ensuring financial sector resilience, addressingrisks and promoting international cooperation. Severalnew case studies enhance the theoretical discussions,highlighting different aspects of developing creditreportingsystemsand the importanceof thesesystemstothecountriesimplementingandimprovingthem.

VIII PREFACE

UndertheguidanceofSebastianMolineusandMaheshUttamchandani, this Credit Reporting KnowledgeGuide was prepared by the Global Credit ReportingTeam within the World Bank Group’s Finance,Competitiveness & Innovation Global Practice.TheGuide was drafted by a team comprised of ShaliniSankaranarayanan and Guy Patrick Ewoukem Elat,with the support from theCredit Infrastructures teamof specialists: LuzMaria Salamina, OscarMadeddu,Fabrizio Fraboni, Colin Raymond, Pratibha Chhabra,Nina Pavlova Mocheva, Ghada O. Teima, andFredesvinda Fatima Montes. The authors would liketo thank colleagues in the World Bank Group for

their continuous support of the work of the CreditInformation Solutions Program and the preparationofthisGuide.1Wearealsogratefultothesupervisors,credit bureaus and registries around theworldwhosework and employees made the development andpublicationofthisGuidepossible.2

Theteamgratefullyacknowledgesthegenerousfinancialsupport of the Swiss State Secretariat for EconomicAffairs(SECO).We hope this Guide will prove both informativeanduseful to all thoseworking in the area of creditreportingdevelopment.

1. Contributors from World Bank Group’s Global Credit Reporting Team include Oscar Madeddu, Colin Raymond, Fabrizio Fraboni, Luz Maria Salamina, Hung Hoang Ngovandan, Shalini Sankaranarayan, and Fredesvinda Fatima Montes. Other important contributions were provided by Nina Pavlova Mocheva, Pratibha Chhabra and Renuka Madathiparambil. We also wish to acknowledge the feedback and inputs received from other WBG colleagues, including Matthew Saal, Sakshi Varma, Elaine MacEachern, Michael Terazi, David Medine, Robert Cull, Ata Can Bertay, Miriam Bruhn, Bilal Zia, and Mohamad Nazirwan.

2. We would like to acknowledge the kind contributions of Bank of Jamaica and Bank of Guyana in developing the respective case studies. We are grateful for the input received from the external peer reviewers: IMF (Arslanalp, Bidisha Das, Esha Chhabra, and Yingbin Xiao), Creditinfo (Stefano Stoppani and Ieva Bieliunaite), BIIA (Peter Sheerin and Neil Munroe), CRIF (Stella Lanzi, Vicenzo Resta, Venturi Emanuel, Parijat Garg, and Racemoli Valeria), and ACCIS (Enrique Velazquez). In addition, we would like to acknowledge the excellent editing assistance of Susan Boulanger. On design, layout, and production, we would like to thank Aichin Lim Jones and Amy Quach. We also would like to acknowledge Bruno Bonansea for producing the global and regional maps.

IXCREDIT REPORTING KNOWLEDGE GUIDE 2019

Overview

Since the first Knowledge Guide was written thirteenyearsago,globalfinancialmarketshavegrownbyleapsand bounds, leveraging a host of new technologiesanddata.Therapidgrowth in innovativeproductsandservicesisadirectresponsetothehugeunmetdemandfor financial services that the traditional financiallandscapehadbeenstrugglingtomeet.AccordingtotheWorldBank,approximately2billionadultsaroundtheworldstilllackabasicaccount(WorldBank2017).Somekeyobstacles tofinancial inclusionareaffordabilityoffinancialservices,distancetoprovider,lackoftrust,andpotentialborrowers’lackofnecessarydocumentation.More broadly, inadequate access to finance and creditcontinues to exert a critical constraint on economicdevelopment.Around2.5billionpeople lackaccess toformal financial services (World Bank 2015), and anestimated 70 percent of formal small- and medium-sized enterprises in developing economies are eitherunservedorunderservedby theformalfinancialsector(Stein, Ardic, and Hommes 2013). The total creditgap amounts to US$1.3 to US$1.6 trillion (US$700to US$850 billion excluding firms in OECD high-incomeeconomies)(Stein,Goland,andSchiff2010).Inemergingmarkets, an estimated 1.9 billion people areemployedintheinformalsectorassmallholderfarmers,household-basedentrepreneurswith retail shops, streetvendors, artisans, and other service providers (ILO2018).Adisproportionatepercentageofthispopulationofpotentialborrowersarewomen:Womenrepresent76percentoftotalborrowersfrommicrofinanceinstitutions(World Bank 2010). These populations generally relyon personal savings or loans from friends, family,or moneylenders to meet their businesses’ capitalrequirements. Being self-employed or part of the

informal sector, these workers frequently lack formalsalaryslipsorothertraditionalincomestatementsusedbylenderstoascertainwhetheraprospectiveborrowerpossesses a steady source of income with which toservicealoanorothercreditreliably.Withoutacceptableproofofincome,thesepotentialborrowersmustpossesscollateral—mostlyfixedassetssuchas land,buildings,and so on—before lenders will consider their creditapplications. Once again, disenfranchised, lower-income segments of the population frequently cannotmeet collateral requirements or provide relevant legaldocumentationregardingassets.Lenders, too, face several challenges in seeking toprovidecredit to thesepopulations.Lendersoften lacktheinformationnecessarytoassessthecreditworthinessofpotential customers, including reliable identificationfor individuals and businesses. In the absence ofautomated screening methods, the relative costs ofpersonal screening and due diligence are very high,while the loan amounts tend to be modest. Potentialcustomers are oftenwidely dispersed in rural areas inwhich lendersmaynotfind it cost effective tooperatebranch networks. With limited access to inclusiveand timely data, lenders face concerns that borrowersmight accumulate many loans from multiple lenders,potentially resulting in over-indebtedness on the partof borrowers and an unacceptably large portfolio ofnonperforming loanson thepartof lenders.Moreover,weak regimes for creditor and bankruptcy protection,coupled with unreliable property rights, often makeattemptsatcollateralcollectionineffective.In markets facing these challenges, credit reportingservice providers perform the crucial functions of

X OVERVIEW

gathering and distributing reliable credit informationacross the entire borrower population, thus improvingcreditor protection and strengthening creditmarkets. Ineffect,theneedforphysicalcollateralcanbereplacedby—or at least supplemented with—reputational collateral.Creditreportingserviceproviderscanreduceinformationasymmetry, thus reducing default rates, which in turnshouldresultinloweraverageinterestrates,customizedproductsandservices,enhancedcompetitioninthecreditmarket,andultimately,increasedaccesstocredit.The newly developing area of financial technology,known as fintech, provides an innovative approach todeliveringfinancialservicesindifferentmarketsaroundtheworld that reflects theactualorperceived inabilityof traditional lenders, including banks, microfinanceinstitutions,andevenmoneylenders,toprovideoptimalfinancialservices tounderservedorunservedborrowersegments. While the jury is still out on where thetraditional financial sector and the new fintech sectorwillmeetandwhat thisencounterwillmeanforcreditreportingasawhole,totheextentthatthesenewentrantsextend credit using whatever means available, theyshouldbeconsideredstakeholdersinthecreditreportingsystem, and the rules for sharing credit informationshouldgenerallyapplyequallytothesenewplayers.This third edition of theCredit Reporting Knowledge Guide,inthespiritoftheearliertwoeditions,continuesto disseminate knowledge on best practices in creditreporting development, based on the experiences ofthe World Bank Group. The original Credit Bureau Knowledge Guide(2006)andthesecondedition(2012)presentedknowledgegainedoverseveralyearsofrunningtheGlobalCreditReportingProgram,andtheyprovidedavarietyofstakeholders,primarilyinemergingmarkets,withacomprehensiveinformationresourcetohelpthemindeveloping their owncredit reporting systems.Thisthird edition reflects on the experiences and lessonslearnedoverthelastsevenyears,withemphasisoncreditreportingforbusinesses,theimpactofnewtechnologiesand data on credit reporting, and the development ofnew products and services catering specifically to theneedsofusersandborrowers.Severalnewcasestudiesenhancethetheoreticaldiscussions,highlightingvariousaspectsofdevelopingcreditreportingsystems.Chapter 1 introduces key concepts in credit reporting:Whyisaccesstocreditimportant?Whatarethefactorslimiting access to credit? How can credit reportingservicesimproveaccesstocredit,andwhatroledotheyplayinensuringfinancialstability?And,finally,whoarethekeyactorsincreditreportingsystems?Thechapter

examinestheproblemofasymmetricinformation:whenborrowersknowmoreabouttheirabilityandwillingnessto repay loans than do lenders. The chapter presentsevidence from empirical research that validates theimportanceofcreditreportingintheoverallagendaforaccesstofinance.Chapter2introducesthedifferenttypesofcreditreportingservice providers (CRSPs) that collect informationon borrowers’ credit histories from creditors andavailablepublicsources.Unlikecredit ratingagencies,CRSPsfocuson individualsandsmallbusinesses.Thethree basic types of CRSPs are credit bureaus, creditregistries, and commercial credit reporting companies.Each has its strengths and weaknesses, and no singletype is inherently better than the others for any givenmarket condition. Indeed, given adequate demand, thethreetypesofserviceproviderscancoexistinamarketunderavarietyofownershipstructuresorasingleentitycanprovide oneormore of the functions providedbythese different entities. Chapter 2 also discusses thecommercialcreditreportingspace,whichhadnotbeentreatedextensivelyinearliereditionsoftheGuide.Chapter 3 covers the evolution of the credit reportingindustry to today, including key trends now emergingandexternaltrendsaffectingitsdevelopment.Thesecondeditionof theGuide introduced theGeneralPrinciplesforCreditReporting,thefirstsetofuniversalstandardsforcreditreporting,developedbyataskforceledbytheWorldBankandtheBankforInternationalSettlements(see Appendix 3). Since the General Principles werereleased, the task force has been formalized as theICCR,andithassinceworkedondevelopingadditionalpublicationstoprovideguidanceonthevariousaspectsofcredit reportingsystems; thesearealsodescribed inthischapter.Recognitionhasbeengrowingregardingthevaluethatcreditreportingcanbringtomicro,small,andmediumenterprises(MSMEs),aswellastothesearchfor alternative data forms to enhance lenders’ abilityto serve borrowers lacking formal credit histories. Inadditiontodevelopments inconsumerandcommercialcreditreporting,greaterrecognitionhasbeengiventotheuseandimportanceofcreditreportingdataforprudentialsupervisionandregulation.Thischapterdiscusseshownewtechnologies,newbigdata,andrelatednewproductsandtoolshavethepotentialtotransformthecreditandthecreditreportingindustries,includingabalancedviewofthepotentialrisksanduncertaintiessurroundingthesenewtoolsandthechallengestheypose.Chapter4outlines the legal and regulatory frameworkoptions for credit reporting systems. The legal

XICREDIT REPORTING KNOWLEDGE GUIDE 2019

framework for credit reporting differs from country tocountry.Itmayincludeacombinationofcreditreportinglaws, banking laws, data protection laws, consumercreditprotectionlaws,faircreditgrantingandconsumercredit regulations, personal and corporate privacy andsecrecyprovisions,banksecrecylaws,andcommerciallaws.Creditreportingactivitiescananddotakeplaceintheabsenceofaclear legalandregulatoryframework;however, in the long run,bestpractice indicatescreditreporting systems benefit from a legal and regulatoryframeworkthatisclear,predictable,nondiscriminatory,proportionate, and supportive of data-subject andconsumer rights. As recognition grows that creditreporting systems are vital to strengthening financialinfrastructure and ultimately access to finance, moreandmorecountriesareincreasingtheireffortstocreatethe ideal legal and regulatory environment for theseactivities.Withtheincreasingavailabilityofdata—andoftechnologiestoharnessthepowerofthesenewdata—alsocomesincreasingrisksassociatedwithsafeguardingdataandtheunderlyingprivacyofthedatasubjects.Chapter5summarizestheWorldBankGroup’s15plusyears of experience in developing credit bureaus andcreditregistriesaroundtheworld.Thechapterpresentsvariousapproachestothedevelopmentofcreditreportingand discusses the business, technological, financial,

and other operational and practical considerations that a developing credit reporting service provider mustaddress. It also reflects on the World Bank Group’sexperienceinestablishingnewcreditreportingmarkets.Chapter 6 presents an overview of the value-addedservices typicallyofferedbyestablishedcreditbureausthrough the repurposing of algorithms and data andtheproductsandservicesofferedbycommercialcreditreportingcompanies.Theinformationprovidedbybothfinancial and nonfinancial institutions allows creditbureaustoprovidecomprehensiveanalysisofborrowercreditworthiness, information for portfoliomonitoring,and fraud detection. The chapter also discusses theuseofcredit reporting informationbyfinancialsystemsupervisors and regulators to perform prudentialsupervisionandsystemicriskmonitoringofaneconomyasawhole.Chapter 7 rounds out the theoretical discussions andpractical guidelines with nine case studies of recentdevelopmentsincreditreportingspanningtheglobe.Theobjectiveof thecasestudies is toprovidepractitionerswithrealexamplesofhowcreditreportingsystemshavedeveloped over time in variousmarkets, including thechallengestheyfacedandthesuccessestheyachieved.

XII DEVELOPING CREDIT REPORTING SYSTEMS IN EMERGING MARKETS

1CREDIT REPORTING KNOWLEDGE GUIDE 2019

The Importance of Credit Reporting Systems

Credit infrastructures, including credit reportingsystems, secured transactions and collateral registries,and insolvencyandbankruptcy regimes, are critical inanyeconomyforexpandingaccesstofinance,extendingfinancial inclusion, and supporting the developmentof stable financial systems. Broadly speaking, creditreportingsystemscomprisetheinstitutions,information,technologies, rules, and standards that enablefinancial intermediation. When comprehensive creditinfrastructures are available, efficient, and reliable, thecostoffinancialintermediationfalls;financialproductsand services become accessible to greater numbersof borrowers; and lenders and investors have greaterconfidenceintheirabilitytoevaluateandpricerisk(IFC2009). The information captured by credit reportingsystems is critical to ensuring stability in thefinancialmarkets.Accesstofinanceisanessentialcomponentofeconomicdevelopment and job creation. A host of studieshave shown a positive correlation between financialdevelopment and economic growth (Taivan and Nene2016). Well-functioning financial systems offer avarietyoffinancialproductsforsavings,credit,andriskmanagementtoawiderangeofpeopleandbusinesses.Access to financial services enables rural and urbanhouseholds tosmoothconsumptioncurvesandacquireessential services, including food,housing,health, andeducation(WorldBank2015).Micro,small,andmediumenterprises(MSMEs)requireaccesstofinancingtomeetshort- and long-term capital needs and to grow andexpandtheirbusinesses.Individual borrowers’ credit needs typically involvepersonal loans, auto loans, mortgage loans, student

loans,andothershort-termcreditneeds.Smallbusinessloans are generally necessary tomeetworking capitalrequirements, to maintain assets for production, or toexpand business operations. In the case of very smallbusinesses,thebusinessowner’spersonalfinancestendto be commingledwith the business’s finances, as theownermaydrawonpersonalfinancingsourcestofundthebusinessinitsearlystages.Accesstofinanceisalsocriticalforlargercorporationsandconglomerates,which,giventheirsize,performance,andassets,typicallymeetfundingrequirementsthroughcapital markets and other sources. Credit reportingsystems are less relevant for these businesses, aslenderstotheselargeentitiesrelyonavarietyofothersources of information when making credit-relateddecisions. This Guide focuses therefore more on thecreditneedsofindividualsandofthemicro,small,andmediumbusinesses thatstand tobenefitmost fromthedevelopmentofcreditreportingsystems.

1.1. The Role of Credit Reporting Systems Despite thetremendousneed,a largeproportionof theworld’spopulationlacksaccesstocredit.Worldwide,anestimated2.5billionpeoplearecurrentlywithoutformalfinancial services (World Bank 2015). In developedeconomies, approximately 90 percent of adults haveaccess to formal financial services, as compared with41 percent in emerging markets (Demirguc-Kunt andKlapper 2012). The World Bank Enterprise Surveysdatabase reports that, globally, 27 percent of firmsidentifyaccesstofinanceasamajorconstraint.ArecentreportbyIFCandtheSME(smallandmediumenterprise)

CHAPTER

1.

2 CHAPTER 1. THE IMPORTANCE OF CREDIT REPORTING SYSTEMS

Finance Forum found that 65 million enterprises— 40percentof formalMSMEs—haveanunmetfinanceneedof$5.2trillionayear,or1.4timesthecurrentlevelofMSMElending.Women-ownedbusinessescomprise28percentofMSMEsandaccountfor32percentoftheformalMSMEfinancegap(IFC2017).Access to credit is largely hindered by the lack ofsufficient information or information asymmetryregardingtheabilityofpotentialborrowerstorepaydebtsandby the lackofasupportingfinancial infrastructureto make such information available (Demirguc-KuntandKlapper2012).Over theyears, thebasicapproachto formal lending has remained traditional: Decisionsare based on subjective judgments about a borrower’spropensity to repay, supported by alternative risk-mitigating mechanisms, including group guarantees, arequirementfor(mostlyfixed)collateral,higherinterestrates,shorterfinancingterms,andsimilararrangements.In most markets, commercial lending traditionallyfocuses on large companies and select retail clientswithproven income, capacity to repay, and/or suitablecollateral.Thecreditneedsofsmallerentrepreneursandindividualborrowersareprimarilymetthroughinformalfinancialservicesandnonbankcredit.3

Microfinance continues to be an important sourceof access to credit and financial services for thevast majority of the global population unserved orunderserved by formal financial channels.The growthof the microfinance industry was driven in part byglobal recognition of its value as a development tooland inpart by its promotionbynationalgovernments,international development bodies, donors, and sociallyoriented investors. What started as a movement ledlargelybyNGOsandcooperativeshasrapidlyexpandedto include downstream lending by larger commerciallenders asmore emphasiswas placed on serving low-incomeconsumersandentrepreneursthroughlow-value,short-tenure loanswith flexible installment plans. Thenumberofborrowersservedbymicrofinanceinstitutions(MFIs) is estimated at around 130million (IFC). Thefield’sinitialrapidgrowthandhighreputationwasbuiltonstrongassetqualitycombinedwithlowdelinquencyrates;however,sometimeinthelate2000s,theindustrysuffered setbacks as portfolios deteriorated globally.The increasingportfolios-at-riskvalueswereattributedto inadequate risk management systems and controls,internal organizational weaknesses, lack of data

sharing with CRSPs, and excessive growth in narrowgeographies,combinedwithunhealthylendingpracticesthat affected borrower repayment incentives andbehaviors.These factors resulted inover-indebtedness,aswitnessed in severalmarkets, includingBosnia andHerzegovina, Cambodia, Egypt, India, Morocco, andPakistan(Lymanetal.2011).Small- and medium-size enterprise finance can bedistinguished frommicrofinance in two respects:First,itcoversawiderrangeofentrepreneurialclientele,andsecond, SMEs are often larger and therefore representa greater risk exposure than do microfinance clients.SMEsthusrequireamorein-depthcreditreviewprocessthandomicrofinanceclients.Still,SMEsoftenfallintothemiddlemarket:toobigfortraditionalmicrofinance,yettoosmallformainstreambanks.AccesstofinanceisakeyconstrainttoSMEdevelopmentand growth, especially in emerging markets. In theirearlystages,SMEsareoftenfinancedinternallybytheowner’ssavingsorearningsandbypersonalborrowingin theowner’sownname.Sustainedgrowth,however,usually requires external funding.A2003WorldBankstudy (Love and Mylenko 2003) that looked at datafrom 5,000 firms, across 51 countries, found that incountries without credit bureaus, 49 percent of smallfirms reported facing high financing constraints, asopposedto27percent incountries thatdidhavecreditbureaus. The study also found that in countries withcreditbureaus,theprobabilityofasmallfirmobtainingabankloanwas40percent,versus28percentincountrieswithout credit bureaus. Another World Bank studybasedondatafrom99developingcountriesfoundthatsmall firms are large contributors to total employmentandjobcreation,buttheirproductivitygrowthislowerthanthatoflargerfirms(Meghana,Demirguc-Kunt,andMaksimovic2011).ThestudyshowedthatSMEgrowthand productivity is hampered by inadequate financialinfrastructureandregulatoryenvironments(inadditiontootherobstacles),anditcalledonauthoritiestodesignpoliciestoovercomethesechallenges.Historically,smallbusinessborrowershaverepresenteda difficult-to-servemarket because of the traditionallyhigh cost of subjective credit evaluation. The SMEbusinessowner’spersonalfinancesareoftencomingledwith those of the business, and this distinction is notimmediately apparent to lenders. The difficulty inassessingthecreditworthinessofSMEbusinessescauses

3. This Guide discusses only the supply side of providing access to formal finance, but the demand side can also limit financial inclusion. The informal sector is sometimes unwilling to join the formal sector, which it can perceive as imposing greater tax burdens and regulatory burdens.


lenderstoadoptprotectivemeasures,suchasimposinghigherinterestrates,requestingsubstantialcollateral,ordenyingcredittoSMEborrowersaltogether.SMEs typically look to internal andexternalfinancingmechanismstomeetworkingcapitalrequirementsand/ortofinancecapitalexpendituresandmaintenance.Intheabsenceof structured and cohesive informationon thecreditworthinessofSMEs,creditors relyonalternativefinancing, including heavy reliance on relationshiplending,collateralbasedlending,factoring,leasing,andothersimilarmeasures.Both lenders and SME borrowers are faced withchallenges,however,whenitcomestograntingandtakingcreditagainstcollateral.Thetwomainchallengesare:

● In most jurisdictions, the definition of collateralgenerally implies fixed/immovable assets, such asland and property, and ignores the moveable assetsmorecommonamongSMEs.Becausemoveableassetssuch as vehicles, equipment, and inventory are notconsidered formalcollateral, lendersareunwilling tograntcreditagainstthem.Intheemergingeconomies,78percentofthecapitalstockofbusinessenterprisesis typically in movable assets, such as machinery,equipment, or receivables, and only 22 percent isimmovableproperty(Safavian,Fleisig,andSteinbuks2006). Because most SME borrowers have moremovable than immovable collateral, they are unableto meet collateral requirements for securing a loan.Lendersloseoutaswell,astheyareunabletotapintothehugeborrowingbaseofSMEandmicroborrowerswithmovableassets,whichtendtobeunderutilizedorunrecognizedbylawasanassettype.

● Weak legal and regulatory frameworks concerningtheuseofcollateralcanpresentchallengestolendersattempting to collect debts. If legal enforcementmechanismsareweakorineffective,thecoststolendersof pursuing delinquent debtors increase. Faced withthepotentialofhighercoststoobtainalegalremedy,through either the judicial system or extrajudicialprocesses,lendersmaygrantcreditonlyatunfavorabletermstoSMEborrowersandmicroclientsormaydenycredittothesemarketsaltogether.

1.2. The Costs of Asymmetric InformationCredit markets are typically characterized by afundamentalproblem:asymmetricinformation(Stiglitz,and Weiss 1981), with borrowers knowing the oddstheywillrepaytheirdebtsmuchbetterthanlendersdo.The lender’s inability to accurately assess borrowers’

creditworthiness contributes to higher default ratesand smaller loan portfolios, which affect financialinstitutions’ profitability. Differentiating betweengood and bad clients becomes very difficult, almostimpossible,whencreditreportsarelacking.Withoutthisinformation, the risk of lending is higher, both raisingthecostsofborrowingandreducing theavailabilityofcredit, as lendershesitate to extend credit tounknownborrowersandseektooffsetthecostsofdefaultthroughhigherinterestrates.Lenders typically address these problems by requiringcollateraltocoverthelossintheeventofadefaultorbyinvestigatingaborrower’sabilitytorepay.Asmentioned,requiring collateral is often problematic, especially indevelopingcountriesandparticularlyinthecaseofnewfirms andMSMEs,which often lack significant assetsthatareformally(legally)recognizedasusablecollateral.Inthecaseofwomenborrowers,theproblemisfurtherexacerbatedaswomentypicallydonotholdfixedassetsintheirnames.Inaddition,thecoststolendersofseizingandliquidatingassetsusedascollateralcanbesignificantand the process lengthy.According to the 2019WorldBankDoingBusinesssurveyonenforcingcontracts,inmost developing economies it takes fromone to threeyears to enforce a contract, with costs reaching 25 to50percentofthedebt.Inextremecases,forexampleinGuinea-Bissau,ittakesonaveragefourandahalfyearstoenforceacontract,andinTimor-Lesteitmaycostupto164percentofthevalueoftheclaim.To investigate a borrower’s ability to repay, a lendermight hire investigators to check the borrower’sbackground,but this isalsoexpensive.Conducting in-depth background checks, while justifiable for largerloans,isnotalwayspossibleorcosteffectiveforsmallloans. Lack of low-cost information often restrictslenders’ ability to lend profitably to informal retail,micro,andsmallbusinessborrowers.Monitoringandscreeningborrowerbehavioroffersoneway tominimizeproblemsofasymmetric information.Past behavior is seen as a reliable predictor of futurebehavior. Banks in many countries, for example,commonly grant credit to a firm only after the firmhashadanaccountwithabankforatleastsixmonthsto a year, which allows the creditor bank to observethe firm’s cash flow. Similarly, the group lendingapproach, mostly used by microlenders, allows thelenders to provide loans to individual borrowerswho,through participation in the group, have developeda credit history with the lending institution. In theseexamples, thecredithistory—sometimes referred toas


“reputational collateral”—minimizes the perception ofrisk,thusenablinganindividualorafirmtogainaccesstofinancing.Nonetheless,therelevanceofpastbehaviorshouldbeconsideredincontextsinceitcannotexplainallbehaviorandcouldbeirrelevantifadverseeconomicconditions change borrowers’ circumstances. Even agood borrower may default if faced with economichardshiporotheradversecircumstances.Credit reporting systems are those critical elementsof a country’s credit infrastructure that address theasymmetric information challenges characteristic ofmostlendingrelationships.Attheircore,creditreportingsystemsconsistofdatabasesofinformationondebtors,together with the institutional, technological, andlegal framework supporting the databases’ efficientfunctioning.Databaseoperatorsarebroadlycategorizedas (i) credit bureaus (consumer andcommercial),withthe primary objective of improving the quality andavailability of data so lenders and creditors canmakebetter-informed decisions, and (ii) credit registries,with the main objectives of assisting governments inbank supervision and of enabling regulated financialinstitutions to access data that can help improve thequalityoftheircreditportfolios(WorldBank2011;alsoseesection2.1inthisGuide).Credit reportingsystemshelpensurefinancial stabilitybyenablingmoreresponsibleaccesstofinance,andtheycanalsoplayaninstrumentalroleinexpandingaccesstocreditandothercredit-relatedservicestotheunderservedand unbanked. They facilitate lending processes byproviding lenders with objective information that canlead to reduced portfolio risk and transaction costsand expanded lending portfolios. By doing so, creditreporting systems enable lenders to expand access tocredit tocreditworthyborrowers, including individualswith thin credit files, particularly women borrowers;micro-entrepreneurs;andsmallandmediumenterprises.

1.3. Key Concepts in Credit Information SharingA credit reporting system comprises the institutions,individuals,rules,procedures,standards,andtechnologythatfacilitatetheflowofinformationrelevanttocreditagreement decision making (World Bank 2011).Developing an effective credit reporting system is alengthy process requiring sustained commitment fromall stakeholders. The entire process of setting up acredit reporting system—from initial discussions, to

publiceducationandworkon the legaland regulatoryframework,toactualsystemimplementation,includinguploading data and issuing the first credit report—may take between three and five years, if not longer.The credit information cycle of collecting, producing,storing,processing,distributing,andusing informationto support credit-granting decisions and financialsupervision involves a number of actors: individuals,MSMEs,CRSPs,dataproviders,authorities,regulators,and supervisors.Active participation by each of thesestakeholders is critical to ensuring the effectivenessofthecreditreportingsystem.Stakeholderparticipationisfurtherenhancedbygovernmentsupportforthesystemas awhole.These actors and their roles are shown inFigure1.1anddescribedbelow.

Credit Reporting Service Providers (CRSP)Creditreportingserviceproviders(CRSPs) are institutions that collect information on a borrower’s credit historyfromcreditorsandavailablepublicsources.TheCRSPcompilesinformationonindividualsand/orsmallfirms,including credit repayment records, court judgments,and bankruptcies, and creates a comprehensive creditreportthatitthensellstocreditproviders.CRSPsspecializeinmonitoringandscreeningborrowerFigure 1.1. Key Stakeholders in Credit Reporting Systems

Source: IFC 2017.

Credit Reporting

Service Providers

Authorities Regulators

Supervisors

Data Providers

Data Subjects

Users


behavior to address issues of asymmetric information.Lenders share information accumulated through theirlending operations with a CRSP. The CRSP collates,validates,cross-checks,andaggregatesthisdataacrosslendersandthendisseminatescreditreports tolenders,generally on a reciprocal basis. Credit reports allowlenders to better assess credit risks, and they allowpotential borrowers with good payment histories tonegotiatemore favorable terms on credit applications.Lenders can therefore make better-informed lendingdecisions, thus not just avoiding loans to high-riskapplicants but also rewarding good payment behaviorwithbettertermsandconditions.CRSPs differ from credit rating agencies, such asStandard&Poor’s,Moody’s, andFitch,which collectfinancial information on large companies; conductdetailed analyses of those companies’ operations,finances,andgovernance;andthenissuecreditratings.CRSPs focus on smaller creditors, concentrating oncreditrepaymentrecordsandstatisticalanalysesoflargesamplesofborrowers,ratherthanonin-depthanalysesofindividualcompanies,toproducecreditscores.TheCRSPrunsandoperatesacredit reportingserviceonaday-to-daybasis.ACRSPcanbeacreditbureau,a credit registry, or a commercial credit reportingcompany (discussed further in chapter 2). The CRSPbears primary responsibility for ensuring the system’ssafetyandefficiency.TheCRSP’sdutiesaredischargedby theon-sitemanagement teamandoperational staff,whoseresponsibilitiesincludecollecting,validating,andmergingdata;producinganddispersingcreditreportstosubscribers and other users; implementing appropriategovernance arrangements; and handling personnelmatters. The CRSP, in the form of a credit bureau orcommercialcreditreportingcompany,isalsoresponsibleforthesustainabilityofoperations,includingincreasingmembership,developingnewandinnovativecustomer-focusedproductsandservices,reportingtoshareholders(where applicable), complying with regulatoryrequirements,anddealingwithconsumercomplaints.

Data Subjects: Consumers and Firms Data subjects are consumers, MSMEs, and largebusinesses whose data is collected, processed, andcollated into reports provided by the CRSP to itssubscribers or members. (The less cumbersome termconsumers is sometimes used in thisGuide to replacedata subjects.) Data subjects are the focus of lenders’efforts to assess the risks of default and nonpaymentbeforeapprovingnewloansoradvancingfurthercredit.

Data ProvidersDataprovidersplayakeyroleinthesuccessfuloperationof a CRSP since the CRSP relies on their proactivesupplyofinformation.Traditionaldataprovidersincludecommercial banks, other financial institutions, andcreditcard issuers.Nontraditionaldatasources includeretailers and utility providers. In addition, all privateandpublicentitiesthatcollectinformationonconsumersare potential data sources for CRSPs. For instance,a CRSP may have agreements with other parties toaccess databases on court judgments, information onunpaiddebts,personalidentityrecords,andregistriesofcollateral,suchasvehicles,realestate,andcompanies.Thefinanciallandscapehasbeenrapidlyevolvingoverthepastfewyearsasemerginginnovativetechnologiesenablefinancialservices(fintech)andalternativelenders.Among these players are alternative lenders likeTala,Kabbage,andothersthatderiveinsightsfrom“newdata”sources,suchasconsumerbehavioronsocialmediaandpayment platforms, and then make lending decisionsbasedontheseinsights.Aslenderswhoactivelyprovidecredit to consumers and small businesses, these newentitiescanalsobepotentialdataprovidersforCRSPswhentheyexchangeinformationwiththem.

UsersTheCRSPsproduceinformationofinteresttoavarietyof users.These users “query” or submit an inquiry totheCRSP on a data subject that has approached themforcredit.Users,alsoknownasmembersorsubscribersoftheCRSP,typicallyincludefinancialinstitutionsandnonbank creditors who contribute credit informationabouttheirowncustomers’accounts.Creditinformationmight also be of interest to other users, ranging fromfinancialsupervisorsandcentralbankstousersinothersectorsoftheeconomy,suchasemployers(particularlywhere a position involves significant financialresponsibility), insurers, or landlords (where legallypermitted).Inkeepingwiththeprincipleofreciprocity,only subscribers contributing information to theCRSPshouldreceivecreditinformationreportsfromit.SomeCRSPschargetheirusersmembershipfeesaswellasapay-per-usefee.

RegulatorsIn jurisdictions where credit reporting activities areregulated, the regulator is the authority with statutorypowers of supervision over credit reporting activitiesand services. Statutory powersmay include the powerto issue licenses and to create operational rules and regulations. The division of responsibilities among


authorities for regulating and overseeing creditreporting systems varies depending on a country’slegaland institutional framework.Sourcesofauthorityand approaches to regulation and oversight may takedifferent forms.Anauthoritymayhave regulatory andoversight responsibility for a credit reporting systemprovider that is registered, chartered, or licensed asan entity fallingwithin a specific legislativemandate.The regulator may also have the power to stipulatecomplianceconditionsforCRSPs,topenalizethemforviolationsornoncompliance,ortocanceltheirlicenses.Credit reporting systems also may be overseen by anauthority that exercises customary or other forms ofresponsibility for oversight that does not derive froma specific legislative mandate. Once a CRSP is fullyoperational,theregulator’sroleistomonitorcompliance.In addition to direct regulation, CRSPs may also beindirectly subject to other laws, for example, businessor company law, consumer credit protection law, andinformation privacy law.As such, theymay also havecomplianceobligationsimposedbyotherregulators.A vastmajority of countries assign regulation of, andauthorityover,credit reportingservices to theircentralbanks. A few countries have a regulatory authorityspecifically dedicated to credit reporting, for example,theNationalCreditRegulatorinSouthAfrica.Inothercountries, a government agency assumes that role; forexample, theFederalTradeCommission in theUnitedStates had the authority to enforce the Federal CreditReportingAct(whichappliestocreditbureaus)aspartofitsmandatetoensureconsumerprotectionincreditandlendingpractices.Inaddition,asofSeptember30,2012,the U.S. Consumer Financial Protection Bureau hasbeenchargedwithmakingmarketsworkforconsumerfinancial products and services and with supervisingcreditbureaus(UnitedStates2012).Insomecountries(China,forexample),thecentralbankactsasboththeindustryregulatorandtheCRSPoperator.Despite the apparent conflict of interest, such systemsoperate reasonably well as long as the two functionsareundertakenbyseparatedepartmentsunderdifferentdirectorships: that is, the department issuing operatinglicensesandsupervisingcreditbureausisnotthesamedepartmentthatoperatesthecreditregistry.TheGeneralPrinciplesassumethatcreditreportingserviceproviderswiththesamefunction,whetherpublicorprivate,willbesubjecttothesamerules;thatis,alloperateonalevelplayingfield.

Sincethecorebusinessofcreditreportinginvolvestheflowofinformationthroughanetworkofstakeholders,credit reporting activities touch on sensitive issues,suchas theindividualprivacyrightsofconsumersandthe protection and security of the data subject’s data.A robust legal and regulatory framework covering allrelevant aspects of credit reporting is essential for thesound functioning of credit reporting systems. Thelegal and regulatory frameworksmay need to provideabalancedresolutionofthenaturaltensionbetweentheobjectivesofaccessingbroadsourcesofinformationforenhancedcredit reporting andofpreserving individualprivacy.Noclearconsensusexistsoverwhatconstitutesan optimal legal and regulatory framework for creditreporting.Inadditiontocontractualagreements,acleartrendworldwideistheenactmentoflawstohelpprotectprivacy and allow data subjects to access and correctinformationaboutthemselves.

1.4. Comprehensive (Positive and Negative) Information SharingToovercomeinformationasymmetriesincreditmarkets,credit reporting service providers collate personal andcredithistoryinformationfromavarietyofsourcesanddevelopcreditprofilesonborrowersthatenablelendersto make optimal lending decisions. Credit historyinformation can be divided into two broad categories:negativeinformationandpositiveinformation.Negativereporting includes only information pertaining tounfulfilled financial obligations, such as defaults,amounts in arrears, judgment orders on debts, andother adverse or negative information. Information ondelinquent debts that are eventually paid off usuallyremainsonfileandformspartof thecredithistoryforadefinedperiodoftime.Databaseswithnegative-onlydataaresometimesreferredtoas“blacklists.”Negative-onlydatabasesweredevelopedinitiallytohelplenderseffectivelyscreenandexcludehigh-riskborrowersthathadaccumulatedsignificantdebtexposure.Positive credit information contains favorableinformation on an individual’s open and closed creditaccounts.Informationsourcescouldinclude:debtratios,on-timepayments,creditlimits,accounttype,loantype,lending institution, detailed reports on the prospectiveborrower’s assets and liabilities, guarantees, debtmaturitystructure,andpatternofrepayments.Research has shown that comprehensive reportingsystems generate more accurate scores than negative-


only systems. An analysis of Chile’s credit reportingsystem, a negative-only system with some positivedata elements, found that credit decisions based oncomprehensive information significantly outperformedthose based on negative-only information (Turner2010). Another study in the United States simulatedand compareddefault rates on loans approvedusing anegative-only credit scoring model with default ratesonloansbasedonascoringmodelusingbothnegativeand positive information.According to the study, thedefault rateon loansapprovedusing thenegative-onlysystem was 3.35 percent, whereas the default rate onloans approved using scores based on both positiveandnegative informationdropped to 1.9 percent, a 43percent decrease (Barron and Staten; see Figure 1.2).(Thefiguresshowthesimulatedcreditdefaultsassuminganacceptancerateof60percent.ThesimulationswerebasedondatainoneofthelargestU.S.creditbureaus.)AsimilarexercisewasconductedusingdatafromBrazilandArgentina,withsimilar results.Thatstudyshowedthat inclusion of positive information would haveproduced a 22 percent decrease in the default rate forArgentineanbanksanda45percentdecreaseindefaultratesforBrazilianbanks(Powelletal.2004;seeFigure1.3). Thus, including positive information in scoringmodelsproducesbetterpredictionsandimproveslenders’abilitytoseparategoodfromhigh-riskborrowers.Forabankwitha$100millionloanportfolio, this translatesintoanaveragesavingsofUS$830,000inArgentinaandUS$1.5millioninBrazil.

Figure 1.2. Effect on Default Rates of Including Positive Information, United States

Source: IFC, using Barron and Staten (2003) data.

Figure 1.3. Effects on Default Rates of Including Positive Information, Argentina and Brazil

Source: IFC, using Powell, Mylenko, Miller, and Majnoni (2004) data.

Figure 1.4. Effect on Approvals of Including Positive Information


Figure 1.4 shows how including positive informationincreasedapprovalratesby88percentinthesimulationusingdatafromtheUnitedStates.

NegativeInformation

Positive & NegativeInformation

3.35

1.9

00.51.01.52.02.53.03.54.0

Defau

lt Rate

s

43% Decrease in Defaults

45% Decline

22% Decline

Positive & Negative Information Negative Information

3.81

BrazilArgentina0

0.51

1.52

2.53

3.54

3.372.98

1.84

Defau

lt Rate

s

NegativeInformation


39.8

74.8

0

10

20

30

40

50

60

70

80

Appro

val R

ates


To summarize, negative-only databases pose thefollowingproblems:

● Inasystemwherepositiveinformationisnotreported,aborrowercouldremainexcludedfromcreditaccess(for up to five years in some countries) based on asingle negative event, regardless of the borrower’scurrentpayment recordorotherpositive informationthatreflectsfavorablyontheborrower.

● Furthermore, in negative-only reporting systems,lenders have no credit information on prospectiveborrowers who have never defaulted, since noinformation on them is reported. Borrowers couldborrowfrommultiplesourcesandneverdefault,eveniftheyborrowfromonesourcetorepayanother.Inthelong run, this borrowing pattern is unsustainable, aswasseeninHongKongSARandKorea(seeBox1.1).

● The biggest disadvantage of a negative-only systemisthatitdoesnotacknowledgeborrowersthatpayalltheir dues andbills on time.Goodborrowers shouldbe rewarded for their good repayment behavior byreceiving access to better products and services onbettertermsandconditions.

Consumercreditbureausandcommercialcreditreportingcompanies collect positive credit information wherethe legal basis exists to do so and where the benefitsof such information sharing are generally known andappreciated.Creditregistriesmaycollectpositivecreditinformation, but the scope of such collection may belimited,asdiscussedinchapter2.Insomemarkets,creditbureausandcommercialcreditreportingcompaniesmayshare data with credit registries to support the micro-andmacroprudentialsupervisionfunction,andthiswillgreatlybeabettediftheseserviceprovidersalsocollectandsharepositivecreditinformation.ExamplesincludetheCzechRepublic,RepublicofKorea,Mexico,SlovakRepublic, Turkey, and the United Kingdom (IBRD2016). Inmarketswhere credit registries do not exist,comprehensive credit information sharing databases(consumer or commercial) can still provide invaluableinputs tofinancial sector supervisors and regulators inmeetingtheirmandateofensuringfinancialstability.

According to Doing Business 2019, approximately87 percent of all credit bureaus surveyed collectedand distributed both positive and negative information(WorldBank2019),oftenreferredtoas“comprehensivereporting.” Over 98 percent of all credit registriescollectedanddistributedboth.Regionalmapsinsection5oftheAppendixshowthenumberofcountriesaroundthe world that have adopted comprehensive creditreportingintheirrespectivejurisdictions.

1.5. Full-File Information Sharing Positiveandnegativeinformationcanbecollectedfromavarietyofsources.Credit reportingserviceproviderscollectinformationfrombothfinancialinstitutions,suchasbanksandcreditcardcompanies,andfromavarietyof nonfinancial institutions, such as utility companiesandcollateralregistries,aswellasfrompublicrecords,suchasbankruptcyrecords.

Figure 1.5. Effect of Including Positive Information on Approvals among Retailers and Other Lenders


Box 1.1. The Limitations of Negative-Only ReportingIn the late 1990s, Hong Kong SAR, China, and the Republic of Korea experienced a major increase in retail credit defaults as a result of the unfortunate combination of reckless lending and the unavailability of positive information. While both had negative credit information registries, positive information was not being shared, and lenders were unaware of the level of indebtedness of existing and prospective borrowers. As competition in the credit

card market increased and banks marketed credit cards more aggressively, many consumers accumulated several credit cards. Borrowers would typically open one credit card account and then open another to pay off the debt accumulated on the first credit card. This borrowing was unsustainable and resulted in a large number of credit card defaults. Following the crises, both countries moved to a system of positive credit reporting.

Retail Retail & Other Lenders

Appro

val R

ates

75.4

83.4

70

72

74

76

78

80

82

84


Simulations using credit reporting data in the UnitedStates (Barron and Staten 2003; see Figure 1.5) alsofound thatsharingpositive informationderivedfromabroadercategoryofsourcesallowssignificantoperationalimprovements by lowering defaults or increasinglendingvolumes tonewcategoriesofborrowers. (Thefiguresshowthesimulatedcreditdefaultsassuminganacceptancerateof60percent.Thesimulations,basedondata fromoneof the largestU.S.creditbureaus, showthatalenderwithatargetapprovalrateof60percentwasabletoreducedefaultratesby38percent.Ifthedefaultrateisusedasatarget,thebankwouldbeabletoapprove11percentmore clients before reaching the targeted3percentdefaultrate.)Creditinformationsharingbenefitsbothsmallandlargeinstitutions.ThestudyusingdatafromArgentina(Powellet al. 2004) found that while small lenders do benefitmorethanlargelendersfromsharinginformation,largebanksalsobenefitfromasignificantdropindefaultsifpositive information isused.Although the resultsmayvaryfromcountrytocountryandfromlendertolender,bothanecdotalandavailableempiricalevidencesuggeststhatinformationsharinganduseofcreditscoringallowbothlargeandsmallbankstoreducedefaultratesand/orincreaselendingvolumessignificantly(seeFigure1.6).Insummary,creditreportscombiningbothpositiveandnegative information from both banks and nonbanklendershavethehighestpredictivepowerforcreditriskassessments.Bureausorcreditregistriesfragmentedbyindustrythatprovideonlynegativeinformationdeliverreports with less predictive power, often resulting ininaccuratecreditriskassessments(SeeFigure1.7).

Figure 1.6. Effect on Default Rates of Increasing Number of Information Sources


Figure 1.7. Effect of Types and Sources of Information on Predictive Power

Source: World Bank, Doing Business 2019.

Types of Information

Sources of Information


NegativeInformation

“Full” (Information Shared by Banks, Retailers, NBFIs)

“Fragmented” (e.g. Information Shared Among Banks Only or

Retail Only)

High Predictiveness

(e.g. U.S., U.K., India)

Lower Predictiveness (e.g. Botswana,

Ewatini)

Lower Predictiveness (e.g. Mexico,

Kuwait)

Lowest Predictiveness (e.g. Malaysia,

Botswana)

ResearchbyMartinezPeria,Soledad,andSingh(2014),usingdataonconsumercreditbureausthatalsocollectdataonfirms,looksattheimpactofcreditinformationsharing onfirmfinancing in a sample of 75,000firmsacross 63 countries from 2002 to 2013. The resultsshowedthatcreditinformationsharingincreasesaccesstofinanceforfirmsandimprovesthematurityofcreditextendedtofirms,thatis,financingforlongerthanayear.Suchfinancingmaybeimportantforfirmexpansionandasset acquisition in themedium term.Martinez Peria,Soledad,andSinghshowthatthegreaterthedepthandscopeofinformationshared,themorebeneficialthetermsforfirmsaccessingcredit.Reformofcreditinformationsharingenvironmentsparticularlystandstobenefitsmallfirmswithlessexperience,asectorgenerallyrelativelyopaquetolenders.One of the challenges of building credit informationsharingbasedon traditional lendingdata is that it cantendtoshutoutnewborrowersiftheylackformalcredithistories. These “thin file/no file” customers (oftenlow-income groups, women, or small- and medium-sizedenterprises)maynothavehadtheopportunity,ortheneed,toborrowpreviously,andtheirlackofcredithistorycanreducefuturecreditavailabilityandaccess.CRSPsattempttoreflectasubject’sbalancesheet,andthey often broaden the range of information gatheredto includenon-loan liabilities, suchasutilitycompanypayables and income information. These categoriestoomaybemissingfor lowincomeor informalsectorindividuals,however.Innovationssuchasthecollectionanduseofnon-creditfinancialtransactionsdata,socialmediaprofiles,paymentsdata,andpsychometricscouldexpandcustomercoverageandallowthebenefitsoffull-fileinformationsharingtoflowtoabroaderpopulation.

79% Decline

41% Decline

Small bankLarge bank

Defau

lt Rate

s

Information from a bank & bureau Information from a bank

1.31

2.22 2.42

0.52

0

0.5

1

1.5

2

2.5


Table 1.1. Benefits of Comprehensive and Full-File Information SharingStakeholder Benefits

Lenders, creditors, alternative data providers

• Ability to see the client’s complete range of credit obligations, payments status, and level of indebtedness or over-indebtedness

• Ability to price risk appropriately and to provide customized products and services to meet clients’ specific needs

• Tools to proactively manage consumer accounts for credit line increases or decreases, payment terms, interest rates, etc.

• Ability to proactively manage collections by streamlining the collections process and maximizing collections by expending effort where most needed and where recovery rate is highest

Consumers • Enables consumers to establish “reputational collateral” based on credit histories, thus reducing the need for physical collateral

• Rewards consumers with on-time payments, no missed payments, and other good borrowing and repayment behavior; inspires creditors to offer them better terms of credit or higher credit lines

• Benefits consumers through reporting of non-traditional data like telephone bills, utility payments, etc., to the credit bureau; consumers with no formal relationships with banks or other creditors can show they meet other payment obligations responsibly and are worthy of credit

Regulators and supervisors • Allows regulators and supervisors to develop appropriate regulatory tools to assist in macro- and microprudential supervision

• Provides supervisors with the information necessary to support systemic risk monitoring and prudential supervision


Credit Reporting Service Providers

The global credit reporting industry can be roughlydivided into three homogeneous, but not exclusive,groupings: credit bureaus, credit registries, andcommercial credit reporting companies.Thedatabasecontent, clientele, and associated services providedby these service providers can vary significantlyfrom country to country. Consumer credit reportingcompanies, referred to herein as credit bureaus, collectinformationonindividuals,includingsensitivepersonalinformationsuchasSocialSecurityNumbers(intheUS)andbankaccountnumbersandinformation.Thecompiledinformationismadeavailableonrequestto customers of the credit bureau for purposes ofcredit riskassessment,creditscoring,orothersimilarpurposes; consumer bureau customers include banksandotherfinancialinstitutionsthatevaluateindividualsforcredit.Credit registries generally support the state’s role as asupervisoroffinancialinstitutions.Loansaboveacertainamountmust,bylaw,beregisteredinthenationalcreditregistry,andinsomecases,creditregistrieshaverelativelyhighthresholdsforloanstobeincludedintheirdatabases.Creditregistriestendtomonitorloansmadebyregulatedfinancialinstitutions.Withthegrowthofconsumercredit,loanvaluethresholdshavebeenreducedorabolished,andinsomecountries(includingArgentina,Belgium,France,Italy, Peru, and Spain), the credit registry often offersproductsandservicessimilartothoseofcreditbureaus.Credit bureaus tend to cover smaller loans than creditregistries,andtheyoftencollectinformationfromawidevariety of financial and nonfinancial entities, including

retailers, credit card companies, and microfinanceinstitutions.Asaresult,datacollectedbycreditbureausare often more comprehensive and better geared toassessing and monitoring clients’ creditworthiness. Incontrast,creditregistrycoveragetendstobelimitedbythescopeofthedataproviders(regulatedlendersonly),and credit registries are often geared toward collectingsystem-wide informationformacroprudentialandotherpolicypurposes.Commercial credit reporting companies are creditreporting companies that collect information onbusinesses,includingsoleproprietorships,partnerships,and corporations. The compiled information is madeavailable on request to customers of the commercialreporting company for the purposes of credit riskassessment, credit scoring, or other similar purposes,suchastheextensionoftradecredit.Commercialcreditreporting company customers include banks and otherfinancial institutions that evaluate businesses for tradecreditorinsuranceforbusinesspurposes.Figure 2.1 shows the different data covered by theseentities. The three types of credit reporting serviceproviders have distinct differences in strengths andweaknesses,operatingmodels,andmarketsserved.Allthreeproviderscancoexistinagivenmarketbasedonthesizeofthemarket,marketpreferences,leveloffinancialdevelopment,andcreditculture.Someconsumercreditbureaus also provide commercial services (such asCRIF,Creditinfo,Experian);thus,itispossibletohaveoneentitycoveringbothservices.Nosinglesolutionismoreappropriatethananotherforanygivenmarket.

CHAPTER

2.

12 CHAPTER 2. CREDIT REPORTING SERVICE PROVIDERS

2.1. Functions of Credit Reporting Service Providers

Credit Bureaus CreditbureausprovidecreditinformationonindividualborrowersandMSMEstoawiderangeofcreditproviders.Theycollectinformationinastandardizedformatfromavarietyofcreditproviders,includingbanks,creditcardcompanies, telecommunications and utility companies,retail lenders, andothernonbankfinancial institutions.Theyalsocollectanddistributeawiderangeofpubliclyavailable information (such as court judgments,bankruptcy notices, and telephone directories) and/or facilitate access to third-party databases (such ascollateral registries, identification repositories, andtelephone directories). Other information may comefrom nontraditional sources, such as billing data fromgas, water, electricity, cable, telephone, internet, andotherservices,whichenablescreditbureaustocompilebetterandmorecomprehensivecreditreports.AccordingtotheWorldBankDoingBusinesssurvey,morethan45

Source: IFC.

Figure 2.1. Data Subjects Covered by Type of CRSP

Consumers Consumers, Micro, Small and Medium Businesses

Large Corporations

ConsumersCredit

Bureau

Consumer & Commercial

Credit Bureau

RatingsAgencies

percent of private credit bureaus included informationfrom utility providers, and more than 65 percentincluded information frommicrofinance institutions intheirdatabases(WorldBank2019;seeFigure2.2).ThisbroadeneddefinitionfordatasourcesbenefitsunbankedindividualborrowersandMSMEsbyenablingthemtobuild credit histories without necessarily having hadformal access to credit, thus overcoming the trap ofbeingineligibleforcreditduetolackofacredithistory.Oncedataiscollected,itiscross-checkedtoproduceacreditreportforeachindividualborrower,whichisthensoldtolenders.Thereportconstitutesacomprehensiveprofile of a borrower or potential borrower’s personalinformation and information on his or her creditaccounts. The personal information section usuallyincludes the borrower’s name, former names, nameofguarantor(s)ifany,identificationnumber(suchasSocialSecurity or other national identification number), dateof birth, addresses, employment information, alerts(suchasIDtheftreportedorsecurityfreezes),anddateoflastinformationupdate.Thecreditsummarysection


typically contains informationonall of theborrowers’creditaccounts(bothopenandclosed),arecordofthestandingoftheaccounts(outstandingamount,pastdueamounts, andpaymentbehaviorhistory), and inquiriesmadeabouttheborrowerintherecentpast.Thereportsnormally also include repayment histories, notingpayments over 12 to 36 months (World Bank 2012). Figure2.3showsthetypesofinformationcreditbureauscollectonindividuals.

Figure 2.2. Sources of Information for Privately Held Credit Bureaus

Source: IFC calculation, based on Doing Business 2019 data.

Borrowers’credithistoriesareoftenrecordedintermsofthenumberofmissedpayments,usingaformatsimilartotheoneinFigure2.4.Thecreditreportalsoprovidesinformationoncollectionsmadeonoutstandingaccountsandanyavailablepublicrecords,suchascourtjudgmentsandbankruptcyrulings.Inmanycountries,creditreportsinclude a credit score, the statistical probability that aborrowerwillmakegoodonhisorherobligation,whichisbasedonanumberofcharacteristics(seesection6.3).

Figure 2.3. Information on Individuals Collected by Credit Bureaus


98 95

44

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80 82

0

20

40

60

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100

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Name o

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ayment

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Reports are usually available to lenders electronically,andmostmodernlargecreditorshavecreditinformationdata uploaded directly into their loan processingsystemsandoriginatingsoftware.Lenderspaythecreditbureau for credit reports through a subscription fee, afee-per-query with significant volume discounts, or acombinationofboth.Historically, credit bureaus only collected informationon individuals. In recent years, with the expansion ofsmall business lending and advances in informationtechnology,morecreditbureauscollateandsellreportson small businesses. In a recent World Bank survey(World Bank 2019), approximately 91 percent of the126 credit bureaus responding contained at least someinformation on firms. Approximately 35 percent ofreportingcreditbureausalsocollectedinformationfromtradecreditorsorfirmsprovidingsuppliercredit,whichis important in assessing a firm’s creditworthiness.Collecting information on both individuals andfirmswithin the same credit bureau has the benefit ofallowing a combined assessment of both a business

Figure 2.4. Sample History of Payments

History of Payments: Observation Periods2018 2017 2016

DNOSAJJMAMFJ DNOSAJ JMAMFJ DNOSAJ J

12113242111 1110113212121 1123145

Source: IFC.

and its owner. The credit history of a small businessowner is an important predictor of the credit risk ofthe small business, since small business owners oftenmix personal and business finances.Many individualspersonallyguaranteetheirbusinessloans.Insuchcases,however,allappropriatelawsandregulationsonprivacyrightsmustbeconsideredandrespected,andthebureaumustensure thatborrowers’personaldata isusedonlyfor thepermissible purposes specified in the legal andregulatoryframeworkandisprovidedonlytousersthatarelegallyallowedtoaccesssuchdata.

Credit Registries Historically, credit registries andcredit bureaus serveddifferentpurposes.Mostcredit registries startedoutasinternal databaseswithin a country’s central bank andwere,andinmanycasesstillare,usedasasupervisionmechanismtoidentifysystemicriskwithinthelendingportfolios of regulated financial institutions. As such,these databases focused primarily on large creditexposures, typically (according toWorld Bank DoingBusiness survey data) with a loan threshold value inexcessofUS$5,000,although,insomepartsofEurope,higherthresholdsapply:forexample,€25,000inFrance,€1million inGermany, and €30,000 in Italy. In 2010Mongolia’s credit registry eliminated the minimumthresholdforloansincludedinitsdatabase.Asaresult,the registry’s coverage doubled after just one year. InBrazil, a circular thatwent into force in2011 reducedtheminimumthresholdforloansreportedbythecentralbank’screditinformationsystemby80percent.


Figure 2.5. Firm-Level Information Collected by Credit Bureaus

91

7872

6370

32

1725 28 32

54 52

85 83

0102030405060708090

100Ty

pe of

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Name

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eport

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titutio

n

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ments

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es

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heck

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t

Utility

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ent

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rds

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e Own

er(s)

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s

Name o

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r

Taxpa

yer ID

Busines

s ID

Name o

f Firm

% of

Cre

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us


Figure 2.6. Sources of Information for Credit Registries

Credit registries by definition mandate all regulatedfinancialinstitutionstoprovidedatatotheregistry(seeFigure2.6).Doing Business 2019 survey data shows that creditregistries actually collect information on individualsandfirms,particularlyidentificationinformation,detailsonloansoutstanding,on-timepayments,dayspastdue,defaults,cancelleddebts,arrears,anddefaults, tonameafewof themorecommonitemscollected.Registriesrely largely on regulated financial institutions, banks,cooperativesandcreditunions,andotherfinanceprovidersforinformation.Someregistriescollectinformationfromfactoringand leasingcompanies.TheLithuaniancreditregistry also collects information from peer to peerlending platforms. Information from issuers of creditcardsistypicallynotcapturedbyregistries(asopposedtobureaus,whichcollectalotofinformationoncreditcardusage). Registries typically do not capture informationfromfirmsthatprovideloans(tradecreditors),retailers,utilityproviders,creditbureaus,orcourts.Initially, information in credit registries was used bycentralbankssolelyfor internalpurposesofprudentialsupervision; over time, credit registry information hasbeen made available to lenders in the form of creditreportsonbothindividualandfirms.Aftercollectingandaggregatingtheinformation,thecreditregistryprovidesa credit report to all reporting regulated financial

institutionsshowingthecurrentaggregateexposuresofregulatedentities.Creditregistriesusuallyprovidetheircreditreportsatlowornocosttothelenders.Ofthe87creditregistriesthatprovidedinformationtotheWorldBanksurveyontheircoststoinspectdata,only14listedafee(WorldBank2012).In some countries credit registries evolved due to anabsence of other credit reporting service providers.Ahandfulofcreditregistriesalsoreportthattheyprovidescoresonindividualsandfirms.Following the financial crisis of 2008, financialsector supervisors generally accepted the need for amacroprudential approach to supervision of systemicfinancial risks. Central banks and/or other financialsupervisors perform a series of analyses and havedesigned instruments to monitor financial systemstability continuously and to take preventivemeasuresifandwhereappropriate.Dataobtained throughcreditregistries (and/or other centralized credit databasesoperatedbyfinancialsectorregulatorsorsupervisors)isonemajorinputallowingcentralbanksandotherfinancialsector regulators and supervisors to perform suchanalysesonasystemicbasis.Moreover,creditdatafromthese sources is crucial to calibrating macroprudentialpolicy regulations ormeasures (such as countercyclicalcapitalbuffersorquantitativelimitstocertainkeyratiosin lending, such as loan-to-value and loan-to-income).


Othe

r

Publi

c Data

base

s

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s

Cred

it Bure

aus

Utiliti

es

Prov

iders

Retai

lers

Firms

Prov

. Loa

ns/

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itors

Cred

it Card

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ceCo

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ions

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it Unio

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anks

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ial Ba

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te

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92

56

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13 12

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Creditdataatthefinancialinstitutionlevelisanimportantinputforoff-sitesupervision(IBRD2016).In fact, some central banks and financial supervisorsalready resort to credit bureaus and commercial creditbureaus toobtain thedata theyneed todischarge theirmicro- and/or macroprudential responsibilities. DoingBusiness 2019 data show that approximately 12% ofregistries responding collected some information fromcredit bureaus. Depending on a number of factors,dataintheseCRSPsmaybesoughtasacomplementtothedataavailable in thecredit registry (orothercreditdatabases operated by financial authorities); in somecases,itmayactuallybethemainsourceforsuchdata,forexample,whenacreditregistrydoesnotexistinthecorrespondingjurisdiction.

Commercial Credit Reporting Companies

The General Principles for Credit Reporting definecommercial credit reporting companies as “Entitiesthat collect information on businesses, including soleproprietorships, partnerships and corporations for the purposeofcredit riskassessment,creditscoringor forotherbusinesspurposes suchas the extensionof tradecredit”(WorldBank2011). Theseentitiescollectcreditdata from banks, other regulated financial institutions,nonfinancial lenders, and other sources, generallytargetingthemedium-andlarge-sizedcompanylendingmarket;theyalsoprovideservicestofinancialinstitutionstoallowgrantingofloans,leases,andsoon.Commercial credit reporting serves a vital functionin the extension of trade credit, which is the largestsourceofshort-termcapitalforbusinesses.Whiledirectinvestmentprovides thestart-upcapital forbusinesses,trade credit provides a significant part of theworkingcapitalforthosebusinesses.Whenabusinessisextendedtrade credit by a supplier, that supplier essentiallybecomesashort-termlendertothebusiness.Businessesmay use such short-term loans to make payroll, buyotherproducts and services, or otherwise invest in thebusiness. Looked at this way, trade credit is often abusiness’slargestuninsuredshort-termasset.But granting trade credit can be filled with risks,particularly when dealing with new customers or inuncertain times. Trade credit grantors need accurate,reliable,timelyinformationtomakeinformeddecisionsonwhethertoextendtradecreditand,ifso,howmuchtoextendandforhowlong.Tradecreditandcommercialcreditinformationareintertwined.Withoutcommercialcreditinformation,theissuesofasymmetricinformationdiscussed in chapter 1 would impact the ability of

trade creditors to make objective lending decisions.Bygatheringinformationaboutthecreditworthinessofbusinessesandprovidingthatinformationtotradecreditgrantorsandothercreditorstosmall-andmedium-sizedbusinesses, commercial credit reporting companiesperformanessential function,helping lenders tomakecreditdecisions.Commercial credit reporting companies provideinformationoncompanies,includingsoleproprietorships,partnerships,andcorporations,availablethroughpublicsources, direct investigations, and payment behaviorreported by financial institutions, suppliers, and tradecreditors.Thesecreditreportingcompaniesgobyvariousnames in different jurisdictions; for example, in theUnitedStatesthetermusedisbusiness credit reporting agency.They typically reportoncompaniessmaller insizeandearningsthanthecorporationscoveredbycreditratingagencies.The information compiled by the commercial creditreporting companies is resold as business credit reports. Data comes from banks, suppliers, financecompanies, lease registrations, business owners, andpublicrecords,suchastaxliens,bankruptcies,andcourtjudgments. In addition, commercial credit reportingcompaniesconductinterviewswithbusinessownersandindustryplayers,collectallavailablefinancialstatementinformationonfirms,andgatheranypubliclyavailableinformation,forexample,fromnewsarticles,websites,and so on (Business Information IndustryAssociation(BIIA);Carbajo2009). Acommercialcreditreportprovidesbasicidentificationinformation on the firm, including address, contactdetails,businessregistrationnumbers,taxIDs,numberofcreditaccountsthebusinesshas,howitusesandservicesitsvariouscreditlines,whetheritpaysitsbillsontime,what leases it holds, its payment history, how it payssuppliersandcollectsfromcustomers(dayspayableanddays receivable), the business’s financial performance,industrybenchmarks for similarbusinesses, tonameafew. The report may also provide linkages with otherrelatedparties,suchascompanyparentorsubsidiaries.Typical elements in a commercial credit report includethe firm’s identification details; trade references,including from those that have extended credit to thefirm;informationfrompublicsourcesreportingthefirm’screditperformance;resultsfrominvestigationsintopublicrecordfilings, includingcollections,courtactions, suits,liens,andsoon;informationfromtheweb,thepress,andothernewssources;interviewswithfirmowners;industrycomparables;financialstatements;andmore.


The information compiled through these commercialcredit reporting companies is typically used for creditriskassessmentorcreditscoringorforotherpurposes,suchastheextensionoftradecredit.Broadlyspeaking,thesecompaniesprovidecommercialcreditreportsanddifferent scores showing for example, the business’screditworthiness or whether the business will becomedistressedinthenexttwelvemonths.Commercial credit reporting companies do not collectandreportsensitivepersonalinformationonindividuals.When a lender assesses a business loan application,however,itwilllikelywanttoinquireintothepersonalcredit of the underlying business owner/applicant.Asnoted, particularly for small businesses, personal andbusinessfinancestendtobecommingled.Thepersonalcredit report is a testament to the personal financialbehaviorofthepotentialbusinessloanborrowerandwillindicatehowcreditworthyandreliabletheborrowerwillbe if given abusiness loan.The lenderwouldneed tocomplywithanyconsent requirementswhile inquiringintothepersonalcredithistoryofaborrower.Giventhebenefitsoflinkingpersonalrecordswithsmallbusinessrecords,severalconsumercreditbureaushavealsobeguncommercialcreditreporting.Smallbusinessesarebetterservedwithintheframeworkofacreditbureauthatalsohandlesconsumerrecords,becausethecostsofcollectinginformationonasmallbusiness,particularlywhere publicly available information is scarce, can behighrelativetoloansizes.Like consumer credit bureaus, strong competition incommercial credit reporting leads commercial creditreportingcompaniestodifferentiatethemselvesintermsof the sources fromwhich they collect data, the typesof information they collect, and the types of productsand services they provide.Users of commercial creditreporting products and services include financial andnonfinancial sector lenders, credit insurers, and tradecreditors.Large companiesmay also use these reportsto conduct industry- or sector-related analyses and todevelopnewmarkets(WorldBank2014).

2.2 Ownership Structures Ownersandshareholders generallyprovideCRSPseedcapital, negotiate and prepare the pre-incorporationagreements, lease or acquire office premises, andcontractfortheCRSP’sinitialneeds,suchasacquiringtechnological assets and recruiting the personnelnecessary to manage day-to-day operations. Ownersand shareholdersmay alsobeusers of the service, forinstance,whentheCRSPisownedbymemberbanks.

Credit bureaus (consumer and commercial) and creditregistriesnormallyserveseparatefunctions.Whereastheformergenerallyfocusonmakinginformationavailabletofinancialandnonfinancialcreditorsforcredit-grantingpurposes,thelattertypicallyfocusonassistingbankingsupervisionwhileimprovingthequalityandavailabilityofdataforsupervisedfinancialintermediaries.Insomeinstances, however, bureaus both support bankingsupervisionandmakedataavailabletocreditors in themarket. Credit registries operating under this broadcategorizationaremostlyownedandoperatedbypublicsectorentities,suchasacentralbankorothermonetary/financial supervisory authority, that is, by the entitiesdirectly responsible forprudential supervisionandriskmonitoringinaneconomy.Consumer credit bureaus deal largely with providingfinancial and nonfinancial creditorswith credit historyinformation, but they could in some cases supportthe overall supervision and risk monitoring function.Dependingonitsfunctionandtherangeofstakeholdersinvolved, theownershipstructureofaconsumercreditbureaucanfallintooneofmanycategories:

● Banks and/or other creditors as either majority or minority shareholders. TheAssociation of Banks inSingapore, forexample,ownsa share inSingapore’scredit bureau. Other countries in which a group ofbanks owns credit bureaus include Bhutan, Croatia,Poland,Romania,SaudiArabia,andSerbia.

● Owned and operated by a separate entity with no creditor ownership. Individual entrepreneurs ororganizations that provide venture capital for theestablishmentofCRSPsmayalsobecomeshareholders:examplesareDPInformationinSingapore,Datacheckin Pakistan, CompuScan in SouthAfrica, and CRBAfricainKenya.ManyCRSPshavetechnicalpartnerstomanagetheinformationtechnologyrequirementsofthereportingsystem.Itisnotuncommonfortechnicalpartnerstoholdanownershipshareinthecompany.

● An association or chamber of commerce mostly operating on membership fees.

● Partially or wholly owned by government entities. Completeownershipbygovernmententitiesisratherrare.Insomecountries,governmententities(forexample,thecentralbankinSriLankaortheMonetaryAuthorityofBhutan)orpublicsectorfinancialinstitutions(asinIndiaandThailand)areshareholdersinthecreditbureau.InSudanandtheUnitedArabEmirates,thecreditbureauisownedbygovernmententities.

According toWorldBankDoingBusiness surveydata(2019),of114creditbureausresponding,approximately


61 percent were privately held with no ownership bybanks,financialinstitutions,orcreditcardproviders;28percentwereownedbybanks,financial institutions,orcredit card providers; 7 percentwere held by industryassociations or chambers of commerce; and 4 percentwere partially or fully owned by governments. (SeeFigure2.7.)Inagradualshiftovertime,moreandmorebureauswithprivateownership,asopposedtoownershipbylendersorotherentities,haveemerged.Thisisdueinparttothegrowingrecognitionthatthecreditreportingbusinessisfairlysophisticatedandthatmeetingmarketneedsrequireshigh-endtechnology;regularinvestmentsin technology, infrastructure, and data security; andcontinualinnovation.Creditbureausinwhichcreditorshavenoownership—suchasthebureauinAustraliaandNewZealand(formerlyVedaAdvantage,nowEquifax)orExperianandTransUnionintheUnitedStates—areviewedasmoreefficientstructuresbecausecreditreportingistheircorebusinessandbecausetheshareholders’mainobjectiveistomaximizebusinessvalue by expanding operations and providing new andinnovative products and services. Conflicts of interestare minimal because the bureau’s relationships withmembers and users are driven by commercial interests.Althoughthisistheidealstructure,itisoftennotfeasible

Figure 2.7. Ownership Structures of Credit Bureaus


incountriesdevelopingtheirfirstcreditreportingservicebecause lendersareoften reluctant to share informationunlesstheyareshareholders(andthereforesharecontrol).Often, lenders resist sharing their customer informationwith a newly established bureau until they are certainthat other lenders will do the same. Therefore, anindependentlyownedbureaushouldobtaincommitmentfromasmanylendersanddatasourcesaspossiblebeforestarting up operations. Another potential challenge forindependently owned bureaus is limited capital (withno shareholder banks provide back-up capital injection ifnecessary).In several countries, such as Argentina, Croatia,Germany, India, Mexico, Romania, the RussianFederation, and Vietnam, bureaus have includedownershipbycreditors.Thisownershipstructurehastheadvantageofallowingafasterstartupbecausethebanks’agreementtobecomeshareholdersbringsaboutastrongcommitmenttotheprincipleofreciprocityininformationsharing. Furthermore, the commitment by existinglenders promises long-term financing. Participation bya government authoritymay also add credibility to theventure. Including a technical partner as a shareholderallowsthecreditreportingserviceprovidertobetteralignitsincentivesandtofocusonoperationalefficiency.Bureaus that include ownership by creditors can,however, face challenges as stakeholder differencescan get in the way of maximizing business value.Creditor shareholders may be reluctant to allow newcreditors to participate because these newcomers,while unable to contribute significant amounts ofinformation,would benefit greatly fromhaving accessto information on existing clients. Furthermore, whencreditorsown the creditbureau, theyare less likely touse the services of any other bureau, thus increasingbarrierstoentryinthecreditreportingmarketbyothercredit reporting serviceproviders. If only a fewbanksare shareholders, but several other banks or nonbankcreditors, such asmicrofinance institutions, arebureaumembers, it is possible that shareholding banks mayinfluence thepricingpolicy inamanner thatpenalizesnon-shareholdermembers.Suchunfairpracticescanbeavoidedifownershipbyindividualcreditorsislimited.Ingeneral,shareholderswhoarealsousersofthesystemhave an inherent conflict of interest in setting pricesbetweentheirroleasshareholderswishingtomaximizecompanyprofitandassystemuserswishingtominimizeusagecosts.Partialgovernmentownershipincreditbureausisrare,but it has been seen in some markets, where equity

28%

61%

7%4%

Private owned by banks/Financial Institutions/other credit providersPrivate not owned by banks/Financial Institutions/other credit providersIndustry Association/Chambers of Commerce

Government owned


investmentbygovernmenthelpsboostprivate investorconfidence.Forinstance,SriLanka’sCreditInformationBureau (CRIB) was established as a public-privatepartnership inwhich thecentralbankoriginallyhelda49 percent equity stake (now reduced to 19 percent),with the rest held by banks and financial institutions(WorldBank2017a). In India, theStateBankof Indiaand the Housing Development Finance CorporationLtd. (HDFC) were majority shareholders (40 percenteach) of the Credit Information Bureau (India) Ltd(CIBIL)when itwasestablished in2006.At the time,Dun&BradstreetandTransUnionheldtheremaining20percent (10percenteach).Over theyears,otherbanksjoined as shareholders, and State Bank of India andHDFChaveexited,leavingTransUnionasthebureau’ssinglemajorshareholder(currentlyholding92percent).Credit bureau ownership by banks and other creditorshasbeenagrowingtrendinemergingmarkets.InIFC’sexperience, however, as lenders gainmore trust in theoperations of a credit bureau they tend to divest theirshareholdings(asintheDominicanRepublicandHongKongSAR,China,forexample).Table2.1summarizesthe different ownership structures and the advantagesanddisadvantagesofeach.Commercial credit reporting companies can bepublicly traded companies, privately run, or smallone-person operations of entities collecting andcompilingdataonfirms.

2.3. Optimal Market SizeThecreditbureaubusinessischaracterizedbynetworkexternalitiesandeconomiesofscalethatcouldclassifythe business as a natural monopoly. Ongoing debateon the optimal number ofCRSPs in amarket has notproducedconsensusthusfar.Ontheonehand,asinglecreditreportingserviceprovidercombiningaggregatedinformationacrosstheentiresystemandincludingbothbank and nonbank credit information would providelenders with the most complete set of information,including comprehensive inquiry information. On theotherhand,thelackofcompetitioneliminatesincentivesforsuchproviders to improvedataquality, incorporatevalue-addedservices,andlowerprices.Competitive credit information industries are morecommoninlargemarketsthatcansupportmorethanoneCRSP.IntheUnitedStates,forexample,consolidationin thefinancialservices industryover thepast threeormoredecadeshasresultedinthreemajorcreditbureausoperating concurrently and competing on the basis

of product and service differentiation. In the UnitedKingdom, the three major credit bureaus all containinformationfromthesamebanks,buttheycompeteonthequalityofinformationandonvalue-addedservices.Competitive credit information industries also existin Italy, India, South Africa, Scandinavia, and the Balticstates.Commercial credit reporting companies generallyoperate outside the ambit of formal legislation andregulation as they deal with business information offirms. To the extent these entities match firm-levelinformation with individual owner information (as inthecaseofsoleproprietorships,LLCs,andsoon),theywouldbesubjecttoexistingcreditreportingorconsumercreditprotectionlawsandmeasures.Noconsistentbodyof knowledge appears to surround commercial creditreporting. Providers of commercial credit reportingservices emerge organically (as was the case withconsumercredit reporting) and reflectmarketneeds inany given jurisdiction. In the absence of legislation,nothing limits the number of providers possible in agiven jurisdiction, although market dynamics wouldeventuallydeterminetheoptimalnumberforanymarket,asisalsotrueforconsumercreditreporting.Theindustrytends to be very competitive and can focus on certainsectorsorsubsectors,possiblyleadingtofragmentationofinformation.Therequirementstosetupacommercialcredit reporting company would ultimately dependon the strength of the owner/ownership structure, theavailabilityofcapital,technicalandbusinessknowhow,a viable business plan, and a strategy formeeting thebusinessinformationneedsoflenders.Whereasthenumberofcreditbureausandcommercialcredit reporting companies differs based on eachcountry’s needs and level ofmarket competitiveness,most countries have only one credit registry. Indeed,bureaus, commercial credit reporting companies, andregistries are by no means mutually exclusive, andin several countries they exist side by side. In thoseinstances, registries typically assist the financialsupervisors in prudential supervision and riskmonitoringandoftenprovidecomprehensivereportingto regulated financial institutions. Bureaus andcommercialcreditreportingcompanieslargelysupportthecreditreportingneedsoffinancialandnonfinancialcreditors and, in some instances, provide statisticalinformationtothesupervisororcreditregistrytoassistwithprudential supervision (thisoccurs, forexample,inAustriaandItaly).


Table 2.1. Comparison of Credit Bureau Ownership Structures Commercial, with

ownership by creditorsCommercial, no ownership

by creditorsNoncommercial, creditor

associationGovernment ownership

(partial or full)Pros • Often the only feasible way to

establish a credit bureau and ensure buy-in from lenders

• No conflicts of interest in management

• Cost support through the association

• Boosts confidence of private sector, creditors, and technical partners

• Lender support implies strong commitment, and ensures bureau sustainability

• Commercial outlook ensures innovation and high-quality service

• Technical partners enhance the credit bureau’s creditwor-thiness

• Open for broad market coverage

• Commercial outlook ensures innovation and high-quality service

Cons • Conflicts of interest are pos-sible, with existing sharehold-ers resisting the entry of new lenders into the credit bureau or the introduction of new services

• Banks are generally unwilling to share data without taking ownership in a bureau

• Limited incentives to innovate

• Inefficient use of govern-ment resources

• Slow decision-making process, as diverging views of large numbers of sharehold-ers must be accommodated

• Lack of capital • Usually lower quality of service than in a for-profit bureau

• Government as sharehold-er creates conflict of inter-est between supervisory and shareholder functions

• Barriers to entry for new providers as well as new members

• Slow decision-making process

Examples • CRIF (Italy) • Equifax (US, Spain) • Taiwan

• Bolivia

• Sri Lanka • Thailand • United Arab Emirates• Creditinfo (Iceland) • Experian (US, UK)

• SCHUFA (Germany) • TransUnion (US)

• Serasa (Brasil) • Compuscan (South Africa)

• SIMAH (KSA) • Datacheck (Pakistan)

Multi-CRSP EnvironmentsAsmentioned,thesizeandlevelofactivityinanygivenjurisdiction’s creditmarketwill determine the numberof credit reporting service providers. Having moreservice providers ensures that the credit informationsharing market remains competitive and that usersreceiveproductsandservicesatthebestpossiblepricesand, as their needs change, innovative new productsand services. Having multiple bureaus or commercialcredit reporting companies comes with its own set ofchallenges,however,including:

Source: IFC 2018.

● Multiple service providers can lead to marketfragmentationofdata,withdifferentserviceprovidersofferingdifferenttypesofinformation,thuscreatingafragmentedpictureoftheunderlyingdatasubject.

● Usersmayneedtoinquirewithmorethanoneserviceprovidertoobtainaparticulardatasubject’scompletecredithistory,thusincurringhighercostsfrombuyingmultipleproductsandservices.

● If standardized data dictionaries and formats are notused,userswillneedtoadapt todifferences increditreporting products and services and train their staff


authorizedtousethesystemstoadapttothemarket’smultipleserviceproviders.

The Link with Collateral RegistriesIn addition to having access to credit information onsmallandmediumenterprises,whichrequirecollateralfor lending, collateral registries—public databasesthat register the security interests over an asset and/orcollateral—cangreatlyenhancelenders’abilitytomakeinformed lending decisions.One reason lenders preferfixed to moveable collateral is that existing liens onmoveablecollateralcanbedifficulttodetermine.Withacollateralregistry,lenderscanuseittoascertainwhetherasecurityinterest(lienorencumbrance)existsovertheSMEasset andwhetheraparticularpieceofcollateralhas any competing claims against it. The registryenablespotentiallenderstoestablishpriorityrightsovercollateralagainstwhichtheyextendacreditfacility.Whileitmayappearthatbureausandcollateralregistrieshold the same types of information, the systems havedistinctfeatures,servedifferentfunctions,andactuallyprovide complementary information. A key legalprinciple inmodern secured transactions law is that acreditor’s security interest over a debtor’s collateralshouldbepublicizedtoallinterestedthirdpartiesthroughpublicationinacollateralregistry.Oncethecreditorhasregisteredasecurityinterestinthecollateralregistry,the

interestisamatterofpublicrecordandisavailableforanyonetosearch.Datacontainedinacreditbureau,ontheotherhand,isprivateandcanonlybeaccessedwiththeconsentofthepotentialborrowerasapplicable.Asecondveryimportantdistinctionisthattheregisteredsecurityinterest(data)inthecollateralregistryhaslegalstanding as a public record under secured transactionslaw.Therecordinthecollateralregistryhaslegalstandingincourt,and in theeventofadefault, the informationcontainedonregistryreportsfromthecollateralregistryareevidentiaryproofofacreditor’spriorityrightsoverthat collateral. The collateral registry establishes thislegalstatusbyaffixingauniqueregistrationortransactionnumberanddateandtimestampingthetransaction.Onthe other hand, the records/reports coming from thecreditbureauhavenolegalstandingincourt.Further,informationcontainedinthecollateralregistryis very limited in depth on creditors and debtors.Thecollateralregistrycontainsonlyinformationondebtorswithanoutstandingloanfacilitywithacreditprovider.Ifthedebtorowesnooutstandingsecurityinterest(loan),the collateral registry should have no record. Creditbureaus,incontrast,trackdebtors’credithistories.Generally, the information collected by collateralregistries is limited to information on certain classesof movable property of borrowers, while informationcollectedbyCRSPsincludesborrowers’credithistories

Table 2.2. Differences Between the Various Types of CRSPsCategory Credit Bureaus Credit Registries Commercial Credit Reporting CompaniesCoverage Retail, micro, small business Retail and commercial Commercial

Sources Various Mostly regulated lenders, supplemented with data from credit bureau and commercial credit reporting companies

Various

Products and Services • Credit Reports• Bureau Scores• Alerts• Monitoring• Industry analysis

Supervision statistics • Commercial credit reports• Scores• Alerts• Monitoring

Regulation Increasingly regulated Central Bank laws No specific legislation

Types of information collected

Sensitive personal information, credit information

Credit portfolio data on individu-als and firms

• Credit history data of businesses• Financial data• Payment performance data

Average ticket size All possible loan sizes Generally, threshold applies Not related on the loan size

Disclosure of source of information

Yes, to protect individual rights Not applicable Depends of the source of data in the given country


andpastpaymentbehaviors.Theoretically,informationononeborrower(credithistory,pastpaymentbehavior,mortgage,immovableproperty,andassetsencumberedbysecurityinterests)couldbecollectedby,andbeavailablefrom, one location rather than from both aCRSP anda collateral registry. Accordingly, potential synergiescanexistbetweenCRSPsandcollateralregistries.Morematurecreditreportingserviceproviderswithdevelopeddatabases and sophisticated technologyplatformshavethecapacitytoincorporateinformationoncreditreportsfromcollateral registries; this ispossible in theUnitedKingdom, where credit bureaus can access the LandRegistrythatrecordspropertyinterests.Theseprovidersmay also have the potential to develop their owncollateral database and perform the function normallyperformedbycollateralregistries.CRSPscanprovideaccesstodatainacollateralregistryeither by establishing and hosting a collateral registryas part of their value-added services or by joining anexisting collateral registry database and sharing thetechnology resources. In developing markets, wheretechnicalinfrastructureandlocalcapacityareinadequateto support the development of both a credit reportingserviceproviderandacollateralregistry,jointsolutionsarelikelytogainacceptance.Threemodels can be considered for setting up a jointcreditreportingandcollateralregistryservice:

● Wheretheappropriategovernancestructureisinplace,createaCRSPandcollateralregistrywithinthesameprivate-sectorinstitution.

● Createapublic-privatesectorpartnership. ● EstablishthefunctionsofbothaCRSPandacollateralregistry under one government agency, such as thecentralbank.

Aversionof thefirstmodel isbeingundertaken inSriLanka, where the credit bureau, Credit InformationBureau (CRIB), has been mandated by law to createandoperatethemovablepropertyregistry.IFCprovidestechnical assistance to CRIB and the government indeveloping the appropriate legislative regime, creatingthe collateral registry, and developing the appropriatebusiness model to support the operation. Currently,thedraftamendedSecuredTransactionsandCollateralRegistrylawisatparliamentandlikelytobeapprovedsometime in 2018. In the amended law, the specificreferencetoCRIBhasbeenremovedandreplacedwithagenericdescriptionofaserviceprovider.Although,nointention exists to remove collateral registry functionsfromCRIBatthistime,itwouldbepossibletodosointhefutureshouldthegovernmentfinditnecessary.

A version of the public-private partnership modelcanbe found in somecountries inLatinAmerica (forexample, in Colombia and El Salvador) in which thegovernmenthasdelegatedpublicfunctions,suchastheestablishmentandmanagementofthecollateralregistry,toprivatesectorinstitutions(amongthem,chambersofcommerce).An example of combining aCRSP and acollateral registry under one government agency canbefoundinChina,wherebotharemanagedundertheCreditReferenceCenter, inturnapartofthePeople’sBankofChina.AnexampleofcombiningaCRSPandacollateralregistryunderonegovernmentagencycanbefoundinChina,wherebotharemanagedundertheCreditReferenceCenter, inturnapartofthePeople’sBankofChina.A joint infrastructure enables more efficient use ofscarce technical and human resources and allowssharing of common disaster-recovery facilities andbusinesscontinuityplans.Italsohelpstoboostlenders’use of the collateral registry. Differences between thetwotypesofservicesmustbetakenintoaccountwhensetting up such joint infrastructure, however.Whereasthe data contained in CRSPs are private, individualdata, the data held in collateral registries are publiclyavailable.Thus,anyjointinfrastructureshouldinvolveagovernancearrangementthatensuresthetwodatabasesarekept separateevenwhilebeinghosted in the sameinfrastructure.Transparentservice-levelagreementswillbeneededbetweenthegovernmententityandtheCRSPhostingthecollateralregistry.In summary, the development of comprehensivefinancial market infrastructure—particularly securedtransactionslawsandcollateralregistriestogetherwithcredit bureaus—promote financial stability and accessto finance by reducing information asymmetry.Whiletheymaycollectsimilardatainformationonborrowers,they serve different functions. Credit bureaus providecreditorswithahistoryofdebtors’financialobligationsand their repayment histories, allowing lenders todetermine debtors’ creditworthiness. The collateralregistry,viapublicationintheregistry,provideslenderswithinformationonwhetherdebtorshaveanysecurityinterests (liens) registered against their movablecollaterals; in addition, through the legal provisionscontained in the relevant legal framework, the registryalso ranks creditors’ competing priority claims in theeventofadebtordefault.Bothsystemsplayimportantrolesinlenders’decisionmakingwhenpricingtheriskofacreditfacility.


Table 2.3. Credit Reporting and Collateral Regimes: Linkages and SynergiesSTR and Credit Bureaus: similarities• Similar tombstone data

• Name, address, contact details • Same creditors, debtors • Same financial transactions

• Both institutions are considered as vital pillars of the financial infrastructure • Both have ability to provide valuable statistical data for

policy makers • Trusted third party

• Technology platform

STR and Credit Bureaus: differences Credit Bureau Purpose and Function • Governed by principles of secrecy (legislation; licensing/

oversight; codes of conduct; membership agreements) • Providing data in an informational way

• No warranty on accuracy of match or information provided • Positive and negative information and public information • Multiple products and services

• Business Model – private = commercially oriented • Publicly or privately owned or mixture • May be more than one in any jurisdiction Collateral Registry Purpose and Function• Govern by principles of publicity• STR search criteria is a legal test providing evidentiary proof• Result from search can be utilized to enforce priority• Can be paper or electronic via internet• Mission critical application: registration tied to disbursement

of money• Business Model: government service; not for profit• Government owned

Potential Synergies• Advanced credit bureaus have potential to include information from collateral registries and to provide this information as a service to

their clients. • Credit Bureaus have potential to develop their own collateral database and perform functions performed by collateral registries. • Credit bureaus could be more than a source of credit reports; they could provide clients with two functions in the sphere of STR:

• Inquiry: allows lender to ascertain the nature of an asset offered as collateral (if encumbered or not) prior to acceptance of the assets • Registration of interest: allows a lender to register a security interest in the asset

Benefits• The arrangement can be useful in emerging markets where the technical infrastructure or local capacity may be inadequate to support

the development of both a credit bureau and collateral registry.• Emerging markets are exploring the possibility of a credit bureau and registry cohabiting within a single private sector institution, a

single public/private institution, or a single government agency.

Challenges• Credit Bureaus are governed by data privacy and protection rules; collateral registries operate on the premise of publicity. • Challenges can be resolved under a governance model providing a suitable and transparent service-level agreement between the

Government and private sector bureau. • Respective data elements can be maintained in separate partitions within the same shared infrastructure and benefit from same

disaster recovery facilities and business continuity plans.

24 DEVELOPING CREDIT REPORTING SYSTEMS IN EMERGING MARKETS


The Evolution and Growth of Credit Reporting Systems

3.1. The Evolution of Credit Reporting SystemsThefirstcreditbureaumaybetracedbacktoLondonintheearly1800s.Therealevolutionofcreditinformationsystems,however, started in the1950s, and since thenmoderncredit reportinghasevolved rapidly, fueledbyimprovementsintechnologyandtheexpansionofcredit.Thisprocesshasmadeaccesstocreditalmostubiquitousindevelopedmarketsbyallowingbankstomovefromthe traditional, subjective approach to granting credittomoreautomatedlendingprocessesassistedbyinputsfromquantitativemodels.Asaresult, lenderscannowdeliverfinancial services at significantly reducedcostsandexpandcredittobroadersegmentsoftheeconomy,thusfurtherdemocratizingcreditservices.Inparticular,theintroductionofcreditscoringinUnitedStatesinthe1950s—coupledwith the automation ofworkflow andcreditunderwriting—playedakeyroleintherapidriseofconsumerlending.LatinAmericahassomeoftheoldestcreditbureausintheworld,butitwasnotuntilthe1990s,thatprivatelyoperatedcreditbureausstartedtotakeoffinmostotheremergingmarkets.Between1990and2018,thenumberofcreditbureausintheworldalmostdoubled.InAsia,many markets turned toward private credit reportingafterthefinancialcrisisinthelate1990s.Fromtheearly1990s to the late2000s, a significantnumberofcreditbureausemergedinEasternEurope.Sincetheinceptionof the Global Credit Bureau Program (later renamedGlobal Credit Reporting Program and now known asCredit InformationSolution), IFCand theWorldBankhave supported the development of credit bureaus inCentralAsia,SouthAsia,EastandSoutheastAsia,Latin

AmericaandtheCaribbean,theMiddleEastandNorthAfrica, and Sub-SaharanAfrica.TheMiddle East andNorth Africa and Sub-Saharan African regions haveseenthemostgrowthindevelopmentofcreditreportingsystemsinthelastdecade.Asaresult,creditreportingservice providers now operate in Botswana, China,Egypt, Ghana, India, Kenya, the Kyrgyz Republic,Mongolia, Morocco, Nepal, Pakistan, the Philippines,SriLanka,Tajikistan, theUEMOAregion,Uzbekistan,andislandsinthePacific,tonameafewlocations.More recently and significantly, the UEMOA region(consisting of eight francophone countries under onecommonCentralBank,theBanqueCentraledesEtatsdel’Afriquedel’Ouest(BCEAO),haslicensedaregionalcreditbureauprovidertoservealleightcountriesinwhatistrulyafirstinregionalcreditinformationsharing.(Seesection7.7formore information.)Severalcountries intheCaribbeanhaveestablishedcreditbureausinthelastfive to six years (including Jamaica, Guyana), whileothershavepassedlegislationtoallowcreditreportingtodevelop(TheBahamas,OECS)InSouthAsia,bureaushavebeenestablishedinmostSouthAsiancountriesinthelasttenyears(Bhutan,ongoingreforminMyanmar).Theintensifyingmotivationtodevelopcreditregistriesis the increasing recognition that sufficient underlyingdata isnecessarytosupportprudentialsupervisionandsystemicriskmonitoringbyfinancialsystemssupervisorsand regulators.The earliest record of a credit registrydates back to 1934, when the German credit registrywasestablished;in2018,122countriesreportedhavinga credit registry. Coverage across regions is uneven:OECD countries lead with 64.44 percent of adultscovered; followed by Europe and Central Asia with

CHAPTER

3.

26 CHAPTER 3. THE EVOLUTION AND GROWTH OF CREDIT REPORTING SYSTEMS

51.32percentofadultscovered;LatinAmericaand theCaribbeanhave44.09percentcoverage;andEastAsiaand thePacifichave33.60percent.Countries inSouthAsiahave18.52percentofadultcoveragefollowedbytheMiddleEastandNorthAfricawith18.11percentofadults covered, while coverage in Sub-SaharanAfricaremainslowat7.02percent(WorldBank2019).The World Bank Group has worked in partnershipwith several governments to improve existing creditregistries or establish public-private partnerships.Some of theWBG’s work with credit registries tookplaceinAfghanistan,Algeria,China,Ethiopia,theLaoPeople’sDemocraticRepublic,andMaldivesforpubliccredit registries; and Indonesia, the Philippines, andUzbekistan for joint public-private partnerships.Manyreform-mindedcountriessupportdevelopmentofcreditreportingservicesalongwithbroaderreformsforgreateraccesstofinanceandpromotionofresponsiblelendingpractices.Map1intheappendicesshowsthelocationofCreditBureausandCreditRegistriesaroundtheworld.Commercial credit reporting essentially evolved asmerchants found they lacked sufficient informationto provide credit to borrowers. The internationalleader in commercial credit reporting, andoneof theoldest commercial credit reporting companies, Dun& Bradstreet, traces its roots back to theMercantileExchange established in New York City in 1841.Formerly, the company delivered its reference booksto subscribers under lock and key. Today, it holdsinformation on 265 million businesses worldwide.Severalconsumercreditreportingcompanies,suchasEquifax,Experian,Creditinfo,andCRIF,alsoprovidebusiness information serviceson small businesses. Insomecountries,suchastheUnitedKingdom,Equifaxand Experian also hold information on medium andlarge enterprises. The market for commercial creditreporting is fragmented, with several smaller playerssometimes providing industry-specific businessinformation (reporting for the construction sector,for example).The development of commercial creditreporting largely depends on the demands of such

services on one hand and the existence of publiclyavailableinformationontheother.The credit reporting industry is a complexindustry that has evolved over time in responseto the very specific needs of different actorsin different jurisdictions. Given the number ofstakeholdersinvolvedindifferentaspectsofcreditinformationsharingandtheindustry’srelianceonfundamental information sharing technologies,the rapid changes in the financial sector implymore changes for the credit information sharingsector going forward. The sector as a whole isbeing transformed by the new technologies,processes, systems, players, and informationsources that have mushroomed in the lastdecadeorso.Whilethesechangesarestillfairlyrecent and continuing to develop, leading creditreportingserviceprovidersareproactivelytakingmeasures to respond by adapting, incorporatingnew technologies into their existing platforms,partnering with new players, and creating newproducts and services. The future of creditreporting depends on the industry’s ongoingresponse to these and future changes ahead.Change notwithstanding, the business of creditinformationsharingisfundamentallyanchoredinthe basic principles set out in General Principles for Credit Reporting,4 which continue to hold,even as the types of providers, data sources, ortechnologiesshift.

3.2. Factors Affecting the Growth of Credit Reporting Systems According to Doing Business 2019 “Getting Credit”indicator (World Bank 2018), 173 of 201 countriessurveyedhadeitheracreditbureauoracreditregistryattheendof2018.Thecreditreportingindustryhasexperiencedunprecedentedgrowthsince2000,especiallyinemergingmarkets(seeFigures3.1and3.3).Thisgrowthwasdrivenbyseveralfactors,discussedhere.

4. In 2008, the World Bank Group, in collaboration with the Bank for International Settlements, launched the Credit Reporting Standards Setting Task Force to develop guidelines and universal standards for credit reporting systems. The 26 individuals on the task force represented public credit registries, industry regulators, private industry associations, developmental financial institutions, and data protection specialists. The task force analyzed issues affecting the creation and overall functioning of domestic credit reporting systems, the potential for growth in cross-border data flows, and their continuous development through reforms. It defined guiding principles for use in promoting best practice in any credit infor-mation sharing environment, taking into account the balance between the financial services industry’s need to access data and the rights of the individuals/businesses to whom that data pertains. See Appendix 3 for more information.


High Growth of Retail Credit in Emerging MarketsBetween 1985 and 1995, unfavorable macroeconomicenvironmentsandstructuralrestrictionsincreditmarketsin emerging economies constrained credit growth.During this period, the private credit-to-GDP ratio forthe emergingmarkets increased from35 to 45percent(WorldBankWorldDevelopmentIndicators,July2012;thedatawasbasedondomesticcredittoprivatesectorasapercentofGDP).Financialliberalizationandimprovedmacroeconomic stability saw steadily rising privatecredittoGDPratiosfromabout46percentin1996to104percent in 2016, barring twoyears following the 2008financialcrisis(WorldBankData2018). WhenlookingatprivatecredittoGDPbythefinancialsector,includingnonbank lenders, this percent went up from about 57percent to 148 percent over the sameperiod.With therapidincreaseincreditprovision,aswellasentranceofnewtypesoflendersintheretailcreditmarket,theneedforcreditinformationandstreamlinedlendingprocessesgrew, leading to the establishment of credit reportingservicesandgreaterdemandforthesetypesofreforms.

Broad Reforms Stemming from the Financial CrisisThe 2008 financial crisis provided major impetus forbroad reformeffortsat thenational levelasauthoritiesin developed and emerging markets realized the needforstrengtheningandimprovingfinancialinfrastructure,includingcreditreportingsystems.TheintroductionandrolloutoftheBaselIIIaccords,whichraisedthecapitalprovisioningrequirementsforbanks,alsounderlinedtheneedformorestringentriskassessmentandmanagementframeworks; this in turn motivated an interest indeveloping or reforming credit registries to collectcreditdata tosupportbothmicro-andmacroprudentialsupervisionandregulation.

The Rise of Digital Access to Credit The past ten years or so have seen a gradual increasein digital forms of access to credit. Some limitstypicallyaffectingtraditionalaccesstocredit,aswellasmicrofinance,arethenecessityofaproximitytolenders,outdated processes for risk assessment (includingsubjective valuations), and time to disburse.Themostprevalentnewmodels linktelcosandbanksinofferingcredit and use mobile handsets and mobile behavior

data tomakecreditdecisions.Consensushasnotbeenreached, however, on whether the benefits of digitalaccess to credit outweigh the risks: namely, whetheruncontrolled or unchecked lending can be prevented;whether digital access creates separate databases andlending pockets that do not communicate; whetherthe credit offered goes beyond short-term, high-costloans, akin topayday loans, favoringexpediencyoverother factors; and whether consumers are adequatelyprotected, both in terms of their data and its securityand in terms of predatory lending practices generally(Francis,Blumenstock,andRobinson2017).Forcreditreporting systems, thesenew formsof credit offeringsrepresent different modes of collecting data fromexistingandpotentiallynewsourcesofinformation.

Developments in Information TechnologyThe credit reporting industry is data driven. Recentimprovements in database management software;decreasing costs for hardware and for storing andprocessing data; and the ability of several markets tojoin and utilize a hub-and-spoke model have reducedstart-up costs for credit reporting services. In recentyears, credit reporting service providers have beenlooking at innovations such as blockchain technologyand its potential application to credit reporting andthe possibility of leveraging the availability of cloudcomputing services. In addition to huge advances ininformationtechnology,computingpower,datamining,and data analytics, these new developments are beingspurred on by an increasing appetite for consumercreditandtheperceivedoractualinabilityoftraditionaloperatorstomeetthisdemand,aswellasbyanemphasison providing customized and tailored products tomeet customer needs while creating a seamless userexperience.

Going Forward: New Data, Lenders and Technologies with Potential to Impact Credit Reporting5

New Data

Credit data can be broadly classified as structured orunstructured. Structured data is grouped and easilyreadableandusableformakinganalyses.Thistypicallyrepresents about 20 percent of all available data.Unstructureddata—the restof thedataavailable—hasalways existed, but only recently have methods for

5. Disruptive Technologies in the Credit Information Sharing Industry : Developments and Implications: World Bank2019.


analyzingsuchdatabecomeavailable.Unstructureddataisrapidlybeingexploitedtobetterunderstandtrendsandpatterns in consumer behavior and experiences and toidentifymethods for developing products and servicesthat better address consumer needs and provide userswithagoodexperience(Hurwitzetal.2017).Bigdataincludesbothstructuredandunstructureddataand requires cost-effective and innovative forms ofinformation processing to produce actionable insightsto support decision making and automation (GartnerResearch). Big data could come from social mediafeeds,onlinelendingplatforms,B2Bplatforms,mobilepayment companies, social media sites (Facebook,Twitter, LinkedIn, Instagram, Yelp!, and so on),transactionaldata(forexample,fromAlibaba,Amazon,and other online sites), and psychometric data, tonamea few.Advances in artificial intelligence (AI) ormachine learning,whichusecomputationalpowerandprogramming techniques tounlock trends andpatternsinbigdata,furtherthepotentialforusingthesenewdatasources.New technologies havemade it easier, faster,andmorecosteffective tominevastquantitiesofdataand to extract meaning from them while minimizingthe risks associated with human intervention. Thesedevelopments hold tremendous potential for creditinformationsharing.Akeydevelopmentinthelastdecadeormorehasbeentheemergenceofunconventionalplayersinthefinancialmarkets,broadlyclumped togetherasfintechs (definedas businesses aimed at providing financial services bymakinguseofsoftwareandmoderntechnology).Thesebusinessescompetewithtraditionalcreditproviders,suchasbanks,bymakingcreditavailableonmorefavorabletermsor byusingproprietary data or big data sourcestodevelopalternativecreditscoringtoolsforconsumersoutside the formal financial system. Lenddo/EFL forinstance is a fintech company that leverages socialmediadata(bigdata)andcombinesitwithotherpiecesofinformation,includingcreditbureaudataifavailable,todevelopcreditscoresforpotentialborrowers.Anotheralternative credit scoring company, Tala, uses mobiledatatoverifytheidentityofpotentialborrowersaswellastobuildcreditscoresandprovideloanstoborrowersnot served by traditional financial institutions (Adams2016). Iffintechcompaniesgrowandcontinue toplayasignificant role increditmarkets, theycouldbecomepotentialdata sources routinely included in theoverallcreditreportingsystem.Overthelasttwodecades,traditionalandnontraditionalplayers have tackled the problem of “scoring the

unscorables”by looking at nontraditional data such asutilities and telco or by using application scorecards.Anothermorerecentcreditscoringtoolreliesontheuseofpsychometrics,whichinvolvesadministeringaseriesofpersonalityandbehaviorteststogeneratecreditscoresratherthanrelyingoncredithistoryalone.(SeeBox3.1.)All of these nonconventional scoring tools allowcreditors toreachthemillionsofpeoplewhocurrentlylieoutsideformalfinancialmarkets.In addition to newdata types, newcreditors, andnewtools, new payment technologies, including mobilepayments(e-wallets)andcryptocurrencies,areemerginganddisrupting the traditionalmodesofpayment in thefinancial sector. While cash and cards still dominatethepaymentslandscape,mobilepaymenttechnologyisgaining greater acceptance, especially among youngerdemographicgroupsandforcertaintypesoftransactions(P2P).Traditionally, payment accountswere identifiedby a series of numbers embossed on a card or storedin afirm’sdatabase.Today, thepayments industryhasbeenrapidlyshiftedfromitsinfrastructureofcardsandterminals toonedominatedbyphones.Thenext stageofthisdevelopmentwillseephone-to-phonedominance.Paymentsarenowmadeatthepointofsale,bothonlineandbetweenindividuals,usinganapp.Today’spaymentindustryisquicklybecomingdominatedby organizations such as PayPal,Venmo, Square, andStripe, throughwhichpayments canbemadebetweenpeople (P2P) or between people and businesses (P2B)orevenbetweenbusinesses(B2B).Eventually,everyonewill be able tomake and accept paymentswhen (andwhere) they like. The new industry standard, EMV(named for Europay, MasterCard, and Visa, the threecompanies that originally created it), will make eachaccountthefoundationforcodesthatchangewitheachtransaction.Eventually,thepowerofcodewillovertakethe usefulness of plastic cards. Payment credentialswill become virtual. The transition made possiblewith advanced codes will impact the way blockchain,augmentedreality(AR),theinternetofthings(IoT),andbiometricsimpactthepaymentsprocess.Thisinturnwillimpact theway consumersview thepaymentsprocessaswellashowgovernmentsregulatetheindustry(TheFinancialBrand).Mobilepaymentsanddatageneratedbymobiledevicesarenewandcriticalsourcesofalternativedataandholdrevolutionarypotentialforincreasingfinancialinclusion.Creditvidya,analternativecreditscoringprovider,usesadvanced analytics and machine learning to processa range of data pulled from users’ phones, including


telephoneusagedatabutalsomessagingcontent,browserdata,andGPSlocationaldata.Thelackofaddedvaluefrommobilepaymentsascomparedtoplasticcards(andcash) has led to the verymodest acceptanceof digitalpaymentstodate.Butwithopenbankingandapplicationprogram interfaces (APIs) providing the capabilityto enhance the customer experience with rewards,instantalerts, andother features,acceptanceofmobilepayments couldbeon thevergeof significant growth.Mobile payment systems have been quite successfullyimplemented in somemarkets (suchasKenyaand thePhilippines), and theypromise a considerable troveofinformationthatcouldandshouldbecomeofacompletecreditreportingsystem.

Cryptocurrencies like bitcoin have also emerged asa medium of exchange in place of legal tender. Theutilityandriskofthesenewpaymentformsisstillbeingstudied, but if cryptocurrencies do prevail and are notrendered ineffective by government regulation, thesepseudo-paymentformscouldpotentiallybecomeanotheralternativedatasourceforcreditreportingsystems.It’s key to understand also that not all data is equal orrelevant for the purpose of assessing creditworthiness.Thevalueofdifferentdatapoints,whetherstructuredorunstructuredshouldbecarefullyevaluatedandweightedaccordingly when being used for assessing credit orbuilding credit scoringmodels, for instance. Evenwith

Box 3.1. EFL Psychometrics and Creditinfo Psychometrics (Coremetrix) Entrepreneurial Finance Lab (EFL) and Coremetrix collect psychometric data in several ways, including using tests administered by digital means (SMS), web-based applications, or phone interviews. These tests help assess potential borrowers’ willingness to pay their obligations. The tests assess not only how the applicants answer questions but how they respond physically, for example, by measuring how long the applicant takes to answer a question. Under the EFL model, alternative credit scores are generated based on psychometric test results and combined with other data, including traditional bureau data, if available. The resulting score is then used to support financial institutions in increasing operational efficiency and loan volume, cutting NPLs, and so on. Judging from results from working with a commercial lender in Kenya, EFL can increase acceptance rates by 20 percent when combined with the lender’s own internal behavioral score. While cooperating with a credit bureau in South Africa, Coremetrix proved that psychometric scores were as accurate as standard credit bureau scores. Moreover, combining standard credit bureau scores and psychometric scores resulted into a 20 percent uplift in overall credit bureau score performance. (The figure below indicates the Gini index of a standard credit bureau score and hybrid-standard and psychometric score combined.)

Another Coremetrix implementation proved very successful in tackling the “thin file” challenge a short-term lending company in India faced in consumer financing. After implementing the psychometric score, with an outstanding accuracy of GINI 0.45, borrowers were able to use credit to acquire commodities necessary to daily life, such as refrigerators, ovens, and air conditioners, something they had previously been unable to do, thus significantly improving their quality of life. The psychometric score is increasingly seen as a way to gather information on and create a digital trail for potential borrowers who are not banked and do not have formal credit histories. FICO, the leading producer of independent credit scores, is exploring partnerships with EFL to leverage psychometric scoring as an additional layer of data and combine it with traditional credit data and bill payment data.

Gini Distribution

Bureau Score Hybrid Score

Gini

30

25

20

15

10

5

0

0.20 0.25 0.30 0.35

Source: EFL and CreditInfo.

Dens

ity


the proliferation of new data points, alternative andtraditionallendersareusingalternativedatainconjunctionwith traditional credit history data to strengthen theirunderwritingfunctions,aswellasforotherpurposessuchasportfoliomonitoringandfrauddetection.There are several challenges involved in the use ofalternativedata for credit reporting thatmustbe takeninto account. Some of these challenges include:collecting and aggregating data from multiple,fragmented sources,quality andveracityofdata, legalandregulatoryuncertaintyonuseofdata,predictivenessofdata,opaquenessofscoringmethodologies,potentialfor discrimination in scoring models using alternativedata,tonameafew.Forinstance,aprimaryadvantageofonlinedataisthatitispubliclyavailableorobtainablethrough simple user authentication and permission,making it relatively easy and inexpensive to collect.However, online data remains somewhat scarce inemerging markets and is skewed towards the youngandeducated.Bycontrast,mobiledata ismorewidelyavailable and easier tomatch to loan applicants sincetelephonenumbersareuniquetoindividualsubscribers.However, given that potential borrowers’ call detailrecords are owned by Mobile Network Operators(MNOs),mobile data collection and utilization entailslargeup-frontcostsduetoprivacyconcerns,fragmentedmarkets, and the potential for MNOs to compete aslendersthemselves.On psychometrics, one potential downside of EFL-typemodels is that data is actively captured and thusincurs higher marginal costs than other data sources.Furthermore, the ability of psychometrics to measureriskishighlydependentonthequalityofthequestionsasked, which may require adjustment across differentcountries.Forexample,citizensofdifferentcountriesandregionsmayhavepersonalitypatternsandpsychologicalcharacteristics that differ based on divergent cultures,languages, and values. Therefore, a challenge withpsychometricscorecardsisthattheyeitherhavetoadapttolocalcontextsordevelopquestionsthatareimpartialanduniversallyapplicable.While there are some obvious advantages for the useofBigDataandhowinformationfromvarioussources(including social media sites) can be used for creditinformation sharing, some potential for unintendedconsequencesexist.Businessesandconsumerswithoutsubstantial social media presence may pay higherinterestratesorbeexcludedastheycouldbecomemoreinformation-ally opaque compare to the more activepotentialborrowers.Astheimportanceofsocialmedia

data increases, its use may evolve endogenously, andpeople who think their profiles could have a negativeimpact on their credit scoresmay abandon the use ofsocialmedia.Ortheymaypoststrategicallyinaneffortto manipulate lending decisions by mimicking highcredit score individuals (Berg et al. 2018). A reportproduced by the International Committee for CreditReporting(ICCR)ontheuseofbigdataandalternativedataincreditreporting,alongwithrecommendationsforcountriesonhowtoleverageallthisnewdata,discussestheserisksandmitigationmeasures(ICCR2018).Anintegralpartofacreditinformationsharingsystemis the ability to uniquely and credibly identify andvalidateaborrower’s identity.Oneof thebiggestvaluepropositionsofastrongcreditreportingserviceprovideris its ability to provide accurate match and mergecapabilities using available information and based onsophisticated algorithms. Biometrics has been gainingpopularity of late and is finding applications in thecredit reporting space. For instance, in Uganda, thecreditbureauhaddevelopedafinancialIDcardbasedonbiometrics,withthesupportoftheregulator,toidentifyborrowersinthesystemandenhancethecreditbureau’seffectiveness. Development of biometrics is, however,costly, time consuming and requires more effort froma largernumberofstakeholders thandoesa traditionalcredit bureau. Moreover, biometric information is notcriticaltothedevelopmentofacreditreportingsystem,althoughastrongbiometricIDplatformcoulddefinitelyenhancetheeffectivenessofthesesystems.Blockchain and distributed ledger technologies(entities that host information on multiple serverssimultaneously, eliminating the need for centralizedinformationstorageand the intermediaries that controlthem) couldpotentiallydisrupt theway information issharedandcouldintroduceagreaterlevelofautomationinto several processes.Blockchain remains at a proof-of-concept stage, but one of its key applications forcreditreportingcouldbeindevelopingdigitalidentitiesand identity verification systems as an alternative toexpensive biometrics systems. Some credit reportingserviceprovidersaswellasfintechsareexperimentingwith the use of these technologies, but its uptakewillrequire meeting several challenges. Some of theserelate to affordability, aligning incentives, cost sharingmechanisms, simplification and standardization,security,andlegalandregulatoryuncertainty,tonameafew.Giventheextentofthesechallenges,itistooearlytoprovideguidanceonadaptingblockchaintothecreditreportingenvironment.


Along with the explosion of fintech companies hascomegreaterrecognitionbybanksandotherincumbentlendersoftheneedtodothingsdifferently,byinnovatingandimprovingexistingoperationalprocessesasmarginsare squeezed, dealing with different processes ascommodities to bemonetized andoutsourced, or evenpartneringwithfintechcompanies.Severalcreditbureausare leveraging the new types of data and technologiesto generate efficiencies in existing processes, developnew products and services, and address the risksassociated with increasing digitization. Some newentrantsarepartneringwith traditionalcredit reportingserviceprovidersorwithothernewentrants.FICO,forexample,theworldleaderincreditscoringtechnologies,has partneredwithEFLGlobal to integrate alternativedataintoitsscoringplatforms.EFLGlobalhasrecentlypartneredwithLenddotoprovideacombinedplatformthatwillleveragedifferentsourcesofalternativedatatodevelopcreditscoringandidentityverificationproductsandservices(PrWeb2017).

Regtech and Suptech Sincethefinancialcrashof2008,financialserviceshavefaced increasing regulation.As the complianceburdenonfinancialinstitutionshasincreased,complianceteamshave ballooned: CitiBank has a compliance staff of30,000.While experts struggled, innovation found itswayin.Fintechhasexplodedoverthelastfewyearsandnowthreatenstoclosethegapwithtraditionalbanking.Lendingmoney in unchartered territories is risky, andthestrongchanceofexploitationmeans thatcloseandevolvingregulationofthesectorisanecessity.Regulationtechnology, also known as regtech, translates complexregulations intoAPI code. It streamlines burdensomecompliance processes to help minimize both risk andhuman resources requirements, and itmeets an urgentneed. Start-up fintech providers simply don’t have themeanstohireanarmyofcomplianceofficers:Withnewregulatorytechnology,theydon’tneedto.Suptechorsupervisorytechnologyisdisruptingthewaysupervisors are collecting, analyzing and monitoringdata to support their supervisory functions. Suptechcan potentially support the automation of supervisorytools to assist in risk data aggregation and analysisfor supervision and in modeling, stress testing, andforecasting. For instance, such tools may help inaggregating data across different financial institutionsglobally while preserving the confidentiality andsecurityoftheunderlyinginformation,perhapsbyusingblockchaintechnologyandcryptographictools.MachinelearningandAIcouldbeappliedtoreadingandanalyzing

the large amounts of structured and unstructured datarelevanttotheoverallrisksupervisionfunction,creatingnewmodels for improvingmodeling, forecasting, andstress testing in the financial sector (IIF 2016). BankofItalyisexperimentingwiththeuseofSuptechusingMachine Learning techniques to aggregate data fromdifferent sources (the Central Credit Register, balancesheetdata)tobuildloandefaultforecastingmodelsformicroprudentialsupervision.

3.3. Competition in the Credit Reporting IndustryHeavy competition in the consumer and commercialcredit reporting services industry is driving providersto develop creative solutions, products, and servicesto meet consumer expectations. Success in the creditreportingbusinessisthusdrivenbyconstantinvestmentand innovation. Existing credit reporting serviceproviders(particularlyintheconsumerandcommercialcredit reporting areas) actively look for additional andalternativewaysofidentifying,segmenting,andscoringborrower populations to assess their creditworthiness.This competition has been further fueled by newplayers and other entrepreneurial efforts to apply newtechnologies and use big data to enhance the creditreportingsegment.

Changes and Growth in the Credit Reporting SegmentRapidgrowthanddevelopmentaretakingplaceincreditreportingsystems.According toDoingBusiness2019,of201countriessurveyed,122reportedhavingoneormore credit bureaus. Figure 3.1 illustrates growth increditbureausfrom1974to2018.In terms of coverage, Europe and Central Asia leadwith 51.32 percent coverage of adults, followed byLatinAmericaandtheCaribbeanat44.09percent(seeFigure 3.2). Since 2012, credit bureaus in East Asiaand the Pacific, SouthAsia, and theMiddle East andNorthAfrica havemade significant leaps in coverage,with increasesrangingfrom5to15percentagepoints.Although Sub-SaharanAfrica had the least-developedcredit information infrastructure, with only 23 of 49countriesreportingcreditbureaus,theregionhasmadesignificantstridesinrecentyears.The same Doing Business 2019 survey foundencouraging trends for the Middle East and NorthAfrica, where 11 of 20 countries had credit bureaucoverage. The East Asia and Pacific region alsoexperiencedsomewhatpositivechanges,with16of25


countriessurveyedhavingcreditbureaus.ThesituationwaslesspromisinginSouthAsiaregion,whereonly4of8countrieshadanycreditbureaucoverage.Again, according toDoingBusiness 2019, of the 201countries,122reportedhavingacredit registry.Figure3.3 illustrates the growth in credit registries frompre-1964to2018.

EuropeandCentralAsialedalldevelopingregions,with26.0percentcoverage,whileSouthAsialaggedbehindat4.8percentcoverage(WorldBank2019;seeFigure3.4).

Coverageratiosmaybe lowforanumberof reasons.First, the bureaumay have been recently establishedandmaynotyethavesufficientlypopulateditsdatabasewithinformationfromtheregulatedandformalfinancial

Figure 3.1. Growth of ConsumerCredit Bureaus

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Figure 3.2. Credit Bureau Coverage by Region 2017

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sector, suchas thebanks.A secondpossible factor isthat only a small portion of the total population usescreditorcredit fromformal lenders.Ascreditgrowthcontinues, the scope of credit reporting coverage canbe expected to expand aswell.As it relates to creditregistries, which have different collection goalsthan do bureaus, the focus is generally on collectinginformationonloansaboveacertainthresholdvalueasdeterminedby thespecificfinancialsectorsupervisor.Since these loans, including corporate or commercialloans, typically represent only a certain segment of

the population, the registries’ population coverage isnaturallylowerthanthatofthebureaus.EuropeandCentralAsialedamongdevelopingregionsonDoingBusiness’sCII, followed byLatinAmericaand Caribbean and then the Middle East and NorthAfrica.SouthAsia,EastAsiaandthePacific,andSub-SaharanAfrica ranked lower on theCII than did theotherregions.The development of credit reporting services inmanydeveloping markets often, but not always, involves

Figure 3.4. Credit Registry Coverage by Region, 2018


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Figure 3.3. Growth of Credit Registries

Source: IFC calculations, based on Doing Business survey data for 2004–2016.

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partnerships with the major and well-establishedinternationalCRSPs.Asaresult,severalmajorplayersdominatethecreditinformationindustryglobally,namelyExperian,TransUnion,andEquifax.Whilethesebureauswere initiallyconcentratedon theOECDcountries,allofthemhaveactivelyexpandedintoemergingmarkets.Since the early 2000s, several new CRSPs withinternational operations have emerged as players;these includeCRIF, an Italian firm present in Europe,NorthAmerica, LatinAmerica and theCaribbean, theMiddleEast,Africa,andAsia;Creditinfo,anIcelandiccreditinformationanddecisionsolutionsproviderwithoperations in Europe, Central Asia, the Middle East, theCaribbean,Sub-SaharanAfrica,and,morerecently,expanding into Asia; CompuScan, Credit ReferenceBureauAfrica Ltd. (CRBAfrica), andXpertDecisionSystems(XDS),alloperating in threeormoreAfricancountries; and Dun & Bradstreet South Asia MiddleEast, Ltd (D&B SAME), which operates in the AsiaPacificregion,theMiddleEast,andSub-SaharanAfrica.The entry of new international CRSPs is a welcomedevelopment asmorecompetition is likely to result inbetterproductofferingsandlowerpricesformembersofthecreditinformationsharingsystem.

Although a sound commercial rationale usually existsforemergingmarketcountriestoseekpartnershipswithexperiencedinternationalproviders,thevalueoflocallydevelopedsolutionprovidersshouldnotbeoverlooked.Inmanyemergingmarkets,inBarbadosandKenya,forexample,theoriginsofcreditinformationsharingcanbefoundinsmallbusinessesprovidingalocalizedservice,oftenwithlittleornosupportfrompolicymakersorthecentral bank. Creditinfo, CompuScan,XDS, andCRBAfricaallstartedoutassmallbusinessesinmarketsthatthe larger international credit reporting companies haddeclinedtoserve,foravarietyofreasons,andhaveendedupasinternationalplayersintheirownright.Regardlessof theirorigins, credit reporting serviceproviders and,more generally, credit reporting systems should strivetoadoptthegloballyendorsedcreditreportingpracticescaptured in the World Bank’s General Principles forCreditReporting.

Increased Emphasis on Different Borrower SegmentsAs reported in the second edition of this Guide, aconcertedefforthasbeenmadeinrecentyearstocollectand share information on microfinance6 borrowers.

6. Microfinance is broadly defined as the provision of financial services to low-income clients who otherwise would lack access to banking and related services. It serves as an important mechanism for expanding access to finance to low-income clients who are self-employed, household-based entrepreneurs. Their diverse microenterprises include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, microentrepreneurs often engage in income-generating activities, such as food processing and trade, and some are farmers. These clients usually have informal or no business records, no collateral, and no access to formal credit markets.

Figure 3.5. Credit Information Index


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Expandingaccesstofinanceforlow-incomehouseholdsand MSMEs is on the development agenda of mostemergingmarketgovernments.Themicrofinancemarketinitially grew rapidly based on strong asset qualityand lowdelinquencyrates.Foraperiodstarting in thelate 2000s, however, the industry suffered setbacks asportfolios deteriorated globally and portfolios-at-riskvalues increased due to inadequate risk managementsystemsandcontrols,internalorganizationalweaknesses,andexcessivegrowthinnarrowgeographies,combinedwith unhealthy lending practices affecting borrowerrepayment incentives and behaviors. These factorsresulted in over-indebtedness, as witnessed in severalmarkets,includingBosniaandHerzegovina,Cambodia,Egypt,India,Morocco,andPakistan(Lymanetal.2011).

Creditreportingwasseenasanimportantinstrumentintacklingthemicrofinancemarket,andseveralcountrieshavebeenactive insettingupcredit reportingsystemsthatcovermicrofinancemarkets.Whilecreditreportingalone cannot create credit discipline in a market orcompensateforinadequateunderwritingstandards,itcanimprove microlenders’ abilities to originate loans andmanagecredit risk,and it createsapowerful incentivefor repayment among borrowers. As credit reportingtraditionallydealtwiththemainstreamlendingsectors,themove tomicrofinance credit reportinghas entaileddeveloping specific file formats to collect and digitizeMFIinformation,treatingindividualsubjectsinagroupseparately, updating data on a more frequent basis (for example, weekly) to match microloan repaymentcycles, and creating specific products and services tomeettheneedsofthemicrofinancemarket.Forinstance,insomecases,insteadofafullcreditreport,thebureaucanprovideaninstantcreditscoreusingSMSmessageor apps such as MyCreditinfo, Finpass, and others. (Formoreonthesedevelopments,seesection7.5.)Rapid technologicaladvanceshave implicationsfor themicrofinancesegmentasMFIscannowprovidemobilemoneyandbranchlessbankingsolutions.MFIs,likemostother financial service providers, are now expandingbeyondprovidingcreditonlyandarelookingatprovidingabroaderspectrumofservicestotheirclients.

SME Credit Reporting Asdiscussedearlier,accesstofinanceforSMEscontinuestobeachallengeandhasbeengettingincreasingattentionfromregulatorsandpolicymakersattheglobal,regional,andnationallevels.Someofthekeyfintechinventionsveer toward meeting the financial needs of SMEs, asegment formerlyneglectedby thebanking sectordue

to the high costs to serve it and the need for highlycustomizedproductsandservices.Theseincludeonlinelending opportunities (Lendico, Kabbage), electronicpayments facilities, and crowdfunding and peer-to-peer financing. (Formore on these developments, see section7.6.)

More Nontraditional Data SourcesOverthelast10years,creditreportingserviceproviders,particularlyconsumercreditreportingserviceproviders,have increasingly been collecting information fromnontraditionaldatasources,includingpaymentsonutilitybills,telcos,mobiledata,andothers.

Moving from Voluntary to Mandatory Sharing and InquiryAdeveloping trend inmany jurisdictions ismandatingthat regulatedentitiessharedataandusecreditbureauservices.AccordingtotheWorldBank’sDoingBusiness2019, 52 percent of respondents said that the lawrequired mandatory reporting to the credit bureau atleastbybanks,and39percentsaidfinancialinstitutions(includingbanks)wererequiredtoconsultwithabureau.Alongwithmandatingparticipation,theregulatorybodymust also be empowered to enforce participation andmonitorcompliance.InMarch2013,ReserveBankofIndia(RBI)constituteda committee to strengthen the infrastructure forsharing credit information. Based on the committee’srecommendations,anumberofpolicy instructionswereissued. An important outcome was that formats forreportingcorporate,consumer,andMFIdatabyallcreditinstitutionswere standardized, and the process for datasubmission by credit institutions to credit informationcompanieswasstreamlined.EffectiveApril15,2015,theRBI also stipulated that all credit institutions, includingNBFIsandcooperativebanks,arerequiredtobemembersof all CRSPs and to submit data—including historicaldata—to them. Prior to this notification, every creditlenderwasrequiredtobeamemberofatleastoneCRSP.Assuch,aCRSPcouldturnonlytoitsmembersforcreditinformation.Iftheborrowerhadacurrentorpastexposurewithanonmembercreditinstitution,theCRSPcouldnotgettheentirecredithistoryoftheclient.Toboostcreditcoverage, industry bodies have suggested the additionof periodic utility bill payments—electricity, telecom,and so on—and periodic insurance premium paymentsinto informationbureaurecords.Thegoal is to increasethebureaus’coverageandtoboostlow-ticketborrowersby clarifying their credit eligibility. Formal financial


institutions,inturn,couldrelyonalternativepaymentdataforprospectiveborrowerswhodonothavepastorpresentcreditlineswithformalfinancialinstitutions.

Greater Emphasis on Consumer Education, Building Awareness, and OutreachAs credit reporting markets evolve and mature, andwithincreasingconcernsaboutthesecurityandprivacyof personal consumer information, credit reportingsupervisors and other regulators are increasinglyinterestedinensuringconsumers’adequatesensitizationto these concerns. The objective is to raise generalawareness regarding credit reporting systems, theirobjectives and benefits to consumers, and consumerrightsandCRSPresponsibilities.Awarenesscampaignsare also rolled out to strengthen understanding ofcredit reporting among other stakeholders, includingsystemusers.Section7.1explorestheseissuesthroughdevelopments in the Kyrgyz Republic and Tajikistan,including how different jurisdictions have worked toenhancegeneralawarenessofcreditreportingsystems.Credit reporting service providers are also investedin building awareness and reaching out to consumersfor their financial education. Creditinfo, for example,launchedaninternationaleducationalinitiativein2016called“CreditBureauDay,”aone-dayeventheldeveryyear during which all companies and individuals canaccesstheirowncreditreportsforfree.In2017almost20 countries joined the initiative, half of which werefromAfrica. During the event, consumers visit creditbureaus, access their credit histories, and check theircreditreportsfreeofcharge.

Adoption of New Technologies and Forging New PartnershipsSeveral credit reporting service providers are movingtowardscloud-basedinformationhostingasameanstofurtherreduceinfrastructurecostsaswellastoincreasethe availability of real-time, updated, accurate, andactionable data for their customers. For instance,Dun& Bradstreet announced that it would partner withMicrosofttoleveragethepowerofcloudcomputingandenhancethelevelofservicesitprovidestoitscustomers(Dun&Bradstreet2017).

Cloud Computing

In recent years, credit reporting service providerslookingtoimproveperformanceandreducecostshaveconsideredleveragingcloudcomputingservices.Cloud

computing allows companies to avoid or minimizeup-front IT infrastructure costs.Many credit reportingserviceprovidershavealreadyembracedthistechnology(wherelegislationpermits),allowinguserstobenefitfromthis technology without the need for deep knowledgeabout or expertisewith eachoneof them.Credit2B isatransformationalcloud-basedpatent-pendingplatformthat combines third-party credit information with anetworkofthousandsofleadingcreditprofessionalsandcreditgrantorsthathaveacommoninterestinaccessingbettercreditinformationabouttheirtradingpartners.Itallowsbusinessestoquicklyobtainbusinessandcreditinformation with over 25 million businesses in theUnited States andCanada, including large, small, andprivatelyownedbusinesses(Credit2B.com).

Electronic Payment Transactions

Banks and a variety of other PSPs have developedelectronic payment services both to address thelimitations of cash as a payment instrument and toprovide new opportunities for increased speed, safety,convenience, and other relevant features in a rapidlychangingworld (WorldEconomic Forum 2016).Theycanbeclassifiedas(i) instrumentsbasedonelectronicfundstransfer(EFT),(ii)instrumentsbasedonpaymentcards, and (iii) instruments based on e-money. (Thethreetypesofe-moneyaree-cash,networkmoney,andaccessproducts.)Transactionsmaybemadeperson toperson, person to business, business to business, person togovernment,businesstogovernment,orgovernmenttogovernment.Electronicpaymentsprovideaccesstofinancialresources.Consumersusingcashorchecksmaybe limited in theamount of funds available for some transactions.Withcash, consumers are limited to their funds on hand,and merchants may be reluctant to accept checks forbigger transactions because of the risk of nonpayment.Electronicpaymentsaddressbothof these issues:Theyprovide consumers with access to all available fundsor linesofcredit foragiven transaction,and theygivemerchants peace of mind about payment guarantees.Besides providing consumers tools that facilitategreateraccesstofinancialservices,electronicpaymentstransactions create structured data trails, that provideobjectiveinformationoncashflowsaswellassubjectivebehavioralinformationtotypesofproductsandservicesused,when,howfrequently,etc.

Artificial Intelligence

AdvancesinAIormachinelearningusecomputationalpower and programming techniques tomake it easier,


faster, andmore cost effective tomine and unfold themeaningofvastquantitiesofdatawhileminimizingtherisksassociatedwithhumanintervention.Theseoptionsholdtremendouspotentialforsharingcreditinformation.Besidesadoptingnewtechnologies,traditionalprovidersof credit reporting services seek out new alliancesand partnerships with nontraditional players in creditinformationsharing.Theyalsoseekincreasecross-bordersharing of credit data, and jurisdictions are reviewingexisting legislative and regulatory environments toaccommodate new trends, innovation, and compliancerequirements.

3.4. Moving Forward: Expected Trends Aswemove to aworldwith ever greater digitizationand information availability, the safety and securityof this information is paramount. Credit reportingservice providers are generally touted as having inplacethestrongestsecuritysystemspossible toprotectthe information in their databases. Recent high-profilesecurity breaches of these databases, however, havecalledthesecurityofthesesystemsinquestion.(Equifaxrecentlyhadabreachaffectingthenonfinancialrecordsof 145 million consumers in the United States.)As aresult,wewilllikelyseeamovetowardmorestringentpoliciesfordatasecurityandsafety.For policymakers and regulators, the absence ofadequatelegalandregulatoryframeworksposesagreatchallenge.Currently,alternativecredit scoringsystemsare treated as protected trade secrets, raising concernsaboutprivacyandunderscoringthelackoftransparencyin howdata is being collected and used. Furthermore,evenwhereexistinglawsoffersomeprotectionsagainstdiscriminatorycreditscoring,currentregimesarelikely

insufficient to address the unique concerns raised byalternativescoringtools,whichusuallydonotofferclear,ifany,comparablestandardizedpricingpolicies.Lastly,there isaconcern thatalternativescoring toolswillbeused to identify vulnerable individuals susceptible topredatoryloans.Moregenerally,theimplicationsofbigdataandfintechon discrimination among customers by the creditproviders (or credit reporting service providers)mightmeritgreateremphasis.Theuseofalgorithmsmaymakemonitoringdiscriminatorypractices trickierasmostofthesemachine learningmodels are “blackboxes,” andthusunderstandingthewaytheyarereachingdecisions/predictions is not clear (Wall, 2018).Credit scores forconsumers from a specific geographical location, raceorgendermaybelower,withoutavailableexplanationsfrom the users of the ML algorithms (Petrasic et al.,2017).Nevertheless, there is also some evidence suggestingdiscriminatory biases are less serious for the fintechlenders compared to traditional mortgage lenders intheUS (Bartlett et al. 2017). In anyevent, abalanceddiscussion of the potential for discriminatory lendingusingalternativecreditscoringsystemsisnecessary.Thefinancialworldisinastateofconstantchange,andit remains tobeseenhowregulatorsaround theworldwill choose to regulate these potentially disruptiveinnovations. Some new models for credit reportingwill succeed, while others will die out. The industrywill continue to be influenced by new developments,however, and more mergers, acquisitions, strategicpartnerships, and changing models and structures arelikelytoemergeinthecomingyears.

38 CHAPTER 3: THE EVOLUTION AND GROWTH OF CREDIT REPORTING SYSTEMS


Legal and Regulatory Framework

7. Specific credit reporting laws can be found worldwide; for example, Ley de Buros de Credito in Ecuador; Credit Reporting Bill in Guyana; Credit Information Companies Regulation in India; Ley de Sociedades de Informacion Crediticia in Mexico; Law on Credit History Bureaus in Moldova; Credit Information Bureau of Sri Lanka, Act No. 18 of 1990; and Credit Bureau Act in Sweden.

8. Some examples include the recently passed Decree on Credit Information Activities in Vietnam, regulations on a credit risk center in Spain (Circular 3/1995 of Bank of Spain), regulations on a credit risk center in Italy (Circolare N 139, 1991 de la Centrale dei Rischi, Bank of Italy), regulations on credit reporting and scoring companies issued by the Central Bank of Egypt, and regulations CN/27/G/2007and CN/28/G/2007 on credit information issued by Morocco’s Bank Al-Maghrib.

As recognitiongrows that credit reporting systemsarevital to strengthening financial infrastructure, accessto finance, and financial system stability, more andmore countries are increasing their efforts to createthe ideal credit reporting regulatory environment: onethat enables and promotes the development of secure,efficient, and reliable credit reporting systems whilefosteringcompetitioninthecreditmarketandprotectingthe rights of consumers with respect to their personalinformation.Theoveralllegalandregulatoryframeworkfor credit reporting should be clear, predictable,nondiscriminatory,proportionate,andsupportiveofdatasubjectandconsumerrights(WorldBank2011).

The legal framework for credit reporting differs fromcountry to country andmay include a combination ofcreditreportinglaws,bankinglaws,dataprotectionlaws,consumercreditprotectionlaws,faircreditgrantingandconsumercreditregulations,andpersonalandcorporateprivacyandsecrecyprovisions.Twobroadapproachestoregulatingcreditreportingcanbeidentified:(i)broaddata protection laws, and (ii) specific credit reportinglaws. The European Union with the recent GDPR(GeneralData ProtectionRegulation) in eurozone andseveral countries regulate credit reporting activitiesunder broad data protection laws that cover not only

creditreportingactivitiesbutalsootherrelationshipsandtransactionsinvolvingdatamanagementandexchange;examplesinemergingmarketsincludeArgentina,Chile,Colombia,Moldova,andUruguay.ChangeshavebeentakingplaceintheEU,however,withthedevelopmentofspecificsectorallegislationcoveringcreditworthinessassessments:forinstance,theMortgageCreditDirectiveandtheConsumerCreditDirective.In some countries, specific consumer credit reportinglawshavebeenenacted.Mostoftheselawshavebeendevelopedover the past twodecades and aremodeledaftertheFairCreditReportingAct(1971)intheUnitedStates.7 Other countries have adopted credit reportingregulations,usually issuedby theministriesoffinanceor central banks based on powers bestowed on themthrough banking legislation.8 Whichever approach isfollowed, the legal framework should support the keyconceptsincreditreporting,reflectthefullscopeofcreditreporting functions and operations, and accommodateevolving trends. In essence, the legal and regulatory frameworkshould:

● Establishtherulesforafair,competitive,andefficientmarketforprovidingcreditreportingservices.

● EstablishtherightsandobligationsoftheCRSPs,dataproviders,users,anddatasubjects.(SeeTable4.1.)

CHAPTER

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40 CHAPTER 4. LEGAL AND REGULATORY FRAMEWORK

● Provideclearguidelinesonthekindsofdatathatcanbecollectedandshared(permissiblepurposes).

● Provide guidance on data security obligations, dataretentionperiods,andothercompliancematters.

● Establishconsumerrightsandprovideaframeworkforconsumerconcernswithcreditreportingdata.

● Establishrulesforcomplianceandactionsintheeventofnoncompliance.

● Establishtheroleoftheregulator/overseerandprovideacleardescriptionofpowers.

In countrieswhere they exist, the legal and regulatoryframeworkforcreditreportinggenerallyfocusesonthefollowingareas:

● EntryandexitrequirementsforCRSPs ● Data collection, retention, disclosure ● Datasecurity ● Rules regarding access, including confidentiality andpermissiblepurposes

● GovernanceofCRSPs ● Consumer rights (privacy, accuracy, and redressmechanisms)

● Oversightandenforcement

Table 4.1. Rights and Obligations of CRSPs, Data Providers, Users, and Data SubjectsCRSPs’ rights and obligations • Record, maintain, collate, synthesize, and/or process information properly and accurately

• Protect information against loss and damage• Protect information against unauthorized access, uses, modification, or disclosure• Retain information for the relevant periods• Grant data subjects access to their own credit reports• Provide consumers information on dispute resolution mechanisms• Ensure timely correction of incorrect data• Enforce subscriber agreements• Maintain a help desk

Data providers’ rights and obligations

• Obtain and store consent from data subjects when collecting data (as applicable)• Inform data subjects of purpose and use of data collection• Protect information against loss and damage• Protect information against unauthorized access, uses, modification, or disclosure• Retain information for the relevant periods• Correct erroneous data in an expedient manner• Ensure restricted access to credit information and continuous training for employees handling

credit information dataUsers’ rights and obligations • Comply with reciprocity principles

• Restrict inquiries to those allowed by law• Maintain records and be able to demonstrate queries were requested for permissible purposes• Use information only for permissible purpose• Disclose information obtained from a CRSP only to authorized parties• Keep information obtained from CRSPs confidential• Appoint a CRSP relationship manager • Dispose of confidential information in appropriate manner

Data subjects’ rights and obligations

• Provide accurate information• Access own credit reports and monitor information• Dispute inaccurate information


4.1. Licensing or Registration of CRSPsSeveraljurisdictionsareadoptingaschemeofentryandexit requirements,mainlyforconsumercreditbureaus,to mitigate risks associated with sharing sensitiveconsumerdata,upholdingconsumerrights,competitionwithinthefinancialindustry,andbusinesssustainability.The most common approach is to follow a licensingprocess that can be used to place restrictions on whocancollectfinancialandotherpersonal informationonconsumersforthepurposesofgeneratingcreditreports.LicensingisalsoamethodofgoverningtheoperationsofCRSPsbystipulatingobservanceofminimumlevelsofbusiness standards.The licensingprocess isusuallyan evaluation of the proposed operator’s business,financial,andtechnologicalcapacitytoprovideasecureandefficientcreditreportingserviceandtheoperator’sability to observe obligations respecting privacy lawsandconsumerrights.Wherelicensingisarequirement,itisimportantthattheprovisionsinthelicensinglawsbeclearandprecisewithregardtowhatabilitiesanoperatormust show: Proportionate licensing requirements arevery important; over-the-top requirements, such asunreasonable capital requirements, should be avoided.Licensing regulations also include provisions forsecuringsensitiveborrowerinformation,intheunlikelyeventthataserviceprovidergoesoutofbusiness,exitsthemarket,orhasitslicenserevoked.Insuchinstances,provisionsmaybemade for the transferofdata to theregulatoruntilanalternativeproviderisidentified.Inmanycountries,creditreportingserviceprovidersarerequiredtoregisterwiththeregulator.Sincetheprocessof registration is usually mandatory and entails filinginformationpertainingtotheCRSP’sbusiness,financial,andtechnologicalcapacity,itissubstantiallysimilartoalicensingprocess.9EvenwhenCRSPsfacenolicensingorregistrationrequirements,theiroperationsareusuallysubject to some oversight by a horizontal supervisor,such as a data protection supervisor, especially withregardtodatacollection,securityofdata,dataprivacy,andconsumerrights.Theseprovisionsmaybecontainedin a country’s banking laws, company laws, or otherlawstouchingonconsumerprotection.

9. For example, the National Credit Regulator in South Africa is tasked with the registration of credit providers, credit bureaus, and debt counsel-ors. Registration of credit bureaus entails filing supporting documents about the operator’s business information and structure, including human resources, financial statements, operational resources (procedures to safeguard databases), and procedures for handling consumer complaints.

4.2. Data Collection, Retention, Disclosure, and Security

Defining Data ScopeGenerally, the scope of data that can be collected anddistributedby a credit reporting system is definedby thelegal and regulatory framework. In some countries, thescope is wide, whereas in others the legal framework isset up to permit reporting only negative information andprohibitscollectingandsharingpositivecreditinformation.CRSPs that collect a wide range of information cangeneratemore comprehensive credit reports. They aremorereliableandmoreefficientthanCRSPsoperatingonlimiteddata.Adatabasewithnegative-onlyinformationincludeshighlyexposedborrowersthathavedefaultedinthepast,butitexcludesthoseborrowersfromaccesstofinanceforlongperiodsfollowingthedefaults,regardlessof the borrowers’ current financial performance andotherfavorableinformation.Ideally,thelegalframeworkshouldallowcomprehensivereportingbasedonaliberalinterpretation of the information that can be collectedandusedtogeneratecreditreports.Assuch,defaultsandothernegativecrediteventscanbeanalyzedintotalitywith positive information on a borrower, resulting inbetterriskevaluations.Access topublic informationisalsorelevantforcreditreporting purposes because information availablethrough public records can enhance the quality of thedata thatcredit reportingserviceproviderscancollect.Forinstance,publicrecordslikeidentificationdatabases,civil status records, and court proceedings enablebetter identification of borrowers and provide moreholistic pictures of their credit history. No worldwidestandard exists covering access to public information,and jurisprudence varies from region to region. Somecountrieshaveadoptedlawsoninformationaccessthatclassifydataandestablishdifferentlevelsofaccessibilityonaneed-to-knowbasis(ThisisthecaseinGuatemala,Ecuador,andNicaraguaandinEUDirective2003/98/EConthere-useofpublicsectorinformation).Ideally,thelegalframeworkshouldprovidecreditreportingserviceproviderswithaccesstorelevantpublicinformation.


The last provision is particularly important as it allowsCRSPs to obtain other relevant information fromnontraditional data sources, such as organs of the stateand courts, entities involved in fraud and corruptioninvestigations,educationalinstitutions,anddebtcollectors.

Data SourcesTheregulatoryframeworkforconsumercreditreportingshould not unreasonably restrict the data sources.All data relevant for an analysis of creditworthiness,including data in public records, should be collected,whilethecollectionofirrelevant datamaybeprohibited.Accordingly, in some countries CRSPs are prohibitedfrom collecting information about a consumer’s race,medicalstatusorhistory,religion,orotherinformationdeemed irrelevant for analyzing creditworthiness (forexample, South Africa). In other countries, notablythe United States, a broader range of information—includingemployment andother information inpublicrecords—maybecollectedbycreditreportingservices.Ideally, regulations prescribing permitted data sourceswouldincludethefollowing:

● Banksoperatinginthesamecountry ● Mortgagefinancecompanies ● Financeleasingcompanies ● Microfinanceinstitutions ● Insurancecompanies ● InstitutionsthatoffertradecredittoMSMEs ● Assetmanagementcompanies ● Suppliersofgoodsandprovidersofservicesonapost-paidorinstallmentpaymentbasis(telecommunicationsandutilityproviders,retailers,andhealthproviders)

● Other reporting services (CRSPs and collateralregistries)

● Identification databases and other private or publicrecords

Box 4.1. Quality of Data

Public records information has always been dogged by suspect quality. Until recently, credit bureaus in the United States reported judgment and tax lien data, but pressure to reform internal databases due to increasing consumer complaints on data accuracy and difficulties in addressing them has led the major consumer bureaus to cease reporting these items. Judgment data is not reported unless all necessary identifying details on the consumer are available, and judgment data are updated frequently (every 90 days). New changes are forthcoming as bureaus will not

be allowed to report medical debt collection information that is less than six months old (reflecting the time it takes to satisfy these obligations), and providers of data to the bureaus will be required to provide full name, address, birth date, and Social Security Number in their reports. These changes reflect the poor quality of data and associated problems that have led to unfair penalties on consumers by the credit reporting system. These changes were negotiated between the attorneys general of 31 states and the consumer credit bureaus.

● Other sources of relevant information provided theexpress consent of the data subject is obtained andconfidentialityoftheinformationismaintained

Therecentexplosionofdata,especiallytheadventofbigdataandmachinelearning,hasledtotheemergenceoffintechcompaniesandotherdisruptionsinthefinancialservice provision industry. While the jury is still outon whether these new data sources and technologiesactuallyfill a gap in themarket, and if so, if they areacting responsibly, these new entrants dealwith creditprovisionandaccumulatedataonunderlyingborrowers;theythusrepresentpotentialdatasourcesfortheoverallcredit reporting system. Provided these new entrantscollectrelevantdataandmeetallthecriteriasetoutbythe firstGeneral Principle, these data should bemadepartoftheoverallcreditinformationsharingsystemtohelp prevent fragmentation of information sharing. Insuchanevent,thesenewdatasourcesanddataproviders(and,potentially,users)wouldbesubjecttotheGeneralPrinciplesforcreditreportingrelatingtothecollection,handling, treatment, and security of data, data sharingnetworks,andtechnologies.Further,theobligationswithrespect tosensitivehandlingof this informationwouldalsostand.From a regulatory standpoint, regulators aroundthe world continue to evaluate the best approach toregulatingfintechandtheuseofbigdata.Theobjectiveistobalancethemarketasawholewithinnovationsthattruly serve the market and measures that proactivelyprotect consumers and their information. One reasonwhy the use of big data and fintech innovations hasexplodedisthatthesemarketsarecompletelyorpartlyunregulated and/or differently regulated, which mayencouragetheentryofnewbusinesses.Butthislackofregulatory clarity also poses issues in termsof a levelplayingfieldbetweenthenewentrantsandestablished,

Source: Cowley 2016.


typicallymoreregulated,financialplayers.Itremainstobeseenwhatpathregulatorsaroundtheworldwilltakeandhowthiswillaffectbigdataandfintech.Depending on the jurisdiction, regulators may requireexplicit or implicit individual borrower consent toprovide data to a CRSP and to access a credit reportprepared by a CRSP. In many countries, includingAustralia, Cape Verde, Jordan, Kazakhstan, Mexico,Panama, Peru, Thailand, Tunisia, the UEMOA statesinWestAfrica, and theEuropeanUnion, laws requireexplicitborrowerconsentforadataprovidertoprovideinformationtotheCRSP.Intheinterestofmaintainingoperational efficiency, the legal framework shouldplacetheonusofobtainingandmaintainingarecordofborrowerconsentfordatasubmissionondataproviders.Intheeventofadispute,thedataprovidermustbeabletodemonstratethatithadobtainedborrowerconsentinaccordancewith the law. In some countries, includingthe United States, consumer consent is not expresslyrequired to report information toCRSPs.The reportedinformationmay not be used for simply any purpose,however; for specific purposes/uses the data subject’sexpressconsentisrequired(seesection4.2.3).Consentisalegalright(basedonrighttoaccess,rightto information, and so on) that could be required toenable the data subject to control the flow and use ofhis or her personal information. If data providers donothaveconsent to share theircustomers’ informationwith CRSPs, CRSPs may be required to secureconsent directly from the data subjects.Alternatively,an agreement among lenders and the CRSP to collectconsentandshareinformationwouldsuffice.The ability to collect and analyze a wide scope ofinformation from a wide range of data sources doesnot necessarily permit CRSPs to use or disclose the

information in anymanner. Inmost jurisdictionswithlegal regulation over credit reporting services, strictobligationscomeintotoplayifthecollectedinformationisbeingusedtoevaluateconsumersforcredit.Thebasicprinciplethatsafeguardsconsumerrightsistheprincipleof“permissiblepurposes.”

Data Disclosure and Permissible Purposes Tosafeguardconsumerprivacy,somelegalframeworksset up a finite list of permissible purposes for whichcollected information may be used. Permissiblepurposes change from country to country, but mostcountries include“assessinganapplication for credit.”The list of permissible purposes can require separateexpress consent in some instances, for example,whenconsidering a candidate for employment. (Disclosinginformation for employment purposes in SouthAfricaandtheUnitedStates,forexample,requiresaseparateexpress consent from customers.) Some countries goin the opposite direction, expressly prohibiting creditreference checks for employment purposes (as inAustralia andChile for example).Generally, themorevalue-added services theCRSPwishes to provide, themore extensive the permissible purposes must be andthe more consent for disclosure will come into play.Accordingly,theregulationlistingpermissiblepurposesshould, in addition to listing specific purposes, makeprovision for other purposes as well—provided the consentoftheconsumerisobtainedpriortoissuingthecredit report. Ideally, abasic regulation settingout thelistofpermissiblepurposeswouldincludethefollowing:

● Assessing an application for credit, insurance, or amortgage,includingguarantors

● Reviewingexistingcreditfacilities ● Developingacreditscoringsystem

Box 4.2. Issues Affecting Consent Regulation10

While the basic purpose of consent is to enable consumers to control their data and protect their privacy, implementation of consent can be extremely difficult and frustrating. In jurisdictions where information sharing is not the norm, this may require revising application forms to obtain consumers’ consent in writing, which can be expensive and may require changes at a corporate level. Also, consent cannot be implemented retroactively, which means that only data collected after a certain time (that is, after consent is collected) can be shared with the credit reporting services provider. Collecting consent on already established accounts can prove challenging, particularly if consumers are not fully aware of the benefits of credit information sharing. As an example, Guyana

passed the Credit Reporting Act in 2010, which went into effect in 2011. A credit bureau was licensed and operational from 2013; however, as lenders had to collect consent prior to sharing information with the credit bureau, the bureau struggled to gather information. In 2015 an amendment to the law was passed that mandated lenders to share information with the credit bureau, allowing it to finally populate its database and collate information to provide meaningful reports and services, thus fulfilling its purpose as a credit reporting service provider. Bank of Guyana, the bureau supervisor, determined that consumer rights could be upheld if consent was required prior to inquiring with the credit bureau or accessing the bureau to pull borrower information.

10. See Credit Reporting (Amendment) Bill 2015. Available at http://parliament.gov.gy/chamber-business/bill-status/credit-reporting-amendment-bill-2015/.


● Acceptanceofguarantees ● Applicationforservices(forexample,whenapplyingforamobilephoneservicecontractintheUnitedStates,acreditcheckoftheapplicantmaybeconductedbythetelecommunicationscompany)

● Verifyingpersonalcredentials ● Paymenthistoryinrespectofcontinuingcreditserviceswithretailers

● Aninvestigationintofraud,corruption,ortheft ● Considering a candidate for employment (in somecountriesthisispermittedwiththeexpressconsentofthesubject)

● Tenancy contracts (in some countries the lessor ispermitted to conduct a credit check of the lesseeapplicant)

Consentandpermissiblepurposesareoftenregardedasmeans toprotect the interestsofconsumers. Ifappliedincorrectly, however, they can hinder the developmentof credit reporting services. In theEU,underboth theoldandthenewGeneralDataProtectionDirective,theconsent requirement related to collection of positiveinformation. Negative information could be shared,since it was in the better interest of society and thelendingcommunitytoproactivelymanagerisksrelatedto poor borrower performance. Further, it is unlikelythat unscrupulous borrowers would willingly consentto share their information if it reflectedbadly on theirrepaymentbehavior.Thatbeingsaid,astheimportanceof credit reporting evolves over time in a society andthe use of credit bureaus and related products and servicesbecomeanintegralpartofthecreditculture,aborrower’s reluctance to consent to share informationwithacreditbureauorthelender’sinquirywithacreditbureauwilleventuallyleadtotheborrower’sapplicationforcreditbeingturneddown.Aslendersrelymoreandmoreontheuseofcredit informationservices, theuseof credit reports and other credit bureau products and servicesbecomeanintegralpartofthelendingculture,andlenderswillrequirecreditreportsonallapplicationsforcreditwithoutexceptions.The concepts of consent and permissible purposes areapplicable largely to consumer credit reporting. In thecase of credit registries, financial market supervisors,most typically the Central Bank or other monetarysupervisor, require all regulated lenders to share datawith the registry and provide aggregated informationback to the regulated lenders.The basis for collectingand sharing such information is mostly found in abankinglaworspecificcentralbankact.Inthecaseofcommercialcreditreporting,theinformationpertainsto

anentityandthereforethequestionofconsumerprivacyandprotectiondoesnot arise.Ofcourse, if thebureaulinks information on the firmwith the personal credithistoriesofthefirm’sowners,itwouldneedtocomplywith any existing legislation relating to the collectionanduseofsuchpersonalcredithistoryinformation.

Retention PeriodsLegislation typically stipulates a specific lengthof time for which information can be stored anddisclosed. Although historical information enableslenders to assess a borrower’s credit quality overtime,thelegislationshouldspecifyacut-offdateforinformationdisclosure,afterwhichtheinformationisnolongerdistributedtousers,soastogiveborrowersafreshstart.Differentdataelementsmayhavedifferentretention periods. For instance, payment historyinformation is usuallymaintained for aminimumoffive years. Public records relating to bankruptcy areusuallyretainedforsevenyearsoruntildischarged.Insomecountrieswithnegative-onlyreportingsystems,onceabaddebt ispaidoff, allnegativedata relatedto it is deleted from databases, either because it ismandated by law or simply because it is commonpracticeinthemarket.Suchpracticesaredetrimentaltocreditors’abilitytomakeinformedcreditgrantingdecisions,however.Ratherthanerasinginformationondefaultsonceloanshavebeenrepaid,thisinformationshould be storedwith the rest of the borrower’s fileforanassignedperiodoftime.AccordingtoaDoingBusiness 2019, of 113 credit bureaus providinginformation, 67 distributed historical informationgoingbackfiveyearsorless,while43distributeddatagoingbackfiveormoreyears.Forcreditregistries,of99providinginformation,60distributedinformationgoing back five years or less, while 30 distributedinformationgoingbackmore thanfiveyears (WorldBank2019).

From the perspective of building credit scores andothervalue-addedproductsandservices,historicaldatathat is two to three years old is important.A bureaudatabasethathastwotothreeyearsofhistoricaldatahassufficientdepthofdatatobeginbuildingscorecardsforitsusersbasedongeneralcharacteristicsobservedacrossborrowersegmentsovertime.Chapter6onvalue-addedproductsandservicesprovidesmoreinformationonhowscoresaredeveloped.Creditregistriestendtoprovideaggregatedinformationbacktousers,andinjurisdictionswheretheydo,retentionperiodsarelessimportant.Nonetheless,retentionperiods


areestablishedtoensurethattheinformationisnotheldlongerthannecessary,whichmightmakeitsusceptibletomisuseorabuse.Furthersystemlimitationsonmemoryandstoragedemandthatinformationbedestroyedafteralengthoftimetoallownewinformationtobecollected,processed,andstored.In the case of commercial credit reporting companies,in the absence of specific legislation around retentionperiodsofinformation,generalbusinessandITlimitationsdictatehowlongdataisdistributedorpreserved.Asanexample,oneofthemajorbureausintheUnitedStatesretains trade, bank, government, and leasing data forthree years;more negative data, including collections,judgements,andliensforoversixyears;andbankruptcydataforovernineyears(BusinessLoans2015).

Data SecurityIn addition to limiting the sources of data and thepurposesforwhichdatamaybecollectedandused,thelegalframeworkmayimposestandardstobeobservedtoensuretheaccuracy,confidentiality,andsecurityofthedatabaseinformationusedtogeneratecreditreports.Somecommonthreatstodatasecurityincludehacking,improper use by CRSPs or their employees, andtampering.AllCRSPs(consumer,creditregistries,andcommercial)shouldgenerallyberequiredtoestablishmeasures to validate the information they collect;restrict database access to authorized personnel whohavebeenscreenedandeducatedaboutconfidentialitypolicies;andprovidesecurityagainsttheft,corruption,andlossof information.Sinceconsumerprotectionisthe motive for such requirements, responsibility foraccuracy and security is no longer a prerogative ofcreditreportingservicesanddataproviders:Itisalegalobligation.Frequently, the laws governing the operations ofCRSPs require that credit reporting service providerstakeactivestepstoensuretheprotectionofdataagainstloss,corruption,misuse,ortheft.Activestepsincludemaking provisions for IT security, limiting access toauthorized personnel, educating staff and technicalcontractors,andputtinginplacestaffdisciplinaryrulesregarding information misuse and other breaches ofsecurity.Thelevelanddetailofsecurityarrangementsnecessaryforeachcreditreportingserviceisnotusuallyspecified by the regulator. This legal requirement isusuallydraftedasageneralobligationfortheoperatortotakereasonablestepsandinstituteprocessestocopewiththelogical,physical,andorganizationalaspectsofdatasecurity.

4.3. Governance and Risk ManagementEffective governance refers to the CRSP’s ability tosuccessfullymanageoperational,legal,andreputationalrisks. Governance pertains to the relationships amongtheCRSP’smanagement,itsinvestors,itsshareholders,and its other stakeholders. Governance arrangementsaddressthepreventionandmitigationofrealorperceivedconflictsofinterestamongstakeholders.CRSPsareusuallycreatedasentitieswithseparatelegalstatus, and as such they are subject to the applicablecorporatelawsandbusinesspracticesoftheircountries.In most countries today, corporate governancemechanismsandcontrolsforcorporationsaremandatory(OECD 2015; U.S. Congress, Sarbanes OxleyAct of2002). External and internal governance controls aredesignedtoreducetheinefficienciesthatmayarisefromconflicting interests among shareholders,management,data providers, users, and other stakeholders. Internalgovernance mechanisms are designed to monitormanagement’s behavior to ensure that it remains inline with the business’s and investors’ goals; externalgovernance mechanisms deal with accountability andoversightthroughindependentauditsandsupervisionbyapublicauthority.Maintainingeffectivegovernanceandriskmanagementinvolvesputtinginplacepoliciesandmechanismsthatmakeprovisionfor:

● Theaccountabilityofmanagers,supervisors,orboardmembers

● Independentauditandreviewprocesses ● Rulesrelatingtothefairandequalaccesstoinformationby the users, including the prohibition of enforcingexclusivitycontractswithdifferentserviceproviders

● Disclosureoftheprocessforcollectinginformation,theallowableusesofinformation,andredressmechanismsavailabletodatasubjects(consumers)

ThethirdGeneralPrincipleoftheOECD Principles of Corporate Governance describes the ideal governance arrangements for credit reporting services and data providers. The governance arrangements of CRSPsand data providers should ensure accountability,transparency, and effectiveness in managing the risksassociated with the business and fair access to theinformation by users (OECD 2004). The legal andregulatory framework can require that credit reportingservice providers establish independent boards toperformperiodicreportingandinternalauditfunctions.InthewakeofthelatestdatabreachinvolvingEquifax,


the existing governance structure anddecision-makingpriorities of credit reporting firms have come underscrutiny. The Consumer Financial Protection Bureau(CFPB) is working with the U.S. Congress to tightenthe reinsoncredit reportingfirms, includingenhancedregulationdefininghowbureaushandledata and reacttodatabreaches.

4.4. Consumer RightsConsumer rightswithin the context of credit reportingservicesrefertoprivacyofthedata-subject’sinformationandoftheaccuracyofproductsandservicesdevelopedusingthisdata.Nodefinitiveapproachexiststoprotectingdata-subject rights within credit reporting systems.Relevant legislation in theUnitedStates, for example,issector-specificandfocusesquitenarrowlyontheflowanduseofdatawithincreditreportingsystems,whereasEuropeanUniondirectivesestablishabroaderrangeofconsumerprotectionsthatgobeyondthecreditreportingsystems.Thekeyobjective,regardlessof theapproachtaken, is to establishconsumerconfidenceand trust inthecreditreportingsystems.

PrivacyTheright to privacy refers to the concept that personal informationisprotectedfrompublicscrutiny.Consumerprivacyconsiderationsarecloselylinkedtothepurposesof disclosure. The regulatory framework surroundingcredit reporting typically sets out specific conditionsfordatadisclosure,butcollectinginformationisnotper seprohibited.(IntheUnitedStates,forexample,creditbureausdonotneedpermissiontocollectinformation.)What is usually prohibited is disclosing personalinformation without consent. Disclosure of private

information occurs both when data providers sendcustomerinformationtotheCRSPandwhentheCRSPissuesareport.Bank secrecy or contractual confidentiality provisionsare often cited as impediments to the development ofa comprehensive credit reporting system. Generally,privacylawsrestrictdisclosureofcustomeraccountsandtransactionsinformationwithoutthecustomer’sconsent.In the banking industry, however, obtaining consentto collect personal information usually provides forsharing such informationwith third parties for specificpurposes. Banks, for example, may share informationwith the banking industry supervisor or with otherfinancialinstitutionsaslongastheyareregulatedbythesame supervisory authority. Credit registries generallyoperate under a mandate provided through a BankingAct or Central BankAct, which allow them to collectinformation from banks and other regulated entitieswithoutrequiringconsumerconsent.Banksandotherdataprovidersgenerallycollectconsumerconsent to share personal and credit information ofindividualswithacreditbureau.Atypicalbankconsentappearsinitsprivacypolicy,forexample,acopyofwhichis usually signed by the customer at account openingor when he or she applies for credit. Privacy policiesoutlinehowthebankorcreditormanagesitscustomers’personal information,and itdescribes ingeneral termsthe sorts of personal information held and for whatpurposes.Customersshouldknowupfrontthepurposesforwhichtheirinformationiscollectedandtheusestowhich the information may be put. In countries withdeveloped credit reporting systems, the consent givento banks by their customers usually includes consentto share customers’ information with credit reporting

Box 4.3. Equifax Data Breach: September 2017

The evolving threat of ever more sophisticated cybercrime requires increased investment in security on the part of credit reporting service providers. The 2017 Equifax breach compromised the personal information of approximately 145 million consumers in the United States and demonstrates some of the new questions arising from such events. Upon discovering the criminal intrusion into its systems, the company worked to determine how many consumers had been affected, a forensic process requiring several months. The number of people affected made it difficult for the company to respond to the unusually high number of consumer queries once the breach was made public. Government inquiries were launched (and are ongoing) into the nature of the intrusion, what the credit bureau did and did not do

in response, and how governance and management contributed to the breach. The incident demonstrated the need to prioritize not only data security, but also governance arrangements for ensuring that companies address such situations effectively. While the outcomes are still unclear, the incident brought greater emphasis to the need for tighter data security policies and practices, accompanied by stringent standards for independent and certified IT audits and governance plans with protocols for addressing breaches. The breach also brought into focus the need for further dialogue on how and when companies should disclose breaches to governments and the public and for new types of digital identifiers in light of the limitations of traditional government-issued identification numbers.


11. Usually a privacy policy requires informing customers of the bank’s intention to collect personal information and about the purposes for and circumstances under which the information can be disclosed to third parties. Signing the privacy form usually amounts to consent to share information with credit bureaus: It typically states, “We may collect and share your information with third parties to offer you other products and services for marketing purposes or to assess credit applications.”

service providers.11 The second part of disclosure,issuingthereport,isusuallyregulated.CRSPsmayissuecreditreportsforspecificandpermissiblepurposesonlyaslistedintheenablingregulations.The issue of consent and disclosure do not relate tocommercial credit reporting information as long as itrelatesstrictlytoinformationonacommercialentity.

Data Accuracy and Redress MechanismData accuracy is critical to the subject of consumerrightsbecauseinaccuraciesindatacanleadtonegativeconsequencesfortheconsumer.Errorsincreditdecisionsmay result from incorrect or inadequate informationsupplied to the CRSP, assignment of information tothe wrong consumer file (for instance where thereare similarities of names and addresses), or theCRSPprovidingthewrongfiletotherequestingcreditor.To protect consumers, laws governing credit reportingmay require capturing specific minimum informationinputsineachconsumerfile.BoththeCRSPandthedataprovidersandsourcesmustcomplywiththisrequirement.For instance, a legal requirement may state that aconsumer’s information submitted to a CRSP containidentifyinginformation,suchasthefullname(s)oftheconsumer,dateofbirth(whereavailable),identificationnumber or passport number (where available), addressand contact information (where available), and detailsregardingcurrentemploymentstatus(whereavailable).Inaddition,theruleshouldallowtheCRSPtouseothermethodsofidentificationandmatchingwhentraditionalmethodsareunavailable. Strictstandardsfordataaccuracyenforcedbyexcessivepenaltiesforfilingerroneousreportsbasedonincorrectinformation can impede the free flow of informationandaffect theefficiencyof the reportingsystem. (ThisoccurredinThailand,forexample,whentherestrictiveCredit Information Business Act, B.E. 2545 (2002),was passed in 2002.) Ideally, regulation should placeresponsibility without imposing strict liability. Legalprovision should require that service providers, dataproviders,andotherdatasourcestakeallreasonablestepsto ensure that the information collected and reportedis accurate, up-to-date, relevant, and valid.When theCRSP identifies incorrect information, it should notify

the data provider, who is responsible for correctingthe information.Only in theeventofknowledgeofanerrorandsubsequentfailuretotakecorrectivemeasuresshould liability fornoncompliancearise, against eithertheCRSPorthedataprovider,dependingonthesourceoftheerrordetermined.Consumers also have a role to play in ensuring theirinformation is correctly reported. Regulations usuallygrant consumers the right to access their own creditreportsandtheabilitytochallengeincorrectorincompleteinformation in their files. Modern credit reportingsystemsprovideconsumerswiththerighttoaccesstheircredit reports freeofchargeperiodically (forexample,onceperyear)orinspecificcircumstances(suchaswhenthe consumer becomes the victim of fraud). TheU.S.Fair Credit ReportingAct, for example, requires thatcreditreportingcompaniesprovideconsumerswithfreecopiesof theircredit reportsat theconsumer’s requestonceevery12months.Inaddition,ifaconsumernotifiesacreditreportingservicesprovideraboutanerrorinthefile,theserviceprovidermustsendthedisputebacktothe creditor/data provider. The creditor/data providermust investigate the dispute and report back to theserviceprovider,whichmustthencorrectitsrecordsandnotifytheconsumerofthedispute’soutcome.Ifborrowersdisagreewiththefinaldecisionregardingaclaimofdataerrororomission,theyshouldbeentitledto obtain resolution through a judicial or extrajudicialprocess, such as an alternative dispute resolutionmechanism.Dependingonthejurisdiction,thisprocessmightbeconductedthroughthedataprotectionagency,as in most European Union member countries, or aconsumer protection body or a unit within the centralbankorotheroversightbody.Credit reportingsystemsthat establish rules with clear guidelines on how toensuredataaccuracyaremoreefficientandgainusers’andconsumers’trust.Inaddition toprovidingdatasubjectswith the right toaccess,challenge,andcorrectinformationintheirfiles,creditreportinglawsmayrequiretransparencyofcreditdecisions.Transparencymeansthatdatasubjectsshouldbe notified of adverse credit decisions taken againstthembasedonacreditreport.Thisruleiscloselytiedto“permissiblepurposes,”asitplacesanobligationonthe


creditreportusertonotifythedatasubject.Accordingly,theruleusuallyprovidesthatanypersonusingacreditreport to deny an application for credit, insurance, oremployment or taking other adverse action against adatasubjectmustnotifythedatasubjectofthedecisionandinformhimorheroftheCRSPsupplyingthereport.Knowing the basis of an adverse actionwillmotivatedata subjects to check their credit reports for factualinaccuracies and take measures to correct them or toimprovetheircreditprofiles,dependingonthesituation.

4.5. Oversight and EnforcementThe objective of oversight by a regulatory authorityis toensure that themarket forcredit reporting is fair,nondiscriminatory, and supported by secure, efficient,reliable,transparentsystemsadaptivetoemergingtrends.Theroleoftheoversightauthoritycancoverfunctionssuch as licensing, registration, consumer advocacy,antitrust measures, and efficiency control. Usuallyauthoritiesperformingtheoversightfunctionarecentralbanks, financial supervisory bodies, data protectionauthorities, ministries of finance and commerce, orconsumerprotectionauthorities.Oversight is important in managing the interactionbetweenfinancialinstitutionsthatmustshareinformationwitheachother.Competitivepracticesamongbankscanunderminethetransparencyrequiredforeffectivecreditreporting.Fairparticipationincreditreportingservicescan be undermined when large financial institutionsuse their size or power to exclude smaller institutionsfromparticipation.Accordingly, theoversight functioninvolves more than just creating regulatory policies,especially in the initial phases. Setting up creditreportingservices(suchascreditbureaus,inparticular)often requires government to help overcome theregulated financial institutions’ resistance to sharinginformation. Inparticular, sharingpositive informationencounters themost resistance, as lenders arewary ofsharing information on their good clients with otherlenders, fearing that their clients could be poached bycompetitors.Oncetheinitialsetupandlegalframeworkis completed, and barring any unscrupulous practices,creditreportingserviceproviderscangenerallyfunctionwithminimumoversight.

Regulatory FrameworkCentralbanks,financialsupervisors,andotherrelevantauthoritiesmight, in the initial phasesof developing acreditreportingsystem,consult theGeneral Principles for Credit Reporting as the broad framework for

drafting specific operational regulations (World Bank2011).Theinvolvementofallstakeholdersattheinitialphases of creating the regulatory framework promotestransparencyand facilitatesbettercompliancewith theeventualstandards.Stakeholdersshouldseekconsensuson several key considerations to be addressed inregulations,including:

● Licensingorregistrationprocessesthatensureserviceprovidershavethefinancialandtechnologicalcapacityandrelevantbusinessknow-howtoprovideanefficientcreditreportingservice

● Ensuring that service providers adhere to minimumlevels of maintaining data accuracy (minimuminformationinputsshouldbeclearlydefined,andotherpermissiblemethodsofvalidatinginformationshouldbeallowed/prescribed)

● Datasources(theindustrystakeholdersshouldstrivetoagreeonthescopeofdatasources)

● Ensuringserviceprovidersadheretominimumlevelsofmaintainingdatasecurity

● Ensuringserviceprovidersadheretoconsumerprivacysafeguards (instanceswhenconsent is required, ruleson disclosure, and “permissible purposes” should beclearlydefinedintherules)

● Prescribingaprocessforconsumerrights’safeguards(theredressmechanismsandprocesstobefollowedintheeventofacomplaintmustbeclearlysetoutintherules)

● Prescribingpermissiblepurposes ● Power of the authority to supervise the serviceprovider, including reporting and independent auditrequirements,on-siteandoff-sitesupervision

● Poweroftheauthoritytohandleescalatedorunresolvedconsumercomplaints

● Power of the authority to conduct complianceinspections for the service provider, data providers,and users

● Power of authority to take appropriate action in theevent of noncompliance (including reviewing andconductinghearingsandissuingpenaltiesandfines)

● Poweroftheauthoritytoconductauditchecks ● Responsibilities to provide consumer education andoutreach.

Manyjurisdictionsdonotprescribespecificmeasurablerequirements for some of the obligations of CRSPs.For instance, fordataaccuracyanddata security, lawsmight be framed to be enabling, that is to requireserviceprovidersto“takereasonablesteps”toverifytheaccuracyofanyconsumerinformationreportedtoitorto“haveinplacepoliciesandprocedures”thatdealwith


data privacy and security. Accordingly, the oversightauthorityensuresthatprovisionsforsafetyandsecurityhave beenmade, but it does not police exactly “how”this obligation is performed. The level of specificityrequired in operational rules varies among countries.(Examples of authorities with clearly defined roles increditreportingindustriesinclude,inMexico,Banxico,LaComisiónNacionalBancariaydeValores(CNBC),Condusef,andSecretaríadeHaciendayCréditoPúblico(SHCP), and in South Africa, the National CreditRegulator.) Ideally,oversightshouldaimtomaintainabalance between consumer privacy and protection andan efficient, secure, innovative credit reporting systembasedonthefreeflowofinformation.

EnforcementSupervision is exercised over CRSPs, traditionaldata providers, and users (as determined under thepermissiblepurposesof credit reports).The regulatoryframework should provide appropriate enforcementproceduresthatencouragecompliancebyallpartiesbutthatarenotsostringentas todiscourage theoperationofcreditreportingservices.Accordingly,theregulatoryframeworkcouldmakeprovisionforissuingnoticesofnoncompliance in the event of alleged noncompliancewithsafeguardobligations.Under thisprocess, serviceprovidersaregiventheopportunitytoremedyviolationswithout adverse action by the authority. Penalties anddamages should be imposed in the event ofwillful ornegligentnoncompliancewithregulations(forinstance,inactiondespitenotices)andinrespecttononcompliancewithconsumerrightsprovisions.Some provisions in credit reporting laws deal withspecificmattersasopposedto“processes,”andassuchthey are not usually enforced through the “notice”system.For instance, in theeventofaviolationof theprovisions relating to permissible purposes, if a reportisdisclosedforanonpermittedpurpose,aviolationhasper seoccurredandthenoticeprocesswouldbeuseless.Accordingly,theoversightpowersshouldcontainamixof enforcement provisions that follow a compliancenoticeprocessandenforcementprovisions foroutrightviolations.Finally,whiletheindustrymayberegulatedbyanauthoritywithpowerstoreviewcomplaints,issuespecific compliance measures, and impose penalties,recourse to the traditional court system should not beexcluded.

4.6. Alternative Dispute Resolution Mechanisms

Advantages of Investing in a Financial Dispute Resolution (FDR) SystemEverystakeholderinthecreditreportingsystemwouldbenefit from a reliable and accessible multilayereddisputeresolutionsystem.Consumersgainanaffordable,fast channel for redressing errors and clarifyingmisinterpretations in addition to the option of goingto court. Reports from theWorld Bank and EuropeanCommission (Harley and Said 2017) identified thatone key way to increase consumer confidence in thefinancial industry is toprovideaccessibleuser-friendlyarrangements to resolve disputes. Credit providerswill also benefit because early resolution preventsescalation and preserves business reputational capital.Unscrupulous competitors who act unfairly will beheld to account. Access to credit for individuals andbusinesses,sustainedbyefficientresolutionofdisputes,arekeyfeaturesofadynamicinvestmentclimate.

Common Dispute Types in the Credit Reporting Context Experience shows that complaints from consumersin thecreditenvironmentareof two types: (1) redressof factual inaccuracies, and (2) redress about legalstatus and liability.Credit report errorsmay affect thecreditworthiness of a consumer. Trade line errors caneitherhurtorhelpaconsumer’screditscore.Consumershavetherighttoaskforredressoftheircreditinformationandeventuallyseekcompensationiftheyhavesufferedprejudice. Identifying the type of dispute at stake will influence the choice of the appropriate disputeresolutionmechanism.

● Factual inaccuracies. Disputes over factualinaccuracies could arise from errors in data entry.This happens when a credit file inaccurately depictsthetermsandstatusofacustomer’saccount,suchasthedateanaccountwasclosed,thecreditlimitfortheaccount,paymentstatusofthedebt,theamountowed,and so on. Furnishers can input accurate consumerinformation incorrectly or make typographicalmistakes (transposing two digits in Social SecurityNumber, misspelling names, transposing first andmiddlenames,andsoon).Consumers(whenapplyingforaloan)mayprovideinaccuratedatatofurnishers,andthecreditbureaucouldpassalongtheinaccuracytotheconsumer’sfile.Factualinaccuraciescouldalso


be caused by process errors. Credit bureau processerrorsarepossible:forinstance,whenabureaufailedtopreventthereappearanceinaconsumer’screditreportof inaccurate data removed following a consumerdisputeinvestigation.Creditprovidersoftwaresystemorprocesslimitationsmayleadproblemslikedatalostwhenaloanistransferredfromoneownerorservicertoanotherwithdifferentrecord-keepingsystems.Anotherexampleisthelossofpaymentrecordswhentradelinesarereportedbymultiplefurnishersovertime.

● Legal Status and Liability. Disputes regarding legalstatusandliabilitycanfirstresultfrommixed files.Thishappenswhenaccountsorrecordsareincludedinacreditfilethatdonotbelongtotheconsumer.Theoppositeisalsotrue:Accountsorrecordsmightbeomitted,leadingtoamixedfile.Aclosedaccountmightnothavebeenenteredinthefile,forexample.Creditbureausmatchingalgorithmscanalsoleadtoaconsumertradelinebeingkeptseparatefromtherestoftheconsumer’sfile.Thismay potentially affect the consumer’s credit rating.Familymemberswithsimilaridentityinformation,suchasfathersandsonswithcommonnames(Jr.,Sr.,andsoon)canalsoexperiencecomminglingoffiles,especiallyif they reside at the same address and distinguishinginformationisnotprovided.Acommonexampleoccurswhenaconsumerchangesnamesaftergettingmarriedordivorced.Untilthebureaucanlinktheindividualbefore

andafterthenamechange,thatindividual’sinformationmight reside in two different files. Another examplecouldbeanaccountmistakenlyincludedinorexcludedfromthesettlementofdebtsintheeventofabankruptcy.Thismayleadtolatepaymentcontestedbyaconsumerbecauseheneverreceivedastatement.Anothersourceofdispute is related to the proof of transactions.Theburdenofproofaboutpaymentsmadeisontheconsumer.Timelags between consumer transactions and the reportingof them to credit bureaus can be problematic, if forinstance,theconsumerurgentlyneedstoobtainaloan.Thissituationmayoccurwithpublicrecords,includingdelays in obtaining written court decisions. Finally,consumers may contest their legal liability based onan alleged fraud or identity theft. These events cansignificantly compromise a consumer’s credit history.Fraudstersmaycreatenewcredit,utilities,orhealthcareaccountsintheconsumer’sname,forexample,andthenletthemgounpaid.Astheseaccountsgodelinquentandarepushedtocollections,thefraudvictim’screditratingcan plummet. Fraudsters may also take over existingconsumer accounts, often disguising the account theftbychangingthebillingaddressoftheapplicantwiththelendinginstitutionormakingpurchasesovertheinternet.Additionally, fraudsters can create synthetic identitiesusinganinnocentconsumer’sSocialSecurityNumberorotheridentifierssuchaslastnameandbirthdate.

Table 4.2. Frequently Used Dispute Resolution ProceduresMediation and Conciliation Arbitration Online Dispute Resolution (ODR)

Mediation is a confidential, flexible dispute resolution process in which a neutral third person, the mediator, acts as a facilitator to help the disputing parties reach a negotiated agreement. Conciliation is similar process to mediation, except the neutral party provides nonbinding recommendations to settle the dispute. Parties are free to reject recommendations; nonetheless, recommendations are usually helpful to the parties and influence settlement discussions. Both procedures aim to provide a dynamic that leads to productive communication and facilitates a mutually satisfactory solution. The mediator/conciliator is not acting as a judge or counsel and has no power to impose a decision on the parties. If a settlement is achieved, the resulting agreement is contractually binding on the parties and can be recognized and enforceable as a judgment if so requested at court by one or more parties.

Arbitration is a confidential process in which the parties agree that a neutral third party, the arbitrator, will render a legally based decision after the disputants have had the opportunity to present the merits of their respective cases. Arbitration produces a decision (award) that is binding upon the parties as if made by a state court judge. The award is final and not subject to appeal. Because arbitration is a departure from the public judicial system, the parties must clearly choose it and understand its implications: that is, they will not be able to resort to domestic courts but must resolve their dispute by arbitration only. Accordingly, the consumer’s free and enlightened consent is essential before proceeding to arbitration.

Online dispute resolution (ODR), is a “mechanism for resolving disputes through the use of electronic communications and other information and communication technology.” An ODR process requires a system for generating, sending, receiving, storing, exchanging, or otherwise processing communications. Such a system is referred to as an “ODR platform.” Dispute is managed through stages, including negotiation, mediation, and arbitration.


Common Dispute Resolution MechanismsPartiesdealingwithfactual and legal disputes in the credit reportingindustrycanoptforvariousdisputeresolutionmechanisms, each having distinct characteristics. Thechoice depends on finding the best fit between theprocedure and the type of dispute experienced by thecreditbureauandtheconsumer.Thekeyquestiontoaskis“Whatisthemostappropriateandefficientprocedurein the context?”Additional factors to consider includethe attitudes of the parties involved, the cost of eachprocedure, time efficiency, control over the processandresults,andthefuturerelationshipwantedbetweenthe parties. Table 4.2 summarizes themost frequentlyused dispute resolution procedures: mediation andconciliation, arbitration, and online dispute resolution.Formoreinformationontheseprocedures,seetheWorldBankpublicationsADR Guidelines (2011) and Mediation Essentials (2016). Per World Bank Doing Business 2017,almostalltheeconomiessurveyed(184)recognizearbitration in oneway or another as amechanism fordisputeresolution.Mosteconomies(173)alsorecognizevoluntarymediationorconciliation.

Appropriate Procedures for Factual Disputes

Data collected and distributed must be free of errors,truthful, complete, andup-to-date.Disputes on factual inaccuracies can be adequately managed throughmediation, which opens a productive communicationchannel between parties to identify data or processerrors. Conciliators’ recommendations may be usefulif disputing parties cannot identify the source of theerrors or sort out a mutually acceptable solution toredressfactual inaccuraciesandprovidecompensation.Arbitrationmaybeusefulasaprocedureoflastresortorifasystemicproblemcreatedtheerrorsandthebureauisunwillingtochangeitsdeficientdataprocessing.Itcanalsobeusefulwhenonepartyisnotwillingtonegotiateingoodfaith.Oneadvantageofanarbitralawardisthatitisfinalandbindingonarecalcitrantindustryplayer.

Appropriate Procedures for Legal Disputes

When the issue of a dispute is a contestation of legal status or legal liability, arbitration may be the mostappropriateproceduretodetermineanyquestionoflawandavoid litigation incourt.For instance,consideranidentitytheftallegedbyaconsumerthatiscontestedbythecreditbureau.Thissituationmayraisecomplexlegaland factual questions. Mediation, or conciliation, canbeappropriateasafirst-levelprocedureforexchangingviewsandthusleadingtoadmissionoffactsandlimiting

thedebateinarbitrationtocorelegalissues.Mediationandconciliationmayalsobe themostappropriateandefficient procedures if parties are interested in findinga tailor-made solution to fulfill their own interests(business reputation, quickly obtaining a loan and soon)insteadofjusthavingtheirlegalrightsrecognized.Amultilayeredapproachusingproceduresinsequentiallevels—for instance, mediation then conciliationand finally arbitration—could be efficient in terms of casemanagement.

Enforcement of Mediation Settlements and Arbitral Awards No matter which out-of-court dispute resolutionmechanismisselected,itisimportanttoassessthelegalframeworkgoverningenforcementofthefinaloutcome(settlement or an award), in the absence of voluntarycompliance.With respect to arbitration, countrieswithmodern arbitration laws have adopted enforcementprocedures that limit thepossibilityof settingasideanarbitral award (defined inBlack’s Law Dictionary as a finaljudgmentordecisionbyanarbitrator).Suchlawsstipulate that enforcement may be refused by courtsonly on the basis of procedural deficiencies (such asfraud, evidence of partiality of the arbitrators, provenmisconduct of the arbitrators, or arbitrators exceedingtheir powers) and not on the basis of arbitrators’inaccurate application of the law. Arbitration awardsobtainedinonecountryareenforceableinternationally.As of 2017, some 153 countries have signed on tothe New York Convention on the Recognition andEnforcement of Foreign Arbitral Awards (New YorkConvention), which sets out the legal framework bywhicharbitralawardsmadeinonemembercountryarerecognizedandenforceableinanother.Withrespecttomediationorconciliation,somecountrieshave adopted laws on enforcement of settlementsreachedthroughout-of-courtmediationorconciliation,butmanycountrieshavenot.(Amediationisasettlementagreement in which the parties bind themselves to asolution and its enforcement; World Bank 2017b.)Countries that have adopted such legal frameworksaccord mediation settlements finality similar to thatof arbitral awards, allowing them to be set aside onlyafterseriousproceduraldeficienciesorifthesettlementis contrary to public policy. In countries without thislegal framework, settlements have the same status ascontracts;inthecaseofnoncompliance,theissuemustbelitigatedincourt.Somealternativedisputeresolutioncentersofferingbotharbitrationandmediationservices


have adopted rules to convert mediation settlementsinto arbitral consent orders to accord them the sameenforceabilityasarbitralawards.

Credit Reporting Disputes Resolution SchemesTo provide a reliable and productive credit reportingenvironment, every jurisdiction should have amultilayered system inplace that allows consumers toseek affordable and efficient recourse to enforce theirrights in a timelymanner. Inmost systems, customersareencouragedtofirstaddresstheirproblemthroughtheinternal mechanism of the financial institution. In theevent the complaint is not resolved to the consumer’ssatisfaction, the option should be available to appealthe decision out of court through an independentombudsman or/and an ADR service independent ofthe service provider. Consumers should also have therighttobringthedisputetothecourtsunlesstheyfreelyagreed tousearbitration. Inaddition todomestic legalcourts,threeschemesoffinancialdisputeresolutionareavailable: (1) internal complaint handling and redressservices offered by the financial providers (banks,retailers,andsoon)andcreditbureaus;(2)appealtoanombudsman’s office or supervisory authority; and (3)appeal toan independentalternativedispute resolution(ADR)serviceprovider.

(1) Internal Complaints Handling and Redress Service

World Bank reports on good practices for financialconsumer protection (2012) and setting principleson credit reporting (2011a, 2015), as well as otherssuch as the G20 High Level Principles on FinancialConsumer Protection, encourage financial institutionsandCRSPstohaveefficientcomplainthandlingservicesthrough which inaccuracies can be reported promptlyand fairly. According to Principle 9 of the G20 FCPprinciples,minimumregulatoryrequirementsregardinginternal procedures for handling complaints and thedissemination of related information should exist andbe similar across regulated entities offering similarservices.Thiscomeswithmanybenefits.Robustinternalcomplaints’proceduresimprovecustomerrelationshipsand increase trust in the credit system. In addition,internalcomplainthandlingiscostefficientforthecreditinstitution (as comparedwith an independentADR ordomestic court dispute resolution system, which haveassociatedadministrativefeesandmayrequireretainingcounsel), and it is normally free for the customers.Despiteitsusefulness,someconsumersmightquestionthe fairness of decisions made by internal complaintservices, however, because of perceived partiality andconflictsofinterest.

Box 4.6: ADR Case Management by the South African Credit Ombud

In South Africa, the Credit Ombud’s goal is to enforce fairness in credit and credit bureau matters. The Credit Ombud’s mission is to effectively resolve disputes between members of the credit industry and credit receivers (consumers and businesses) with regard to credit and credit information matters; to act as an educator of the public in matters pertaining to the credit industry; and to act at all times honestly, independently, and fairly, balancing the rights of all parties.The complaints process at the Ombud office starts most often with a telephone call to its call center, where experienced call center agents assist consumers in logging complaints over the phone and with the least possible red tape. The call center received a total of 32,095 calls in 2016, an increase of 32.3 percent as compared to 2015. The other point of entry is a new SMS line established in 2015 with a short number, allowing consumers to send a simple SMS. The Credit Ombud’s call center agents then call the consumers, paying for the call, to discuss how their office can assist them. This benefits consumers without airtime who cannot afford to spend a long time on their cellphones. The office

received 4,866 SMSs in 2016 that were then dealt with by the call center agents. When assisting a consumer via email or telephone without logging a complaint, the agents record the interaction as a general inquiry. In many instances, for example, agents advise consumers on how to obtain a credit report and how to follow the credit bureau dispute process. This discussion is not logged as a complaint, but as a general inquiry. In 2016, agents logged a total of 14,343 complaints and general inquiries, an increase of 16.5 percent compared to the previous year.Agents opened 4,123 disputes, 8.8 percent less than the previous year. In the same period, they closed 4,422 disputes, 12.8 percent less than in 2015. As in previous years, the complaints related to statements of account matters, incomplete or outdated credit bureau information, and emolument attachment order complaints. The agents found in favor of consumers in 69.42 percent of the cases, which meant that their investigations revealed something incorrect in the credit agreement or credit bureau listing.


Dispute resolution policy and procedures.CRSPsshouldhavewrittenpoliciesinplacefortheproperhandlingandresolutionofanycustomercomplaints.AwrittenpolicywillholdtheCRSPliablefortheannouncedpolicyandmakeitsubjecttomonitoringbyasupervisingauthority.Thepolicyshouldhavesixbasiccharacteristics.

● Availability of contact points to submit a complaint.A range of channels to file a complaint (toll-freetelephonenumber,e-mails,SMStextmessages,onlineplatforms, and so on) should exist and be accessibleduring business hours, without unduewaiting times.Acknowledgment of receipt of the complaint shouldbe sent in writing or in a durable medium that theconsumer can store. The consumer should also beinformedaboutthemaximumperiodwithinwhichtheCRSPwillgiveafinalresponseandbywhatmeans.

● Clear information on the dispute procedure. Thepolicyshouldstateinplainlanguagethemainstepsofcustomers’disputeresolutionprocedure,providefirmand reasonable timelines, and guarantee fairness inhandling thecustomerdispute. It shouldalsoexplaininplainlanguagetheconsumer’srightsintheprocess.

● Mandatory training and independence.The staffandagents who handle consumer complaints should beappropriately trained. Complaint handling functionsshouldbeindependentfrombusinessunits(marketing,sales, and so on, if applicable) to ensure fair andunbiasedcasemanagement.

● Clear information on the right to appeal to an independent ombudsman and/or ADR service provider. The policy should inform consumers of their rightto appeal and should state the coordinationwith anyombudsman, and/or (ADR) service available in thejurisdiction. It should alsomake clear that access tocourtsalwaysremainsanoption.

● Guarantee affordability and promptness of procedure.The policy should consider the user’s perspectiveand limitations, so theproceduredoesnot lead toanunreasonablecost,delay,orburdensonconsumers.

● Mandatory record keeping and accountability. Theobligation to keep written records of all complaintsand the availability of aggregate statistics should bepart of the dispute resolution policy. Credit bureausshould be required to use analysis of complaints tocontinuouslyimprovetheirpoliciesandprocesseswiththeobjectiveofreducingtheriskofinaccuraciesandof providing better protection for consumers’ rights.Complaintresolutionproceduresshouldbeincludedinthe credit institutions’ code of conductandmonitored

by the supervisory authority.An effective complainthandling and redress mechanism combined witheffectivecomplaintsreportingandmonitoringprovideearlywarningsignalstoregulatorsandsupervisorsonmarketdeficiencies,badpractices,oremergingrisks.

(2) Appeal to a Credit Ombudsman

Credit Ombudsmen have been established in manydifferent countries and sectors.Fourkey issues shouldbe addressed when developing the appropriate andefficientombudsmanscheme:(i)committingtorespectfundamental principles, (ii) choosing a governancestructure, (iii) choosing financial sectors covered, and(iv)choosingfundingmethods.Ombudsman schemes in credit reporting industriesaim to provide a quicker, cheaper, less formalway ofresolving disputes than the courts. Public confidencerequires that—like a judge—the ombudsman shouldbe, and be seen to be, independent and impartial.Anombudsmancanactasamediatororasanadjudicator,depending on the circumstances.Whenmediating, theombudsman facilitates discussions between parties tohelp themfind a fair agreement.When adjudication isneeded,casedecisionscanbemadebyanombudsmanorbyadecisionpanelcomprisinganindependentchairand an equal number of industry representatives andconsumer representatives. Unlike the courts in manycountries,theombudsmandoesnotrelyonthepartiestobringforwardallthenecessaryevidenceandarguments.Theombudsmanactivelyinvestigatesthecaseanduseshisorherspecialistknowledgeoffinancialservices.Thismeansthattheconsumerisnotplacedatadisadvantageby the financial business’s greater resources andtechnicalknowledge.Andneithertheconsumernorthebusinessneedstoemployalawyertoputtheargumentsfor them (though they are not prevented from doingso). In deciding whether to uphold the consumer’scomplaint, the ombudsmanwill consider the law, anyindustry code, and good industry practice. But thedecision/recommendationwillbebasedonequity:whattheombudsmanconsiderstobefairinthecircumstancesof the case.Theombudsmanwill give reasons for thedecision/recommendation. The ombudsman shouldhave the power to issue a recommendation with areasonableexpectationtheCRSPwillfollowit,withanyfailuretoconformbeingpublishedbytheombudsman.The decision can be binding or not, depending on theombudsman’s powers. The decision may be bindingon both the consumer and the CRSP or sometimes


binding only on theCRSP. If binding, someoversightbycourtsmightberequiredtocomplywithArticle6ofthe European Convention on Human Rights and withArticle10oftheUnitedNationsUniversalDeclarationof Human Rights. But that does not mean bindingdecisionsrequireafullappealtothecourtsonthemeritsof the case. It is enough that the court can require theombudsmantoreconsiderthecaseifitconcludesthattheombudsmanfailedtofollowafairprocedure.Another service offered by ombudsmen to consumersandcredit institutionsishandlingpreventiveenquiries.Anindependentexplanationfromthecreditombudsmancanoftensortthingsoutquickly.Byhandlingenquirieseffectively,ombudsmencanpreventmanyofthemfromturningintofull-blowncomplaintsandcanplayaroleinconsumerfinancialeducation.InsomewesternEuropeancountries, financial ombudsmen find that only about aquarter of inquiries turn into full cases.Advice fromtheombudsmancanalsobeuseful forcredit reportinginstitutionsuncertainofwhatfairredresswouldbeunderparticularcircumstances.

(3) Appeal to an ADR Service Provider

ADR service providers exist in almost every countryworldwide. Some ADR centers specialize in creditreporting disputes. Article 9 of the G20 High Level Principles on Financial Consumer Protection providesthat recourse to an independent redress process should bemadeavailable toaddresscomplaintsnot efficientlyresolvedviathefinancialservicesprovidersandauthorizedagents’internaldisputeresolutionmechanisms.ADR service providers’ goal is to provide a quicker,cheaper, less formal resolution than can be obtainedfromthecourts.Theyofferavarietyofdisputeresolutionmethodsasacontinuum,eachprocedurehavingitsownadvantages and disadvantages, allowing the partiesto choosewhat best suits their specific circumstances.Thesemethodsofdisputeresolutionincludenegotiation,mediation, conciliation, dispute review boards,arbitration, and so on. Independent ADR serviceproviders have the advantage of flexibility in tailoringprocesses to the parties’ needs, sometimes leading tomixed-mode procedures such as “med-arb” or “arb-med,” for instance.SpecializedADRserviceproviderscan also play a preventive role in monitoring trends,identifyingsystemicissuesandmarketmisconduct,andreportingissuestoregulators.Appendix5showsafew

scenariosofspecializedADRserviceprovidersdealingincreditdisputes.

Perspectives for Fragile and Conflict-Affected Countries Access tocredit isparticularlychallenging incountrieswith weak rule of law, as is access to reliable disputeresolutionmechanisms.Inthiscontext,publicinstitutions,such as the administrative or judicial system, may bein structuration and unable to provide viable solutionsforcreditconsumers inadisputewithcreditproviders/bureaus.Torestoreconfidenceincreditreportingsystems,every CRSP should ideally put in place a complaint-handlingservice,justasindevelopedcountries.Maintaininggoodcustomerrelationshipsandincreasingtrustinthecreditindustrydoesnotnecessarilyrequireacomplexandcostlydisputeresolutionscheme.Asimpleandaccessiblechannelforcorrectingfactualinaccuraciesis the necessary first step in creating an environmentfavorable to responsiblefinancial inclusion.The entirefinancial sector, aswell as the consumers,will benefitfrom truthful, complete, andup-to-date data. Industry-specificombudsmen(credit,banking,insurance,andsoon) were originally created for that purpose based ontheeconomicinterestofindustrystakeholdersandcost-benefitadvantages.Thisfirststepcouldeventuallyleadtocentralizedombudsmencoveringallfinancialsectors,including CRSPs, as is now the trend in high-incomecountries.Anotherapproachisforindustrystakeholdersto create a collective dispute resolution fund andsubsidize a specific mediation/arbitration program forcreditdisputesadministeredbylocalADRcenters.Inmanycountries,ADRcentersareaffiliatedwith,andsometimes hosted by, a local chamber of commerce,whichalsohasaninterestinbuildingatrustworthycreditreporting environment. In such programs, consumersmay bring the dispute to an independentADR centerto benefit from the services of a chartered mediator/arbitrator insettling thedispute.Servicewould ideallybe free of charge for consumers since honorariumswouldbepaidbythecollectiveindustryfunds,notthespecific credit reporting serviceprovider indispute, toensure theminimal arms’ length distance necessary topreserve impartiality.This initial stepcouldeventuallyleadtothecreationofaspecializedADRcenterdealingexclusivelywithcreditdisputes.


4.7. Cross-Border Data Flows As consumers and businesses migrate from onejurisdiction to another with increasing frequency,financial markets are becoming regionalized andglobalized and demand for credit reporting on datasubjects outside their homemarkets is increasing.ThefifthGeneral Principle states that “Cross border creditdata transfers should be facilitated,where appropriate,providedthatadequaterequirementsareinplace.”Cross-border data flow is a useful tool throughwhichadata subject’scredit canbemonitored frommultiplemarkets.With cross-border data flowmodels, data onborrowers applying for credit in a countrywhere theyhave no credit history, but who have credit historiesin theircountryoforigin,canbeassessedeasily,sincethe information is available to potential creditors inbothcountries.Inprinciple,thiscreditreportingmodelwouldworkwellintheregionalcontext,whereseveralcountries are in close proximity and where citizenscan move freely from country to country through theregion, but potential challenges arise with respect tocredit reporting services subject to a multiplicity ofregulatory laws, consumer protection frameworks, and institutionalstructures.Cross-bordercreditdataflowsoccurtoalimitedextentin theEuropeanUnion,where themarkets are largelyintegrated and persons, businesses, and goods andservicesmoveextensivelyandfreelyacrossborders.Inthe Union Economique et Monétaire Ouest Africaine(UEMOA)region,coveringeightfrancophonecountries,however, for the first time ever, one regional creditreportinglegislationallowsseamlessflowofinformationacrosseightcountries.(Seesection7.7formoredetails.)If the preconditions for cross-border data flows exist,thelegalandregulatoryframeworkforcreditreportingshould allow such credit information sharing acrossborders, provided adequate measures are in place tosafeguard theprivacyand informationofdata subjectsand to provide simplified dispute resolution processesfor borrowers. Generally, credit information sharingbetween different jurisdictions occurs only when eachofthejurisdictionsprovidesthesamedegreeofsafety,security,andprotectionfortheunderlyinginformation.Section7.9talksabouttheEurozoneAnacreditproject,a cross-border credit information sharing scheme thatallows the ECB, national central banks, and othermonetary supervisors to collect and individual bank-

level loans to enterprises (above €25,000) across euroandsomenon-eurocountries.Theregulatorsrecognizedthe need for a cross-border sharingplatform, realizingthatfirms’ exposure to credit across borders could notbe captured adequately through any single nationalcreditregisteralone.Regionalvisibilityoffirms’creditexposures enables regulators to identify industries orsectors with high exposure or vulnerabilities; in otherinstances,itallowstheECBtodefinemonetarypoliciesthataddressregionalfinancialaccessneeds(ECB2015).Standardsgoverningtheexchangeofcommercialcreditreportinghavebeendevelopedoverdecadesinresponsetotechnologicaldevelopmentsandmarketrequirementstoassesscommercialtradecredit,bankloans,andtradefinance. All standards that apply to consumer creditbureaus do not necessary apply to commercial creditreporting companies, particularly when those relatingto consent, protection of privacy, and permissiblepurposeascommercialcreditreportingcompaniesdealwith information related to firms and not individuals.The only exceptionwould bewhen commercial creditreporting companies link companies to the underlyingindividuals thatown, run,operate,orsiton theboardsof these companies. In these instances, all due regardmustbegiventoensuringthatthepersonalinformationoftheseunderlyingindividualsisprotected.The general sentiment from industry associationsis that commercial credit reporting is a space that isself-regulated for the most part and does not needfurther legislationand regulation.Themainargumentsfor this line of thinking is that commercial creditreporting companies (as opposed to consumer creditreporting) serve different markets, do not deal withpersonal information, use different types and sourcesof information, andhavedifferent clients anddifferentpurposes.Giventhecompetitivenessofthecommercialcreditreportingspace,thesecompaniesconstantlystrivetoofferthemostup-to-dateandinnovativeproductstomeetcustomerneeds.Theseentitiesshouldnonethelesscomplywith relevantcompany incorporation lawsandanyotherlawspertainingtooperatingabusinessinthegivenjurisdiction.Asitrelatestothecollection,collation,and treatment of data formaking credit decisions, theGeneral Principles of Credit Reporting surroundingdata,datasecurityandefficiency,governance,andcross-border data flows could all apply to the commercialcreditreportingspace.


Developing Credit Reporting Systems in Emerging MarketsDevelopingacreditbureau,commercialcreditreportingcompany, or credit registry is a time- and resource-intensive project involving the commitment of manystakeholders such as government, monetary andsupervisory authorities, regulators, credit reportingserviceproviders,dataproviders,users,andconsumers.Thischapter,drawingonGeneral Principles for Credit Reporting togetherwithWBGexperienceandexpertisein setting up credit reporting systems (consumer,commercial, and credit registries) in client countries,outlineskeypracticalaspectsofthatprocess,including:

● Assessingmarketconditions ● Designinganadhocnationalorregionalcreditreportingstrategy

● Changingperceptionsandbuildingawareness ● Guaranteeingadequatedataavailability ● Ensuringfinancialsustainability ● Creatinganappropriatebusinessmodel ● Identifyingappropriatetechnologyneeds ● Consideringoperationalandpracticalissues ● Establishinganappropriatelegalandregulatoryframework(discussedinchapter4)

These activities can be carried out simultaneously orin sequence depending on the availability, capacity,andneedsof the stakeholders involved.The followingsectionsprovideadditionalguidanceoneachactivity’sobjectives,whoshouldbeengagedinit,andhowitcanbecarriedout.Generally speaking, theactivities listedaboveapplyacrossthedifferenttypesofcreditreportingserviceproviders,butthespecificsofeachinterventionvariesdependingontheobjectiveandprimarypurpose

ofthecreditreportingserviceprovider(thatis,whetheritisaconsumercreditbureau,commercialcreditreportingcompany,oracreditregistry).

5.1. Assessing Market ConditionsAmarketassessmentcanhelpdeterminewhetheraCRSPwillbefinanciallysustainableinaparticularmarketand,ifso,inwhatform.Differentstakeholderscanplayaroleinassessingmarketconditions.DevelopmentinstitutionsliketheWBGcanworkwithgovernmentauthoritiesorcreditor associations to undertake an assessment. Thecomponents of this in-depth analysis may include thefollowingaspects,whicharediscussedfurtherbelow:

● Marketanalysis ● Stakeholderanalysis ● Technicalscopingstudy ● Legalandregulatoryenvironmentassessment ● Specifyingstaffingrequirementsandidentifyingavailableskillsinthelaborforce.

Market Analysis A credit reporting service provider is fundamentallya business, and therefore a natural starting point fordeveloping such a provider is to undertake relevantmarketanalysesthatcansupportthecreationofaviablebusinessplanfortheentity.Themarketanalysisshouldundertake projections of demand and costs that willenablethecreditreportingservicetopriceitsproductsand services accordingly. Pricing is one of the keyfactorsinsustainability,andcrucialinvestmentdecisionssuchassoftwareacquisitionsanddisasterrecoveryplans

CHAPTER

5.

58 CHAPTER 5. DEVELOPING CREDIT REPORTING SYSTEMS IN EMERGING MARKETS

should be aligned with the pricing strategy to avoidpotentiallosses.Atypicalmarketanalysisshouldfocusonthefollowing:

● Population size (reflecting current and future creditactiveindividuals),whichindicatespotentialcustomerbase for lenders

● Size of existing retail and SME credit market andpotentialforgrowth

● Levelofsophisticationofthecreditmarketintermsofproductsandservices

● Sizeoftheexistingcreditreportingservice(s)intermsofborrowers/firmscovered

● Capacity and scope of information in the bureau orregistry

● Potentialdemandforcreditinformation ● Existing and potential data sources and publicinformation sources, and now potentially, theavailabilityofnewdata sources, includingdata fromfintechproviders, bigdata, and alternativedata fromtelecommunicationcompanies

● Possibility that the demand for credit information issatisfiedbytheexistingproviders

● PresenceofotherCRSPsandacreditregistry ● Creditmarkettrends ● Legislativeorregulatorylimitations.

Stakeholder Analysis Assessing the credit reporting service’s potentialstakeholders (such as lenders, nontraditional dataproviders, existing credit reporting service providers,authorities,andpolicymakers)andtheircommitmenttotheprojectinvolvesaskingthefollowing:

● Is there a broad consensus among lenders on theusefulnessofcreditinformationsharing?

● Whoarethepotentialmembersorusersoftheproposedcreditreportingservice?

● Are lenders willing to share positive and negativeinformation?

● Dolendershavethetechnologicalcapacitytosharetheinformation?

● Aretheregulatoryauthoritiessupportive? ● What is the potential business model for the creditreportingservice?

Inmarketswhereaserviceprovideralreadyexists, thefollowingshouldbeexplored:

● Does fullfileandcomprehensive informationsharingexist?

● Doestheserviceprovidermeettheneedsofthemarket? ● Doestheserviceproviderfollowbestpracticeintermsofthesafetyandsoundnessofthesystem?

● Doesthemarketneedadditionaltypesofproductsandservices?

● Doprovisionsexistforupholdingconsumerrights? ● Areproductsandservicescompetitivelypriced? ● Could thecredit informationsharingmarketbemoreefficient,effective,andresponsibletomarketneeds?

In the case of credit registries, the focus of thestakeholder analysis is more on understanding whattechnological capabilities and data collection practicesregulated entities have to share information with thecredit registry.As supervisors relyon several differentdatabases (for e.g.Balance SheetDatabase) that oftenfall under different authorities to support their microandmacroprudentialfunctions,theanalysisshouldalsolookathowdifferentauthoritiescancollaboratetoshareinformationinasystematicfashion.

Technical Scoping Study Theobjectiveofa technical scopingstudy is toassessthe technical capacity and lenders’ readiness toparticipate in the credit reporting service. This studyinvolves sending detailed questionnaires on the natureand formats of available information to all potentialparticipants (lenders) and following up with meetingstodiscussthesurveyresults.Thestudybroadlyfocuseson the following issues and specific questions dependonwhethertheanalysisisbeingperformedforbureaus(consumer/commercial)orregistries:

● TypesofretailandMSMEcreditproductsoffered ● LevelandgrowthratesofretailandMSMEcredit,byproduct

● Current and expected number of credits issued, toinform projections about the potential volume ofinquiries

● Availability of electronically stored historicalinformation

● Whetherborrowerconsenttodiscloseinformationtoacreditreportingserviceisbeingcollected

● AvailabilityofuniqueIDnumbersforindividualsandMSMEsorotheridentificationmethods

● Levelofsophisticationoflenders’internalinformationmanagementsystems

● Technology and infrastructure constraints facinglendersandpotentialnecessaryupgrades

● Levelofawarenessamonglendersonissuesrelatedtocreditreporting

● Levelof technical andcommunication infrastructurein thecountry,whether itwillbeable tosupport theneeds of the proposed credit reporting service, andwhat upgrades may be necessary that will requiresignificantinvestment


Comprehensiveanalysisoftechnicalcapacityisessentialto determine whether a technical partner is necessary,to develop technical specifications for the proposedcredit reporting service, and to help lenders makechangesneededintheirtechnologyplatformstoenablethem to join the credit reporting service. Technologyrequirements and the qualities that make for a strongtechnicalpartnerarefurtherdiscussedinsection5.6.

Legal and Regulatory Environment Assessment Thelegalandregulatoryenvironmentcomponententailsconsultationswithregulatorsandqualifiedlegalexpertstoassessthecountry’slegallandscape.(Formoreonthistopic,seechapter4.)Themainquestionstobeaddressedincludethefollowing:

● Is information sharing permitted or limited underexistinglegislation?

● Whatistheexistinglegislationrelevanttoinformationsharingandtheproposedcreditreportingservice?

● Who are the oversight and enforcement authoritiesrelevant to information sharing and credit reportingservices?

● Is an operating license or registration required toestablishacreditreportingservice?

● Whataretheimplicationsof thelegalframeworkfortheserviceprovider’soperations?

● If the regulatory environment is not enabling orlimiting,what regulatory reformsmust take place toachieve an environment conducive to informationsharingandcreditreporting?

● Whatnewrulesorregulationsarebeingproposed? ● How organized are consumer groups, and howsupportivearetheylikelytobeofinformation-sharingplans?

The proposed operator should ascertain (as part of itsmarketassessment)thatitisallowedtolegallyoperatebefore finalizing any aspects of its operations. If themarketassessmentrevealsthatthelegalandregulatoryenvironment is not enabling, further efforts to engagelegislators and oversight authorities should be madepromptly,astheprocessofintroducingamendmentsorcreatingnewlawscantakeseveralyears.Dependingonthe complexity of a country’s rule-making processes,government authorities and regulators who supportdevelopmentofacredit reportingsystemmaywork tomake thenecessary regulatorychanges simultaneouslywiththeproject’sdesignorset-upphase.

Specifying Staffing Requirements and Identifying Available Skills in the Labor ForceA credit reporting service relies on informationtechnology skills, which may be in short supplydependingonthemarket.Inthispartoftheassessment,theaimistomatchtheskillsrequiredfortheoperationswiththeskillsavailableinthemarketandtoestimatewhatskillstrainingwillbeneeded.Section5.7.1discussestheorganizational structure and staffing requirements of anewlyestablishedCRSP.

5.2. Changing Perceptions and Building Awareness

Why It Is Important to Change Perceptions and Build AwarenessA critical step in developing a credit reportingframeworkinanymarket,istochangeperceptionsandbuildawarenessoncreditreportingwithinthesectorandcommunity.

● Lendersmaybeaversetoinformationsharingduetobank secrecy rules or stiff competition in the creditmarkets. Lenders are generally resistant to sharingpositive information on their clients for fear thatcompetitors will steal their good customers. In theageoffintech,onlinelending,andawholealternativelendinguniverse,theimportanceofcreditinformationsharingmaynotbewellunderstoodoranintegralpartofthebusinessmodelsofthesenewtypesoflenders.

● Authoritiesmaybeunfamiliaroruncomfortablewithsharing financial information and, for a variety ofreasons, some political, they may resist informationsharingefforts.

● Consumers may not understand the importanceof providing their information to credit reportingserviceproviders inmarketswhere thecredit cultureisrelativelynascent,andcashisstill largelyused.Inmarketswherecreditismoreprevalent,borrowersmaybehesitant toshare theirpersonal informationoutofprivacyconcerns.Increasinglytoday,withtheadventoffintechproviders,consumersmaybeprovidingtheirinformation unwittingly, without understanding thatbysigningontoanalternativelender’sservicestheirinformationmay be collected, analyzed, and used tomakedecisionsaboutthem.

While credit bureaus have access to a broad rangeof data and provide awide range of services to assistlenders in making lending decisions, in the absence


of any legislation requiring mandatory participation,the business model is usually based on voluntarycontributionofinformationbydataproviders(typicallyinvolving a reciprocity arrangement). In somejurisdictions,usuallyintheformativestagesofthecreditreporting environment, some potential data providers,most commonly larger institutions fearing loss ofmarket share,may resist sharing information. In thesecircumstances,theauthorityofthecentralbank,throughits ability to encourage participation in a data-sharingenvironment, can have a profound catalytic effect onestablishinggoodpractices.An organized structure for credit reporting andinformationsharinghelpsprotectlendersandborrowersalike, but the technology is now available for manyplayers to create their own credit scores from a rangeof data.Where no formal reporting framework exists,themarketwillbelefttoitsowndevices.Thiscanbeagoodthing,butitmayalsoleadtolackoftransparency,increased proprietary use (by telcos for example), andlackofconsumerprotection.

Different Types of Messages Thedrivetosetupacreditreportingsystemcanoriginatefrom any of several stakeholders in a given market.Awareness-raising activities should deliver different,targeted messages to different stakeholders. Eachstakeholder will, at some stage, require support fromvariousgovernmentbodies,supervisoryandregulatorybodies, policy makers, and law makers. Awarenessraisingtargetedatgovernmentofficials,policymakers,andregulatorsshouldaddressthefollowingissues:

● The importance of input from government officials,policymakers, and regulators in creating a safe andefficientcreditreportinginfrastructure

● Theroleofgovernmentandtheneedforgovernmentleadership in developing a legal and regulatoryframeworkconducivetocreditinformationsharing

● The importance of information sharing for financialstability and expansion of credit (different products,moreborrowers,differentchoiceofproviders)

● Improvedoversightofthefinancialsector ● Role of government in encouraging data providersto participate in and use the credit reporting serviceproviders

● Role of authorities in overseeing activities of creditreportingserviceprovidersandensuringcompliance

● Roleofauthoritiesinenablingcreditreportingserviceproviders’accesstopublicrecords

● Roleofauthoritiesinensuringconsumerprivacyrightsare upheld

Foranaudienceoffinancialandnonbankcreditorsandother data providers, awareness-raising efforts shouldfocus on explaining what they will gain from beingpart of a credit reporting system. Efforts should bemade to educate these participants about their rights,roles,andresponsibilitiesinthecreditreportingsystem.Specifically,awarenessraisingshould:

● Address concerns about sharing informationand thefear of losingmarket share due to such informationsharing

● Highlight and explain the role of the relevant creditreportingserviceprovider

● Explain the different measures available to preventcompetitorinstitutionsfrompoachingcustomers

● Emphasizetheneedforcooperationamongacountry’sbanking, financial, and nonbank institutions for thecreditreportingservicetosucceed

● Emphasize the need for comprehensive informationsharingtopreventfragmentation

● Assurelendersoftheconfidentialityofallinformationprovidedanddiscusstheobligationsoflenderstotreatconfidentialinformationappropriately

● Explaintheimportanceofsharingpositiveinformation ● Encourage broad participation by bank and nonbanklendersinthecreditreportingservice

● Encourage timely and accurate data submission andemphasizetheimportanceofcompliance

● Emphasize the benefit of improved risk evaluationthroughouttheaccountlifecycle

● Emphasizeimprovedtransparencyinriskmanagement ● Promote the introduction of updated credit controlpolicies and procedures taking into account theinformation in the credit reporting serviceprovider’sdatabase

● Highlighttheneedtoeducatestaffaboutcreditreportingandprovidecontinuoustrainingopportunitiestostaff

● Address how an adequate legal and regulatoryenvironment provides for an efficient and smoothcreditreportingenvironment

● Emphasizetheneedforaccuratedatasubmissionandtimelycorrectionoferroneousdata

Atdifferentstagesinthedevelopmentofacreditreportingsystem,thekeystakeholderdrivingtheprocessmaywantto organize outreach targeting the public. Governmentauthorities, supervisors, and regulators may want toexplain their roles andoverall support for developing acreditreportingsystem.Creditreportingserviceproviders


or data providers may want to establish links withconsumersandexplainhowconsumerdataishandledandtreated to allay any fears surrounding data privacy andsecurity.Suchawarenessraisingeffortsshould:

● Explaintheroleofacreditreportingserviceproviderand the benefits it offers for consumers or SMEs intermsofexpandedaccesstocredit

● Explainroleofregistriesinsupportingtheprudentialsupervisionfunctionoftheregulator

● Discuss the types and nature of information thatwill be collected and the purposes forwhich suchinformationwillbeused

● Discuss the obligation of CRSPs to respect theprivacy of personal information and their duty totreatallsuchinformationasconfidential

● DiscusstheredressmechanismsthatwillbeavailabletoconsumerstoaccesstheirdataandtochallengeandcorrecterroneousinformationonCRSPdatabases

● Emphasize the importance of borrower consentto enable data sharing as related to the legal andregulatoryframework

● Emphasizetheroleoftheborrowerinprovidingthemostaccurateinformation

Inadditiontoeducatingthepublicaboutcreditreporting,campaigns should educate the public on using creditresponsiblyandreducingtheriskofover-indebtedness.

Different Tools and Strategies AvailableAcriticalelementinbuildingacreditreportingsystemis the focusonbuildingawareness among lenders andtheir clients, the public, government officials, policymakers,regulators,andotherpotentialparticipantsinthecreditreportingsystem.Marketandstakeholderanalysis(discussedinsection5.1)providesthekeystakeholdersdrivingthereformprocesswithinsightsintotheissuesto be addressed through awareness raising. Below aredescriptions of some of the tools useful for changingperceptions and building awareness of the benefits ofinformationsharing.

Roundtables and Conferences

Consensusandbuy-inofstakeholdersisachievedthroughbuildingawarenessofthebenefitsofinformationsharing.For instance, in 2012, IFC facilitated the first regionalconference on credit reporting for countries of theUEMOAtolaythegroundworkfordevelopingaregionalcreditreportingsystem,andin2017,asecondconferencewas organized to inform regional stakeholders of theestablishmentofthecreditbureauandofhowthedifferent

stakeholders could play an important role in ensuringits success. Similar consultations were instrumental inpromoting theestablishmentofcreditbureaus inEgypt,Kenya,Morocco,Russia,Tajikistan,Vietnam,andseveralother countries. The Panamanian Credit Association(APC) regularly holds seminars to educate SMEs andconsumersonhowtointerprettheircreditreportsandhowitimpactstheirabilitytogetcredit.Arangeofstakeholderscanbeinvolvedinconsultations,conferences,androundtables,including:

● Supervisoryandregulatorybodies,suchasthecentralbankandotherfinancialsupervisoryauthorities

● Other government bodies, for example,ministries offinanceorcommerce

● Policymakers,lawmakers,attorneysgeneral,membersofparliament

● Credit reporting service providers (existing and/orpotential)

● Lenders, includingbankingandnonbankingfinancialinstitutions, microfinance institutions, leasingcompanies, insurance providers, and other creditors,such as utilities and retailers

● Other potential data providers (public data sources,fintechs,onlinelenders,P2Plenders)

● ConsumerrepresentativeorganizationsandthepublicThese events can be organizedby the key stakeholderdrivingthedevelopmentofthecreditreportingsystem,likeacentralbankorabankingassociation,dependingonthecountrycontext.DevelopmentpartnerslikeIFCarealsoregularlyinvolvedinarrangingandfacilitatingsuchevents.

Media

Media coverage of conferences and roundtables, aswellasarticlesontheroleofcreditinformation,withexperts’ opinions and reflections on the local debate,canbeusefulinpromotingawarenessofcreditreportingsystems. Such efforts have significantly increasedpublicawarenessof theneed tobuildacredithistoryand to submitone’s credit records to a credit bureau.Initially,mediacoveragecanbefacilitatedbythekeystakeholderdrivingdevelopmentofthecreditreportingsystem,suchasacentralbankorabankingassociation.Oncethesystemisdeveloped,creditreportingserviceproviders may choose to provide press releases orattract media coverage to promote the concept ofcredit reporting and to ensure greater buy-in by dataproviders,users,andconsumers.


Internet

Once itbecomesoperational, aCRSP’swebsite shouldbeuserfriendlyandcontain informationforconsumerswhereapplicableexplainingaspectsofconsumercreditand credit reporting. The site must inform consumerson how to access their credit reports and explain thechannelsavailabletochallengeandrectifyinaccuraciesidentifiedintheircreditreports.Creditreportingserviceproviders can take advantage of the new advances insocial networking, such as Twitter and Facebook, topromoteawareness.

Partners

Partners of credit reporting service providers canprovide key media channels for educating the marketor promoting credit bureau services. Partner websites,conferences,roundtables,andsocialmediacanprovideeducationandpromotionopportunities.

Communications StrategiesThe stakeholder leading the reform usually develops aconsistent communications strategy for implementingoutreachandraisingawareness.Adetailedcommunicationsstrategywillidentifythefollowing:

● Differenttargetaudiences ● Baseline assessmentmethods tounderstand the levelof understanding on the basics of credit, managingfinances,andcreditreporting

● Different messages developed and customized toaddressdifferentaudiences

● The communications channels most likely to havethe greatest impact (TV, radio stations, internet,newspapers,fliers,socialmedia,andsoon)

● Resources needed to implement communicationstrategies

● Timelines for rolling out outreach and awarenessraisingactivities

Thecommunicationsandoutreachactivitiesmustoccurovertime.Initialphasesofawarenessraisingmayfocuson obtaining buy-in from financial system supervisorsandregulatorsandfromcreditors.Astheprojectevolves,more outreach and awareness may be conducted tosensitize alternative data providers, their respectiveregulators, and other relevant authorities about theinitiative.Whenlegislationisdrafted,sensitizationmustbe undertaken with authorities and lenders regardingthe law’s contents and key implications. When thelegislation is passed and a credit reporting serviceprovider is identified or is being established, outreach

canfocusonsensitizingconsumersaboutwhatthecreditreportingsystemaimstoachieveandhowitwillenablegreateraccesstoresponsiblefinanceforallconsumers.

5.3. Ensuring Adequate Data AvailabilityData refers to all the information a CRSP collects,processes,andusestogeneratereportsandvalue-addedservices.ThedifferenttypesofdataprovidersforCRSPsweredefinedanddiscussed in section2.1.Themarketanalysis discussed in section 5.1 provides the CRSPwithasenseofthechallengesitwillfaceincollectingdata to populate its database.To ensure adequate dataavailability, the CRSP should pay attention to thecharacteristics of data and data collection described in thefollowingsections.

Data QualityData quality is the most important and challengingelementinsuccessfulcreditreporting.CRSPsmusttakestepstoensurethatthedatatheyuseisaccurate,complete,andup-to-date(WorldBank2011,Principle1).Toensurehigh-qualitycreditreporting,datashouldbe:

● Accurate (correct, up-to-date, having a strongvalidation process for identification of data subjectsandotherinformation)

● Sufficient,relevant,andcollectedonasystematicbasisfromallreliable,appropriate,andavailablesources

● Timely(updatedonacontinuousbasisandavailabletouserspromptly)

● RetainedsafelyforasufficientamountoftimeThe role of ensuring data quality and of constantlyworkingtoimprovedataqualityfallsinvariousdegreesondataproviders,creditreportingserviceproviders,anddatasubjects.According to the General Principles, accurate datais free from error, truthful, complete, and up-to-date. Inaccuracies indata can result in adverse events, suchasinadvertentrefusalofacreditapplicationfromagoodconsumerorextensionofcredittoabadborrower.Creditreportingserviceprovidersrelylargelyondataprovidersforaccuratedatacontent.Responsibilityfortheinputofinformation,and therefore theaccuracyof informationsupplied, should remain with the data provider. TheCRSP, however, is responsible for validating the databefore uploading it onto its database. The serviceprovider’s data-capturing system shouldnot allowanyalterationoftherecordssuppliedbythelender.Althoughaserviceprovidermayacceptorrejectafilesuppliedby


the lender, it shouldnotmakechanges to thefile, thuslimiting the service provider’s liability in the event ofinformationerrors.A credit reporting service provider should have amethod forconsolidatingdata intouniformformats. Ifinformation is incomplete, the provider should have amethodformatchingandmergingseparatepiecesofdatatoconstructacompletefileonadatasubject.Ideally,thecreditreportingserviceproviderandthedataprovidersshouldagreeonminimumdatainputsandonmethodsofstoringdata-subjectinformationinaformatthatallowsthecreditreportingserviceprovidertoeasilyextracttheinformation andupload it to its own system to furthermatchandmergewithotherdata.Achallengetodataaccuracyandvalidationisthelackof uniform identification schemes. Issuing nationalunique identity numbers is usually the prerogativeof the government. Under the World Bank’s ID4Dprogram,severalcountriesare looking intodevelopingdigital identification systems.12 Adopting a nationalidentificationsystemattheinitialphasesofestablishingacreditreportingsystemwouldbeideal,butitisnotalwaysrealistic. Therefore, in jurisdictions without nationalidentification numbers, orwhere use of such numbersisprohibitedbylaw,CRSPsmayhavetodeveloptheirown systems to identify data subjects using matchingalgorithms traditionally combining name, address, anddateofbirth.InNewZealand,forexample,CRSPsusesophisticated matching solutions because legislationpreventsrecordinguniqueidentifiersorspecificuniqueIDsdonotexist.InAustralia,underexistinglegislation,theonlynationaluniqueidentifiersavailable—taxfilingandMedicarenumbers—canbeusedfortaxandmedicalpurposesonlyandthusareunavailableforuseincreditreportingsystems.

The ability to use algorithms to match informationis significantly restricted in emerging markets,however, where crucial information, such as names,addresses, and dates of birth, are often unreliable. Insomemarkets, regulators have looked into developingbiometricsystemstoovercomethechallengesofproperidentification.Forinstance,inUganda,thecreditbureaudevelopedaspecificbiometric-enabledcardforfinancialsectorclients toassist in thedevelopmentof thecreditbureaudatabase.

Data Sufficiency Asdiscussedinsection1.3,severalstudieshaveshownthatinclusionofinformationfromnonbanklendersintoa credit scoringmodel generates scores with a higherpredictivepower,whereascreditreportingfragmentedbyindustryhaslesspredictivepower.Creditreportingserviceprovidersshouldcollectbothnegativeandpositivedatatoprovidelenderswiththemostcomprehensivepictureof their portfolios. Broadly speaking, all data relevantfor an analysis of creditworthiness, including data inpublicrecordsandprivatenonfinancialsources,shouldbecollected to theextent that it is legallypermissible.Withtheadventofnewtypesoflendingmethodologies,platforms, and lenders, the data aggregated by thesenew credit providers could potentially be included inthebroadercreditinformationsharingspaceandshouldbe seriously considered to provide a complete pictureof borrowers across themarket andpotentially fromasystemicriskmanagementperspective.Minimum data inputs should be consistent with theguideline on “sufficient data” stipulated in General Principles on Credit Reporting.Inpractice,theminimumpossible amount might be vital to a credit score bykeeping accounts active and reported to the creditagencies.MostcreditbureausintheUnitedStatesreport

Box 5.1. Errors in Consumers’ Credit Files

An increasingly prevalent issue in the United States is the number of consumer credit files that contain errors. Marginal errors occur in the files of approximately one in five consumers, falsely implying the consumer is riskier than is true and potentially resulting in offers of credit products at higher rates or on more stringent terms. Ensuring data accuracy falls on the data providers as well as the credit bureaus; however, incentives to ensure accurate data are low in an environment that emphasizes volumes and speed of

processing over accuracy. The three big bureaus in the United States contain information on 200 million data subjects, with at least 2.6 billion pieces of information, 1 billion of which is updated monthly. Clearly, when dealing with such large volumes of data, errors will occur. Regulators are increasingly calling for greater penalties on bureaus or data providers to ensure that they take all steps necessary to ensure data accuracy.

Source: Klein 2017..

12. Available at: http://id4d.worldbank.org/.


anythingthatlenderssendthem:Noamountistoosmallforacreditreport.Insomecases,thecreditbureaushaveaneffectiveminimumof$0.In many countries, the collection of irrelevant data isexplicitlyprohibited.Irrelevantdataincludesinformationabout a consumer’s race, medical status or history,religion, or other information deemed immaterial forpurposes of analyzing creditworthiness. This presentsaninterestingissuewhenconsideringtherangeofnew(alternative data providers) and the new data typesthat are being used to evaluate creditworthiness andmakecreditdecisions.Currently there isnoconsensuson how these data providers and data types should beregulatedasregulatorsacrosstheglobearetakingvariedapproaches from waiting and watching to developingspecificregulationonentitiesusingandprocessingthesenewdatatypes.Ideally, aCRSPwould choose to collect data from asmanydifferentsourcesaspossible,but in reality, legalandregulatoryframeworkssurroundingcreditreportingmay not support this. Until recently, for example,positive credit reporting was prohibited by law inAustralia.In2016alawwaspassedtointroducepositivecreditreportinginthecountry,butitisstillnotcommonpractice to share positive information; in response, amandatemayrequirepositiveinformationsharingwithinacertaintimeframeiflendersarenotforthcomingwiththisdata..NewZealandpassedalawenablingpositivecreditinformationsharing(thatis,comprehensivecreditinformationsharing)in2012,anditisbeginningtoseethe benefits of positive credit information sharing. Inother instances, nontraditional providers of data, suchasutilitiesandtelecommunicationscompanies,mayfallunderadifferentregulatorypurviewthantraditionaldataproviders like banks and financial institutions (as, forexample, inIndia).Therespectivelegalandregulatoryframeworks may not permit data sharing with creditreportingserviceproviders.Some public records, such as identity registries forindividuals and businesses, might not be available tothe public or accessmay be restricted. CRSPs shouldseektonegotiatespecialagreementswithpublicrecordsagencies to ensure the smooth and systematic flow ofinformationcrucialforvalidatingtheidentityofthedatasubject.Insomecases,thismayinvolvedefiningacost-recoveryschemetoalleviatethefinancialburdenonthepublic agency. Depending on the legal and regulatoryenvironment facilitatingaccess,CRSPsmayalsoenterinto agreements with private data sources to collectinformation.ToensurethatallCRSPsinthemarkethave

accesstoawiderangeofdatasources,itisrecommendedthatdataprovidersandotherdatasourcesdonotenterintoexclusivecontractswithanyspecificCRSP.In addition, the technology platform of the serviceprovider must be designed to receive information indifferent formats. In some markets, small banks andnonbanking financial institutions may be unable toprovideinformationelectronically.

Data TimelinessDatashouldbemadeavailable tocreditors ina timelymannerbecausetheyaremakingcriticalcredit-grantingdecisions based on the information received fromcredit reporting service providers. Timeliness requiresdata providers and other data sources to update theirdatabasesfrequently:withinaspecifiednumberofdaysafter theoccurrenceof a specified relevant eventor atendofeachbillingcycle.Updateddatamustbeprovidedto the CRSP on a systematic basis. This will usuallytake the form of a predefined schedule as determinedby agreement between the CRSP and data providers.Updateddatashouldbeincorporatedintocreditreportsandmadeaccessibletousersassoonaspractical.The 2018 Doing Business survey showed thatapproximately30percentofcreditbureaus(inasurveyof103creditbureaus)reportedthatdatarequestsweremetinstantaneously.Themajorityofcreditbureausmetall demands within seven days of receiving a request(seeFigure5.1). (SeealsoWorldBank2004,“GettingCredit”indicator.)Thekeyindicatorsforthetimelinessofserviceincludethefollowing:

● Time between obtaining the query and issuing the report: Inmany countries, the process is automated.Dependingon the search capacity of the software, itmay take just a few seconds. In many developingcountries where the reports are not provided online,the processmay take hours or, in some cases, days.MinimizingthedeliverytimeisanimportantobjectivefortheCRSP.

● Time to assimilate information and update records: Thisreferstothetimebetweenreceivinginformationorupdatesfromthedataprovidersanditsintegrationinto the CRSP’s database. Validating and merginginformationreceivedfromlendersmaytakeanywherefrom one day to one month (World Bank 2018a,“GettingCredit” indicator),dependingon thequalityof information supplied by lenders, the reliability ofidentifiers, or themerging algorithm.This parameteriscriticaltoensurethatthedataavailabletolendersisuptodate.


● Time to correct errors: Of the 103 credit bureaussurveyedintheDoingBusinessSurvey,approximately70percentreportedtakinglessthantwoweekstorectifyerrors.Another21percentreportedtakingbetweentwoweeks and onemonth to correct errors (WorldBank2018a, “Getting Credit” indicator). Generally, whena CRSP finds errors in a file, it sends a correctionto the data provider, who has the responsibility ofcorrectingerrors.Giventheemphasisonensuringthatconsumerrightsareprotected,regulationsincreasinglyprovideguidanceon the amountof time available atthedisposalof theCRSP toaddress issues related toincorrectinformation.Generally,theCRSPhasabout15daystoaddresstheerrorortonotifyconsumersthatadditionaltimeisrequired.

Data Retention

Retention Period for Storing Data

Data should be retained safely for a sufficient amountof time.Most credit reporting service providers retaininformationforfivetosevenyears.Insomemarkets,thelengthoftimethatinformationmaybestoredisrestrictedby legislation. The retention period for information isdeterminedby thepurpose forwhich thedata is used.On one hand, data should be kept for an amount oftime sufficient for the purpose of debt collection andto reduce the risk of over-indebtedness, a period that,based on global experience, ranges between five andseven years. In jurisdictions where credit scoring and

other value-added products have been developed, datashould be retained for at least three years to allowsufficient observations to build predictive scores.Dataforsupervisionandstatisticalpurposesmayneedtoberetained for a longer period. In the United States, forexample, informationremainsoncreditbureaurecordsfortwo,seven,ornineyears,dependingonthetypeofcreditordebt.Insomecountries(Brazil,forexample),informationisneverdeletedfromthedatabase.

Retention Period for Disclosing Data

Adistinctionshouldbemadebetweenthelengthoftimethatdataisretainedandthelengthoftimedataisincludedinacreditreportordisclosedtousers.Insomecountrieswithanegative-onlyreportingsystem,onceabaddebtispaidoff,allnegativedatarelatedtoitisdeletedfromdatabases, either because deletion ismandated by lawor because it is common practice in thatmarketplace.Suchapracticemaypaintafalsepictureofaborrower,however,whomaybearecalcitrantdebtorwhopaysoffanoldloanonlytogetafreshloan,whichheorshethenfails to repay. Conversely, disclosing data, especiallynegativedata, for excessively longperiods (more thanfive years) can unduly penalize a borrower who hasotherwise reformed his or her payment habits. Mostcountriesopttolimitthenumberofyearsthatnegativeinformationmaybesharedtogivepreviouslydelinquentborrowersasecondchanceinaccessingcredit.Typically, legislationprovidesguidanceonthenumberof years that data can be distributed,which, based oninformationfromDoingBusinesssurveys,rangesfromtwo to tenyears.Different typesofdataare subject todifferentdistributiontimelimits.Forinformationrelatingtopreviousinquiries(thedatafootprintleftonthecreditbureaueach timean institutionrequestsacredit reporton a data subject) is of little value to lenders beyondeventsthathaveoccurredintheprevious12monthsandis,therefore,usuallymaskedfromcreditreportsafterayear.InBrazil,whileinformationisneverdeleted,itmaynotbedistributedbeyondacertainnumberofyears;forinstance,negativeinformationisdistributedfor5yearsand positive information is distributed up to 15 years.(WorldBankDoingBusiness2019).TheagreementbetweentheCRSPandthedataproviderswill usually stipulate how long information will beshared,when itwillbearchived (and thepurposes forwhicharchivesmaybeused),andwhenitwillultimatelybe deleted. In practice, data is archived rather thandeletedsothatitisalwaysavailable,butitisnolongerpublishedafterapredefinedtimeperiod.

Figure 5.1. Average Time between Request and Release of Data


7 Days – 1 Month 3%

Within the Same Day 2%

1 – 7 Days37%

Information Is Released Instantly

58%


With the explosion of new data and technologies,all data relevant for making credit-related decisionsshould be considered as potential data sources for credit reportingserviceproviders.Thisisimportanttoprovideacomplete,nonfragmentedpictureofborrowers’creditprofiles,whether they access credit throughCRSPs orthroughnontraditionaldataproviders.Thecollectionandprocessingofnewdata(suchassocialmediaandotheronlinedata)continuestoevolve;itislargelyunregulated,andthepredictivityofonlinesourcesinlendingdecisionshasstillnotbeenobservedforasufficientperiodoftimetoprovedecisive.To theextent thesedata sourcesareconsideredbyCRSPsornontraditionaldataproviders,however, all the data rules applicable to traditionaldata providers—including data quality, sufficiency,timeliness, retention periods, and safety and securityrequirementstoensureconsumerprivacy—shouldapplytotheuseofthesenewdatasources.(For more on data retention, see section 4.2 of thisGuide.)

5.4. Ensuring Financial SustainabilityA CRSP is a business and needs to be financiallysustainable,regardlessofthemarketinwhichitoperatesandregardlessoftheprimaryfunctionitperforms.Thesizeofthecredit-activepopulationdictatesthelevelofsophistication and complexity of the credit reportingsystem to be implemented. In emerging economies, averylargeproportionofthepopulationisoftenunbanked,withtheresultthatexistingcreditaccountsreflectonlyasmallpercentageofthepotentialmarket.Creditbureausand commercial credit reporting companiesdependonvolume (number of inquiries or consultations by theirusers)tobesustainableandtogenerateprofits.Althoughcredit registriesarenotfocusedonprofits, theyshouldhaveaccesstoaconsistentsourceoffundstomaintainregistryoperations.CRSPs (mostly credit bureaus and commercial creditreporting companies) make their profits by sellingreportsinresponsetoqueriesfromusers/membersofthereportingservice.Withoutalargeborrowerbase,CRSPsmustchargehighfeesfortheircreditreports,whichmayreducethedemandfromlenders.Incountrieswheretheuse of credit is not prevalent, CRSPs might face thischallenge in their initialyearsofoperation.Developedcountries with small populations, such as Iceland(population338,349)andNewZealand(population4.79million), operate small but profitable credit reportingservices because their populations, though small, usecreditmarketsactively.Forexample, inNewZealand,

where the economically active population is estimatedat slightlymore than2million,oneof the threecreditbureausreceivesabout4.5millionqueriesayear.In emerging markets where the economically activepopulation is too small to generate sufficient demandfromlenders,aregionalsolutionmaybeaviableoption.The UEMOA region, for example has a single creditreporting service provider serving all eight countriesintheUEMOAregion.Whilethecombinedpopulationacross the region exceeds 122 million, each of theUEMOAcountriesaredisparateintermsofpopulation,levelofcreditactivityandreadinessforcreditreporting.A shared credit reporting service provider leveragingcommon technology infrastructure and skills offeredcost efficiencies and a significantly reduced time tomarket than setting up independent credit reportingserviceprovidersineachoftheeightcountries.

5.5. Creating an Appropriate Business Model After the market assessment, the proposed creditreporting service provider should have an overviewof themarket environment and be ready tomove intothe “design-and-build” phase. Since conditions differfrom country to country, what works best is a designsuitabletoacountry’smarketenvironment,takingintoaccount global best practices.Accordingly, the resultsof themarket assessment will direct the next steps inthe process: deciding on the bestmodel for the creditreporting service, developing a business plan, andcreatinganenablinglegalframework.Themarketassessmentorfeasibilitystudywillinfluencethemodelandbusinessstructureoftheproposedcreditreportingservice.Themostcommonmodels thathavebeentriedandimplementedinthepastare:

● Creditbureaus(withcommercialcapabilities) ● Creditregistries ● Public-privatecreditreportingserviceprovider ● CommercialCreditReportingCompanies

(Formoreinformationseechapter2ofthisGuide.)

Model 1. Credit Bureaus (With Commercial Capabilities)Chapter 2 covers the basics of credit bureaus anddiscussesthepotentialrangeofshareholdersorownersof bureaus. Some markets demonstrate a willingness,as determined by stakeholder interest and readiness,to allow credit bureaus to provide credit informationservices in the market. The more common ownership


structuresare(i)bureausinwhichcreditors/lendersareshareholders, and (ii) bureaus that are independentlyownedandoperated.(SeeTable2.1foranoutlineofthebenefitsanddisadvantagesofeachstructure.)Regardless of the bureau’s ownership structure, a keyconsideration in determining the optimal model forsettingoneupinamarket,iswhethertohostthebureauon- or offshore. Credit reporting is a capital-intensivebusinessrequiringsignificantinvestmentsbothforstart-up and, particularly, for the continual technologicalupdates that the activity’s evolution demands (forexample,quality,security,integrityofdata,value-addedservicesdevelopment, compliancewith the legislation,and others). Countries with large populations (suchas China, Brazil, Indonesia, Mexico, and Russia) anda solid credit culture and consumer credit industriesnormally represent an attractive business case forcredit reporting service providers. Significant volumesof inquiries dramatically shorten a bureau’s break-even period for attaining financial sustainability, thusallowing the business to generate earnings and profitswithin an accelerated time. In smaller markets wherelocalcreditbureausalreadyexist,thechallengeremainsof meeting market needs by continuously innovatingand investing in the latest technology and security/cybersecuritymeasures,allwhileremainingafinanciallyviableongoingenterprise.In small markets where local credit bureaus do notalreadyoperate,oroperatelesssuccessfully,partneringwith existing known international credit bureaus maypresent a strong option. Sometimes, however, thesemarkets face more difficulty in attracting skilled andrenowned information providers. Alternative optionssuchasoffshorehosting(alsocalledthehub-and-spokemodel) and, given today’smore advanced technology,cloudhostingmayofferviablesolutions.Theoffshorehostingorhub-and-spokemodelisoptimalforsmallermarketswhereestablishingindividualcreditbureaus would not be economically viable. A single,internationallyoperatingcreditbureauissetuptoservemultiple small markets.As the name suggests, a hubhousesdatainsilosfromeachcountrywhileeachspokereceivesanddeliverssecuredatafortherespectivecountryinwhichitisbased.Thisconfigurationcentralizesmanycommon,repetitive,andtime-consumingtasks,suchasdata cleansing, security, customer-support, and systemmaintenance. It also leverages thehighly sophisticatedsecurity systems already in place for the hub andprovides high-security facilities and systems to storedatafromthespokesatafractionofthecostofcreating

suchsecurefacilitiesfromscratch.DuetothesensitivenatureofthedatahousedbyaCRSP,itiscriticalthattheserviceproviderhaveextensiveexperienceinmanaginga credit reporting service to international standardsand in ensuring that no data is shared across the siloswithout a data-sharing agreement. This approach notonlyofferstopservicequalityforusers/dataproviders,italsoallowssmallemergingmarketstoovercometheinnumerablechallengesoftimeandcostfordevelopingcredit reporting services. Other advantages includereducedstaffingneedsandpersonneltrainingcostsandthe ability to leverage products, technical experience,and the sophisticated value-added services used inadvancedmarkets.Theweb-based technologyusedbymost bureau operators allows easy inclusion of othercountriesorlendingsectorsregardlessofsize.Established in 2000, TransUnion Central America isan example of a hub-and-spoke model, with a hubin Guatemala and regional spokes in Costa Rica,El Salvador, Honduras, and Nicaragua, covering acombinedpopulationofover38million.(ThehubwasoriginallyestablishedinCostaRica,butin2007itmovedtoGuatemala, rapidly andwithout disruption, becausetelecommunicationsnetworkswereofbetterqualityandoperationalcostswerelower.)AnotherexampleofexistsinSouthAfrica,whereTransUnionrunsacreditbureauthat servicesNamibia andBotswana. InEurope, someofthelargecreditbureausoperateonthehub-and-spokemodelorofferbusinesscontinuitycoveragetooffshoreoperationsthroughasimilarconfiguration.ThisincludesanoutsourcedarrangementfortheCzechRepublicandtheSlovakRepublicoperated fromItalybyCRIF(seeBox5.2).SomeofthePacificIslandshavealsoadoptedthemodel.MorerecentlytheUEMOAregioninAfricahas adopted a hub-and-spoke approach. (See section7.7.) The individual country service providers (thespokes)shareandleveragethemodernandsophisticatedtechnological system developed in the hub, thusimproving efficiency. Furthermore, the creation of asinglecross-bordercreditreportingservicefacilitatesthedesignofstandardizedproductsandservicesacrossallUEMOAfive countries,whichgreatly benefits lenderswithcross-borderbusinessoperations.

Model 2. Credit Registries The market assessment might indicate a marketpreference, particularly by the central bank or otherfinancial sector supervisory authorities and regulators,todevelopacreditregistrytomeetthecreditreportingdemands in the market. Chapter 2 touched on the


purpose, features, andorganizationof credit registries.Registries are generally operated by central banks orothermonetary authorities chargedwith a supervisionfunctioninaneconomy.Giventhattheseregistrieshousedata that enable authorities to monitor the systemicrisk levels inamarketandmaintainfinancial stability,a credit registry is typically hosted in the country inwhich it is established.The principles of data quality,integrity, security, and financial sustainability apply totheoperationsofacreditregistry.In some instances, the same entity housing the creditregistry may also be responsible for overseeing itsoperations and ensuring it is in compliance with thelegalframework.InBangladesh,forinstance,thecentralbankischargedwithoperatingthecreditregistry,calledthe Credit Information Bureau, as well as overseeingthe operations of the registry. In Haiti, similarly, theCentralBankhas funded thedevelopmentof a locallydeveloped and operated Credit Information Bureau.Giventhepotentialconflictinherentinthissituation,itwould be advisable for the central bank to entrust thetwofunctions—operationsandsupervision—at least totwoseparatedepartmentswithinthebanktoensurethesystem’sintegrity.InChina,thecreditregistry,theCreditReferenceCenter, isoperatedby thePeople’sBankof

ChinaandsupervisedbytheCreditInformationServicesBureau,aseparatedepartmentunderthePeople’sBank.

Model 3. Public-Private Credit Reporting Service ProviderIn some instances,market stakeholdersmay indicateapreferenceforahybridmodelinvolvingboththeprivateandthepublicsectors.Thismodelisbasedonastrongandsignificantpartnershipbetweenthesectors,withthepublic sector playing a significant role in developingthe infrastructure and processes for credit informationcollectionandsharing.Centralbanks, in theircapacityas regulatory and monitoring bodies for financialinstitutions, are well placed to steer the legal reformsthatmayberequiredandalsotobuildawarenessaboutthe benefits of information sharing among financialinstitutions. In many countries, financial institutionshaveahighdegreeof trust in their centralbank’s roleasan independent thirdparty. In theabsenceofadataprotectionauthority,centralbanksareofteninapositiontoleveragethis“capitaltrust”toestablishcreditreportingservicesinpartnershipwiththeprivatesector.Thismodeloffersseveraladvantages,notablyprovidingthe central bank with a wealth of free informationallowingittoperformitsprimaryfunctionofmonitoring

Banks in the Czech Republic were eager to get the credit information that credit bureaus would supply, but while they were willing to pay on a per-transaction basis to acquire credit reports, they were unwilling to invest in developing a costly data security infrastructure. The solution was to outsource the operations of the credit bureau to CRIF, a leading Italian credit bureau. In partnership with CRIF, two credit bureaus were set up in the Czech Republic, a banking bureau in 2001 and a nonbanking bureau in 2003, both using CRIF’s facility in Italy. In 2006, the two credit bureaus began sharing credit information with each other (based on consumer consent), allowing financial institutions to have access to reliable, cross-industry credit information.Using CRIF’s platform, banks were not required to invest in developing a data security infrastructure for the credit bureau and were able to benefit from a higher level of data security than would have been conceivable in a bureau operated in the country. Fortunately, the legal environment posed no problems: Czech law states that personal data can be processed abroad, provided that the hosting country abides by data protection laws that are the same or stricter than those in the Czech Republic.

Box 5.2. Outsourcing from the Czech Republic

The business model based on outsourcing was designed to achieve the best, most cost-effective solution, along with the highest level of security. It also generated positive impacts on the overall operations. With a local staff fundamentally focused on clients instead of IT issues, a much faster start-up was possible in terms of both data collection and data dissemination. Best practice internal processes were put in place to fully integrate the two cross-border technical structures. Last but not least, the technical and process environment facilitated development of value-added products, reducing cost and time to market.The bureau has reached full penetration in the retail banking market, with 25 member banks. The banking bureau match rate or hit rate13 is 92 percent, which is comparable to the hit rate in the most developed bureau markets. Over 13.5 million records are held in the banking credit register, covering more than 5 million people. The nonbanking bureau, with an additional 40 members from the leasing and consumer finance market segments, now has an additional 4.5 million credit files on 2.5 million people. Inspired by the success of the Czech credit bureaus, the Slovak Republic chose to develop an outsourced credit bureau as well. In partnership with CRIF, a banking bureau was set up in 2004, and a nonbanking bureau in 2008. Both bureaus operate out of Italy.

13. This is the ratio of the number of reports issued to the number of queries received. It represents an important indicator of the ability of the bureau to satisfy lenders’ demand for information.


andmanagingsystemiccreditrisk.Thismodelalsohastheseadditionaladvantages:

● Itpreventsthecreationofamonopolyoninformationsharing by allowing asmany local and internationalprivateentitiesaspossibletoenterthemarket,wheremarketsizesupportscompetition.

● It lays the groundwork for the creation of a solid,competitive,anddynamicinformationsharingmarket,allowing competition in terms of prices and qualityofservices,withtheobviousresultingadvantagesforlendersandconsumers.

● It establishes a complete and seamless creditinformationsystemaccessibletoalllenders.

● Itfacilitatestheinclusionofdataprovidedbyentitiesnotregulatedbythecentralbank.

Adisadvantageof thismodel is theduplicationof effortinvolved,especiallyinsettingupthetechnicalinfrastructure.AsthecollectorofdatafromtheentitiesitsupervisesandthedistributorofdatatoCRSPs,thecentralbankmust,insomecases,establishabasictechnicalinfrastructure(adatawarehouse). Furthermore, the central bank as aggregatorofdatamusthaveandmaintainthecapacitytocontinuetoprovide this service,whichmaybecostly.Public-privatepartnerships have emerged in several markets, such asEgypt,MoroccoandtheUEMOAregion.

Model 4. Commercial Credit Reporting CompaniesPurely commercial credit reporting companies haveevolvedorganically over time in response to amarketneed for information about a fairly opaque creditmarket:lendingtosmallbusinesses.Forthemostpart,commercialcreditreportinghasdevelopedintheabsenceof any specific legal and regulatory framework.Theseentitiesarenormallyorganizedascompaniesregisteredundertheirrespectivejurisdictionallaws.Ascommercialcreditreportingdoesnotdealwithpersonaldata,theseentities are not bound by specific data protection orprivacy legislation.Theyare,however, responsible forcomplyingwithanylegislationregardingtheprocessingofcommercialcreditinformationandanyotherrelevantlegislation. Moreover, these entities should strive toabide by theGeneral Principles for reporting on data,data processing, governance requirements, and cross-bordercreditreporting.Themodelsdescribedabovearenotentirelyexclusive.Acountrymayverywellhavearegistryandoneormoreconsumerorcommercialbureausoperatingsidebyside.In markets where these entities do not already exist,the choice of model will be determined by assessing

the market and, in particular, the stakeholders. Theseassessments will suggest the preferable structure forthemarket, and theoptimalnumberofentitieswillbedeterminedbythesizeofthecreditmarket.

New ModelsIn the more decentralized digital world, several newoptions have arisen as alternatives to the traditionalcentralized database models described above. Forinstance, some service providers are looking at thepotential of compiling and creating records uponrequest, doing away with the need for centralizeddatabasesthatrequireconstantsecurityandmonitoring.New companies are offering or exploring the idea ofportablecreditreportingsolutionsthatenableconsumerstocontroltheirowncreditinformationsharingandmoveitacrossborders.Theseexcitingnewdevelopmentsandinnovationshavehugepotentialtotransformtraditionalconceptionsofthecreditinformationsharingmarket.Akeyindicatoristhateventheleadingserviceprovidersinthespaceareexperimentingandrollingoutprototypesfor new ways of information sharing, indicating anawareness of andwillingness to embrace the potentialofdisruptiveinnovationandtechnologytostayrelevant.

5.6. Identifying Appropriate Technology Needs CRSPs require adequate technical infrastructure andcommunicationsnetworks toprocess andmanagedataand databases as well as to offer effective and securedelivery of credit reports to clients. CRSP technicalinfrastructure systems are not off-the-shelf solutionsthat can be acquired and installed into a computerhardware system. CRSPs usually must develop oracquire locally adapted and customized systems thatwill enable data collection from existing and newdata sources.Theprocessmay take6 to18months todevelopandinvolvesananalysisofavailabledatafromdata sources, preparation of functional specifications,actual system development, and acceptance testing.The process of lenders extracting data from their coresystems isoneof themostchallengingandpotentiallytime-consuming processes that has to be addressed aspartofaCRSPestablishment,anditschallengesshouldnotbeunderestimated.Withrecentproliferationinopenbanking practices and enabling frameworks like theEU’sPSD2,someofthesechallengesmaysoonbecomeathingofthepast,asdifferententitiesincludingcreditreportingserviceprovidersmaybeable toextractdatadirectlyfromdataprovidersthusalleviatingsomeoftheburdenonthelatter.


Figure 5.2. Qualities of a Strong Technical Partner

Technical Strategic

• Experience (years)• Track record / success with setting up credit

reporting services in developing and developed economies

• Expertise of personnel / management team• Ability to provide comprehensive solutions (products,

software and value-added services).

• Willingness to add value to business plan and financial model

• Willingness to take equity positions• Financial strength of company• Management profile• Availability of office / skilled resources in or near

project country• Understanding of domestic banking / credit

market and related issues• Direct relationship (no 3rd party)• Willingness and proposal for know-how transfer.

Source: IFC.

Cost should not be the only driver in the decisionto develop or purchase a technology platform forCRSP operations. In addition to a solid technicalinfrastructure, CRSPs require unique knowledge andexperiencebecauseofthecomplexityoftheirtechnicalinfrastructureand thehighsensitivityof thedataheld.In some emerging markets, newly established CRSPsface a shortage of specialized information technologyandbusinessskills.Inthesemarkets,theparticipationofanalreadyestablishedandexperiencedCRSP,aseithera shareholder or a technical partner, greatly benefits anewCRSP in terms of technical expertise, reputation,crucialbusinessknow-how,andexpertiseindevelopingvalue-addedservicesastheCRSPgrowsandthemarketmatures.Technological advancements in the last decade havedramaticallyalleviatedthecostpressuresofdevelopinginformationtechnologysystemsforthecreditreportingindustry. Until a few years ago, the industry mostlyoperated on heavy and costly mainframes. It is nowpossible for new CRSPs in emerging markets toacquireinformationtechnologyplatformsfromexternalsources—usually internationally reputable technologyproviders—rather than having to build them in-house.

Figure 5.2 outlines the qualities of a strong technicalpartner.When selecting a technical partner, the CRSP needs to evaluate a potential partner according to the followingcriteria:

● Technical: Does the potential partner have thecapabilitytoimplementthesysteminaccordancewiththelocaltechnicalspecifications?Doesithaveatrackrecord in implementing credit reporting services insimilarmarkets?

● Strategic:IsthepotentialpartnerabletocommittotheCRSPoverthelongterm?

● Financial: Is the cost of the system in linewith thedemandforservices?

The CRSP’s technology system must perform thefollowingfunctions:

● Collect, validate, andmerge data from all available,legallypermissibleandrelevantdatasources.

● Generateanddistributereportsandothervalue-addedproductsandservices.

● Providedatasecurityandbackup. ● Providesystemperformanceandmonitoringreports.


These functions are described in more detail in thesectionsbelow.

Collect, Validate, and Merge DataThesuccessofaCRSP’soperationsdependsonitsabilitytoextractcreditperformancedatafromfinancialinstitutionsandotherlendersandtodeliver,ataminimum,creditreportsinaneasy-to-useformat.InthediversecountriesofEgypt,India,andRussia,extractingdatainaformatacceptabletotherespectiveCRSPswasamajorchallengeandrequiredsubstantialinvestmentininformationtechnologyresourcestoupgradelegacysystems.Extractingcreditcardrecordshasprovedmucheasier,sincethesetendtobehostedonmore modern systems that store data in a more logicalformat. Legacy banks, often state-owned or recentlyprivatized banks, andMFIs with large branch networksface a major challenge because often their records arepaper-based and their credit functions decentralized. ForCRSPs operating in thesemarkets, the practical solutionhas typicallybeen to start collecting the credit portfolioswithbetter-qualityinformationfrombanksabletoprovidetheinformationeasilyandthengraduallytostartcollectinginformationfrommore lendersandmoreportfolio types.CRSPs may benefit from open APIs going forward incollecting data. Companies focused on data automationandextractionandfintechsusingthisandproprietarydatafor lendingdecisionsmayhelp traditionalCRSPsexploitthesenewalternativesourcesofdataonceitsqualityandreliabilityisproven.TheCRSPisresponsibleforvalidatingalldataitreceivesbefore uploading it. The initial phase may be laborintensive.TheCRSP’s systemmust includeautomatedprocessestocheckallmandatoryfieldsarecompleteandconformtothestandardformat.Thesystemmustalsobeable to rejectfilescontainingcritical errorsormissinginformation,returningthembacktothedataprovidertoresendacorrectedfile.Afterthedatahavebeenvalidated,theCRSPmustmergethenewdataintoitsdatabase.Thesystemmustbeableto locate the respective subject,whether an individualoralegalentity,usingnationaluniqueidentifiers,suchaspassportoridentitycardnumbersortaxIDsorothermatch-and-mergetechniquesdiscussedinsection5.3.1.The objective of theCRSP is to be able tomatch theincomingdatawiththesinglebestpossiblematchfromallthefilesheldonthebureaudatabase.Once the correct subject file has been identified,the system will update the existing record or, if theinformationrelatestoanewborrower,createanewcreditfileinthedatabase.

Generate and Distribute ReportsWhenenoughdatahasbeenuploadedand theCRSP’sprocessforvalidatingandmergingdataisinplace,theCRSP is ready to generate reports. Figure 5.3 showsseveral common deliverymodes used by CRSPs.Thetypicalmodesofaccessforusersare:

● Online access:Theuser’ssystemisconnectedto theCRSP’sinteractivesystemandtheuserextractsreportsas required.The interaction is system-to-system, thatis,performedentirely throughtheuser’ssystemwithno human interaction.Host-to-host connectivitymaybeagoodsolutionforanewlyestablishedCRSP,sincesomedataproviderswith largevolumesof customerdata could integrate their database systems with theCRSP’s system, thereby eliminating data duplicationand streamlining work flow. Some bureaus andfintechs provideAPIs to allowusers to access creditreportinginformationandintegrateitwiththeircreditmanagementsystems.

● Dial-up or web: TheuseraccessestheCRSP’ssystemviatraditionalinternetbrowsersandPCsoftware.Onceconnected to the CRSP’s system, the user providesthe necessary authentication information (user name,password,andsoon)tovalidateaccess.Thismodeofaccessislessexpensiveandispreferredbyuserswhoareeithernottechnicallycapableofpermanentsystem-to-systemconnectionsorwhosubmitlimitedinquiriesto the CRSP. Increasingly, information is accessiblethrough mobile applications, using SMS technologyand other means that make the information readilyavailable,on-the-goandinformatscustomizedtomeetspecificuserneeds.

● Batch access:DataprovidersdeliverinformationtotheCRSP electronically or via portable storage devices.Batchaccessprovidesuserswithacost-effectivemeansofprocessinglargevolumesofinquiries.Itisusuallyrecommended for processing of risk monitoring forlargeclientportfolios.

● Consumer access:Consumersseekingcopiesoftheirownreportsmustbeabletoapproachthecreditbureauinperson,viaanapprovedagentnetwork,orusingaweb-basedsolution.

Provide Data Security and BackupData security is a high priority for CRSPs and dataproviders because they manage highly confidentialconsumer information.Securesystemsprotect thedataandreportsandindoingsoprotecttheCRSP’sintegrityandreputation.Theenormousamountofdatacollectedisstoredindatabasesystemssubjecttoloss,tampering,


destruction, theft, or misuse. Specific measures andsafeguardsshouldbeadopted tocopewith the logical,physical,andorganizationalaspectsofdatasecuritywiththe objective of containing and limiting data securitybreachesand, intheevent theyoccur,addressingthemswiftly.Ensuringdatasecurityisanongoingobligationand safeguard measures should be regularly reviewedand updated to be effective against newly emergingthreats.Somesecuritypoliciesmightinclude:

● Limiting access to the database via mechanisms foridentifying and authenticating users (including staffandcontractors)

● Maintainingandmonitoringlogstotrackeachaccessto the database

● Protecting the database against cyber breaches(hackers)andmalwareattacks

● Continuallymonitoringthreatstoexistingtechnologiesandensuringup-to-dateprotectionforthesame

● Maintainingadatabaseback-up ● Ensuringappropriategovernancestructure ● Continually updating all items stored in an offsiterecoverydatabase

● Periodically testing backup hardware and recoveryplans

● Delineating authority among network administratorsandstaff

● Ensuringphysicalsecurityofthefacility,thesystems,and the data

● Instituting organizational security policies andproceduresforhandlingdifferenttypesofdatasecuritybreaches

Withtheincreaseincybersecuritythreats,creditreportingservice providers (particularly those handling personalconsumer information) will increasingly be requiredto comply with relevant cybersecurity regulations indifferentjurisdictions.

System Performance and Monitoring TheCRSPshouldcreateaplanforrespondingtodifferentthreats and assign specific accountability to differentpersonnel (such as network administrators and ITdirectors)forensuringcompliancewithsecuritypoliciesand procedures. CRSPs should develop and routinelytestbusinesscontinuityplans,andmanagementshouldprovideforregularITauditcheckstoensureadherencetoandenforcementofsecuritypoliciesandprocedures.Existingandnewstaffshouldbeawareof thesecuritypoliciesandproceduresthroughregulartraining,changesto these policies, and procedures and consequences for violating the policies and procedures. ExtensivebackgroundchecksshouldbeconductedonCRSPnewhires.Inaddition,managementshouldreviewandupdatesecuritypolicies andproceduresperiodically to ensureconsistency with important factors, such as changingstandards for data security, changing regulations, andsystemupgrades.

5.7. Operational and Practical ConsiderationsTheCRSP’sfirstoperationaltaskistocollectinformationfromdataprovidersanduploadtheinformationontoitsowndatabaseforfurtherprocessing.Informationsharingbetween CRSPs and data providers/sources is usuallygoverned by agreements between the parties. Sincetheprincipleof reciprocity is thebasis forexchanginginformation, data providers are generally also users ofthedata.Insomeexceptionalcases,amember(suchasapublicdatasource)mayagreeonlytosupplyinformationandnottorequestinformationfromtheCRSP.Insomeinstances, a user (such as a regulator or supervisor)may not contribute data to the database. Figure 5.4summarizes the key issues to address in agreementsbetweenCRSPsanditsusersanddataproviders.Inthecaseofregistries,thelegalmandatetoprovidedatawilltakeprecedenceoveranyagreements;however,theregistryanddataprovidersstillneedtoagreeondataformats,datainputs, reportingfrequency,modeof reporting,andotherdetails.Theownerof the registry (mostoften thecentralbank)willalsoneedtoensurethatdataprovidersabidebytherulesandsubmitdatainrequiredformatsonscheduletoensuretheintegrityofthedatabase.

Figure 5.3. Common Delivery Modes for CRSPs

Source: IFC calculations, based on Doing Business 2019 data.

0

20

40

60

80

100

120

140

Via Internet Via Website

Credit Bureaus Credit Registries

89

127 125

93


Source: IFC.

Contracts/Agreements

Users Data providers

• Principles of reciprocity• Rules of data sharing• Data ownership• Usage protocol• Confidentiality• Cost of services and availability• Adherence to data protection and / or consumer credit legislations• User obligations to provide accurate, timely data• CRSP responsibility to process data, maintain integrity and security• Other clauses concerning claims, costs, damages and penalties for inaccurate data.

• Protection of the CRSP, users and consumers• Commercial conditions on external data provisions

and usage• Restrictions on the use of the data• Stipulate frequency of updates • Notification of errors in the information • Specify type, media and format of updates• Notification of changes to type, media and/or format

of the data• Process to ensure high data quality standards • Data protection implications with the data supplied• In case of outsourcing, a Service Level Agreement

defining, obligations, availability of data, access to the database, backup, etc.

• Purge rule.

Organizational Structure

Pre-Operational Phase

Initially, staff members should cover more than onerole, whenever possible. The early phase of a CRSPcanessentiallyberunbyageneralorprojectmanager,an office/communication manager, and a technicalcoordinator. Ingeneral,employingageneralorprojectmanagerwho isknowledgeable,experienced,andwellconnectedin thefinancialsector iscriticalforsuccess.Inadditiontoprovidingtechnicalassistance,areputableinternationaltechnicalpartnercanalsoprovidestrategyand business development support to management.Finance, administrative, and legal functions can beoutsourcedatthebeginning.

Operational Phase

OncetheCRSPbecomesoperational(thatis,thesystemhas gone live and has started selling its first reports)severalfactorsaffectthedecisiononstaffing.ACRSP’sfunctionanditsemployees’dutiesaretoobtainaccount

historydatafromdataprovidersandtosortandaggregatethe data into personal credit histories. The CRSP’ssystemthengeneratesreportsbasedonthecaptureddata.Amongthefactorstoconsiderindeterminingworkloadsarethefollowing:

● Numberofexistingandpotentialsubscribers ● Number of branches/workstations connected to theCRSP

● Inquiryvolumes ● Competitors’strength ● Consumerawarenessandeducationneeds ● Projectedandactualdatabasesize ● GrowthplansfortheCRSPincludingnewproductsandservices,newmembers,newusers,newtargetmarkets

● Complexityofoperations(suchastheneedforoff-linechecks/updatesovernightoronweekends)

● Dispute resolution trendsThe main divisions of the operational CRSP are ITand Operations, Compliance, Business Developmentand Marketing/Sales, and Finance/Administration.

Figure 5.4. Key Items in Contracts/Agreements with Users and Data Providers


Divisional heads in each area report directly to thechief executive officer (CEO)/managing director, whomanages the company’s activities and, in turn, reportstotheboardofdirectors.Theboard,whosemembersareappointedby theshareholders/ownersof thebureau, isresponsibleforoverallcorporategovernance.Ideally,theboard should include an independent director and one or twomembersoftheexecutiveteam(theCEO/managingdirector and operations director/representative of thetechnical partner). The board of directors nominatesoneofitsmembersaschairmanoftheboard.Figure5.5showsasampleCRSPorganizationalstructure.Staffing requirements and responsibilities for anoperationalCRSPareoutlinedinTable5.1.The CRSP should operate a help desk or customerservicedepartment.Helpdesktechnicalexpertsshouldassist members/users who have problems connectingto the system,uploadingdata, andmodifying someoftheirdata.Theymayalsoassistnewlendersthatrequireadditional help in enabling their internal systems toconnecttotheCRSPsystem.

Figure 5.5. Sample Organizational Structure of a CRSP

CEO/MD

Assistant to CEO

Head of Business Development & Marketing Head of IT & Operations

Legal/Compliance Unit

Customer ServiceSales & Marketing OfficersAdministration Officers

Database Officer

Network Administrator

IT/Support Services

Head of Finance / Administration

Source: IFC.

Thehelpdeskorcustomerservicedeskalsodealswithconsumersandfirms thathavequeries regardingcreditreportsortheirinformationontheCRSP’sdatabase.Theyshouldbeequippedtosupportcustomersinaccessingtheirowncreditreportsorscores.Thehelpdeskstaffshouldbe knowledgeable on theCRSP’s redressmechanisms,such as registering customer complaints and providingothereducationalinformationtocustomersinaccordancewiththeCRSP’soperationspolicies.Toaccommodatetheneedsofgrowingnumbersofusersand borrowers and their respective requests, most ofthe growth in staffwill occur in the customer servicedepartment.Thesalesandmarketinggroupwouldalsoneed to grow to promote the CRSP’s products andservicesasitseekstoexpandintonewmarkets.Last but not least, it is recommended that the CRSPappointacomplianceofficer(s)earlyonintheoperationsset up process. CRSPs, which are regulated in mostcountries,needcomplianceofficers toensure that theyare in compliancewith regulatoryobligations, internaloperationalpolicies,andindustrycodesofconduct.


Table 5.1. Operational Phase Staffing

Role Key TasksCEO/Managing Director • Overall bureau strategy

• Marketing / business development activities• Overall responsibility for performance of company Reporting to shareholders and Board

Head of Finance and Administration

• Finance and administrative operations • Human resources functions (recruitment, compensation, performance management, career development).

Finance / Administration • Day-to-day administrative and bookkeeping operations.

Legal Counsel • Overall legal support• Internal legal training.

Head of Business Development & Marketing

• Market segmentation • Product development• Branding• Advertising• Sales and promotion.

Sales & Marketing Officers • Maintain relationship with existing clients and enroll new client• Implement sales & marketing plan and achieve business objectives• Advertising, conferences/exhibitions• Sales and promotion• Market research• Media affairs• Identify new data sources.

Head of IT & Operations • Vendor relations• Data management• Technology management• Network and security operations• Customer service.• Member and user training.• CRSP staff training.

Customer Service Officer • Consumer Help Desk.• Member/user support.

Database Officers • Data quality checking procedures• Data uploading• Emergency updates.

Network Administrator • Network administration• Subscriber communications interfaces• Network security.

IT Support Service • Housekeeping• System administration• System and software updates and maintenance• Subscriber and internal Help Desk

Compliance Unit • Internal process audit• External compliance• Oversee data quality and dispute resolution process.

Source: IFC 2012.


Financial ProjectionsForecastingfinancialoutcomesofanewlyestablishedCRSPrequiresanassessmentofpotentialrevenueandcosts, and an identification of the drivers in each ofthesecategories.

Revenue ProjectionsThemain revenue driver for the CRSP is the numberofcreditreportsorvalue-addedservicessold.Revenueprojections are based on the estimated demand forcreditreportsandthepricingofreports.Inmostcases,theCRSPchargesaflatmembership feeplusachargeperinquiry(perclick).Volumediscountsusuallyapply,anditiscommontohaveapricingmatrixthatdependson thevolumeof inquiries and the typeofuser.Table5.2providesahypotheticalpricingmatrixbasedontheannual inquiry volume per user. The cutoff points forvolume discounts are determined based on projecteddemandandaverageexpectedinquiries.ItisimportanttonotethatthepricingmatrixinTable5.2 is purely hypothetical and is not intended as abenchmarkforanymarket.Pricingineachmarketwillultimatelybedeterminedby thesizeof themarket intermsofcreditactivepopulation,thenumberofrecordsin the database, the number of system users, and thevolume of inquiries generated by users. In general,lendersincountrieswherethesizeofthecredit-activepopulation is small will face higher prices.Within agiven market, lenders generating smaller volumes ofinquiries(basedonthesizeoftheirlendingportfolio),including smaller microfinance lenders, would facehigherprices.Withtheincreasedfocusonmicrofinancecredit reporting, however, CRSPs are beginning toacknowledge the need to price microfinance lenders’products and services differently than those fortraditionalcommerciallenders.

The inquiry-demand estimate should be based on asurveyofpotential users.Thefinancial projections forrevenue should allow time between the launch of aCRSP’soperationsandthebreakevenpointatwhichitwillachieve its targeted inquiryvolume. It iscommonfor many technical issues to arise relating to lenders’connections to the CRSP and to integration of CRSPinformation into lenders’ billing cycles. Resolvingthese issuesmaytakeat least three tosixmonths.Thegrowthrateforthevolumeofinquiriesisbasedontheprojected credit growth rate for the economy and theexpectednumberofnewusersjoiningthebureau.It isfeasibletohavegrowthratesof50percentandaboveinthefirstthreetofiveyearsofaCRSP’soperationsinacountrywithstablecreditgrowthandnewusersjoiningtheCRSP.

Cost Projections

Inlargepart,costsaredrivenbythechoiceofwhethertoacquiretheCRSP’stechnologyplatformortodevelopthe technology platform in-house.With either choice,thepossiblecost range iswideandwilldependonthesystem’slevelofsophisticationandthetypesofproductsitisexpectedtoprovide.Costprojectionsbasedontheassumptionthatanexistingplatformwillbeacquiredshouldincludethefollowingcostelements:

● Development/customization/installation fee for thetechnologyplatform(usuallypaidininstallments)

● Maintenance fee, usually a flat fee paid monthly,quarterly,orannually

● Licenseandroyaltyfeespaidtothetechnicalpartnerbased on the number of inquiries received by thesystem in addition to fees to cover ongoing updatesandenhancementstothesystem,usuallyatanagreed-upon rate

● Consultancyfeeschargedbythetechnicalpartnerforanyserviceoverandabovetheservicesspecifiedinthedevelopmentandmaintenanceagreement.

Otherelementstobeaddressedinthecostprojectionsinclude hardware such as database and networkservers, network equipment and workstations,system software applications, disaster recoveryarrangements,officefurnitureandequipment,utilitiesand telecommunications expenses, labor costs, andmarketing costs, all of which can be substantial.Ascountrieslookatcloudbasedsolutionsandwithgreateraccess to the same, several credit reporting systemsmaypotentiallymigrate to or behosted in the cloud,whichcanchangethecoststructureoftheseplatforms.

Inquiry volume Price per Inquiry (in US $)<25000 1.75

25,001 – 50,000 1.0050,001 – 100,000 0.95100,001 – 250,000 0.85250,001 – 500,000 0.8

>500,000 0.7

Table 5.2. Hypothetical Pricing Matrix for Credit Reporting Service Providers

Source: IFC 2012.


In some cases, an important cost component is thecostofdatatheCRSPmayacquirefromexternaldatasources;forexample,asourcethatcontractstoprovidedataonlytotheCRSP.Table 5.3 provides a hypothetical profit and lossstatementforthefirstfiveyearsofaCRSP.The above table itemizes the typical line itemsobserved in a consumer credit bureau business plan.The template may be leveraged to create businessplans for commercial credit reporting companiesand credit registries. For instance, commercial creditreporting companiesmay spend a significant amounton purchasing data from different sources, such asbusinessdirectories,andsoon.InpreparingabusinessplanfortheCRSP,itisimportanttoassesshighandlowscenariosforprofitabilitybecausethe successfuloperationalizationof theCRSPdependson many external factors. CRSPs often face start-updelays caused by banks’ inability to upload data, forexample.Inmanycountries,historicaldataissimplynotavailable to populate the database.Thefirst fewyearsmaybededicated tobuilding adatabase from scratch.Underestimationofcostsortimerequiredtocustomizeand implement the system is common. Usually, thismeans theCRSPmay pay high consulting fees to thetechnologyprovidertofinalizesystemimplementation—likely delaying the breakeven point—and it may alsoprove costly for data providers that must adapt theirsystemsbut lack thebudget or skill sets to do so in atimelyfashion.Although the need to generate revenue is obviousfor consumer credit bureaus and commercial creditreporting companies that generally operate forprofit, it is not as clear-cut for credit registries.Most credit registries are established under themandate of a banking law, on a not-for-profit basis,to enable prudential supervision and systemic riskmonitoring of the financial system. Traditionally,the tendencyhasbeennot tochargeusers(regulatedfinancial institutions) for reports. This was the casefor most registries operating in Latin America andthe Caribbean. Their revenues would thus be zero.Insomecountries(forexample,Algeria,Azerbaijan,Bangladesh,China,Lebanon,andMaldives),thelawempowers the registry to recover theoperatingcostsforitsservices.Pricingpoliciesenablingregistriestorecovercostsseemprudentinlightoftheobjectiveofmaintainingfinancialsustainabilityofoperations.

Measuring Effectiveness of a Credit Reporting ServiceThe effectiveness of a CRSP, like that of any otherbusiness, can be measured in many different ways.A good performance measurement system includesmultipledimensionsofperformance,includingfinancial,operational, and behavioral characteristics. The keycategories for measurement include quality, quantity,timelinessofproductsandservicesdelivered,financialperformance,andcustomersatisfaction(seeFigure5.6).

Quantity

Thiscategoryisameasureofthevolumeofgoodsandservicesdelivered.Relevantindicatorsinclude:

● Number of queries received by the system over the reporting period. This is the key measure of thedemandfortheCRSP’sservices.

● For consumer credit bureaus and commercial creditreportingcompanies,thenumber of credit reports sold. This key output measure can also be tracked at theproduct level:howmanybasic reportsare sold,howmanyreportswithcreditscoresaresold,andsoon.

● Number of borrowers with credit records in the system at the end of the reporting period. This can also betrackedfordifferentcategoriesofborrowers, suchasfirmsandindividuals.

● Number of records in the system at the end of the reporting period.Eachborrowermayhavemorethanonecredit line, and thehistoryoneachcredit line isstoredseparately.

Figure 5.6. Key Performance Indicators of a Credit Reporting Service Provider

Source: IFC.

Quantity Quality

Timeliness

FinancialPerformance

CustomerSatisfaction


● Hit ratio. This is the ratio of the number of reportsissued to the number of queries received. It is animportant indicator of the CRSP’s ability to satisfylenders’ demand for information. The hit ratio isindicativeofthedepthofdataavailableintheCRSP.

● Number of products offered. This measure couldinclude basic reports, detailed reports, credit scores, alerts,portfoliomonitoring,frauddetection,consumerproducts,andotheritem.

A CRSP’s objective is to simultaneously increase itscoverageratio,definedasthenumberofborrowersinthesystemdividedbytheactivepopulation,anditshitratio.Considerationofonlyoneof these twomeasuresdoesnot provide an adequate understanding of the CRSP’sperformance.ThehitratiomaybehighinaCRSPwithavery lowcoverage ratio, forexample.Thissituation,oftenfoundinunderdevelopedcreditmarkets,indicatesthattheformalfinancialsystemservesasmallgroupofindividualsandthatmostlenderscontinuetargetingthesamegroupfornewlending.

Table 5.3. Hypothetical Profit and Loss Statement for a Consumer Credit Bureau Year 1 Year 2 Year 3 Year 4 Year 5

Total revenue (in USD) 0 500,000 1,000,000 1,750,000 2,625,000

% change in revenue 0 100 75 50

Costs

Operating cost

Labor 315,000 346,500 450,450 585,585 761,261

Rent 50,000 52,500 55,125 57,881 60,775

Utilities 1,500 1,800 2,160 2,592 3,110

Office equipment, supplies 7,000 8,000 8,000 8,000 8,000

Telecommunications 14,400 17,280 20,736 24,883 29,860

Audit, legal and other fees 12,000 12,000 12,000 12,000 12,000

Insurance 13,000 13,000 13,000 13,000 13,000

External data, marketing 20,000 25,000 30,000 37,500 46,250

Total operating costs 432,900 476,080 591,471 741,441 934,256

% of total cost 52% 55% 54% 53% 53%

Fixed costs

Rent, furniture, other fixed costs 20,000 20,000 20,000 20,000 20,000

System hardware & software 75,000 75,000 75,000 75,000 75,000

Technology platform 300,000 300,000 400,000 550,000 725,000

% of total cost 36% 34% 37% 40% 41%

Total fixed cost 395,000 395,000 495,000 645,000 820,000

Total cost ($) 827,900 871,080 1,086,471 1,386,441 1,754,256

% change in cost 5% 25% 28% 27%

Net income before interest & taxes ($) (827,900) (371,080) (86,471) 363,559 870,744

Tax 0 0 0 109,068 261,223

Net income after taxes ($) (827,900) (371,080) (86,471) 254,491 609,521Source: IFC.


Quality

This category refers to the accuracy, completeness,consistency, and currency of the CRSP’s data.Information,themainassetoftheCRSP,onlyhasvalueifitisaccurateandcurrent.Relevantindicatorsofqualityinclude:

● Number of complaints. The CRSP must have amechanism to receive and log complaints fromconsumers/borrowersabouttheaccuracyofinformationintheircreditreports.

● The percentage of complaints with inaccuracies due to actions of the CRSP.Many complaints that aCRSPreceivesmaybeunjustifiedorresultfromerrorsstemmingfromthedataprovider.Trackingthenumberof complaints that can be attributed to the CRSP’sactionsallowstheCRSPtoimprovethequalityofitsprocesses.

● Data quality reports.TheCRSPshouldrundataqualityreports to analyze the completeness and consistencyof the data. Such reports produce tabulations offields such as IDs and addresses, dates of birth, andother identifying information, allowing the CRSP todetermine whether the system contains duplicate orincompletefiles.

● Number of rejected files. When accepting a datafile from the data provider, the CRSP runs simpleconsistencychecksonthedata(forexample,checkingfor minimum inputs). If the file does not pass thistest,thesystemrejectsitandsendsitbacktothedataprovider.TrackingthenumberofrejectedfilesallowstheCRSP tomonitor thequalityof data available inthemarket.

Timeliness

CRSPsshouldmonitortheirperformancebasedonhowquicklytheycanrespondtoinquiries/requestsfromusers,how quickly they can turn around requests to rectifyerrors,andhowquicklytheycanupdate,assimilate,andmergerecords.(Seealsosection5.2.2ofthisGuide.)

Financial PerformanceWhereasreturnonequity,profitmargins,andoperationalcostsarestandardindicatorsoffinancialperformance,theCRSPmayalsotrackmorespecificindicators,suchas:

● Profit margin per product line.TheservicesthatCRSPs(mostly consumer and commercial bureaus) providevarygreatlyandareboundtohavedifferentlevelsofprofitabilityandcost structure.While theCRSPmaysellcreditreportsatarelativelylowcost,forexample,itmaysellanalyticalproducts,suchascreditscoringandportfoliomonitoring,athighermargins.

● Profit margin per client. CreditBureausaimtoattractlarge creditors by providing significant volumediscounts.On theflip side, smaller creditors such asmicrofinanceinstitutionsarelesslikelytopaythesameprices for credit reporting products as their bankingcounterparts.Thebureauwouldstandtogainmorebyofferinglowerpricestosmallcreditorstoattractgreaternumbersofthemtoenrollasbureauusers.Analysisofprofitmarginsbyclientsallowsabureautobettertailoritspricingstrategy.

Registries that do not operate for profit will want tocloselymonitorthesustainabilityoftheiroperationsyearafteryearanddevisesimplecostrecoverymechanisms.

Customer Satisfaction

Methodsusedtomeasurethiscategoryincludecustomersurveysoractionstakenbycustomers.

● Number of complaints. By tracking complaints fromlenders separately from those of data subjects, thebureaucanidentifyareasforimprovement.

● Average time to resolve complaint. Providing fastresponsestocomplaintsisonewaytoimprovingclientsatisfaction.Helpdeskswithstaffavailabletoanswerquestions and complaints promptly can contribute tothiseffort.

Systematically trackinga setofkey indicators enablestheCRSP tomonitor its performance and formulate aclearstrategytoimproveservice.


Developing Value-Added Services

As competition increases in every sphere, includingin credit information sharing, traditional serviceproviders are pushed to develop innovative productsand services to meet their users’ growing needs. Thisentailsprovidingawholesuiteofservicesthataddressalltheneedsofcreditorsfromprospectingtooriginationto portfoliomanagement and collections.Additionally,serviceprovidersarepushedtowardfindingnewer,moreefficientwaysofservingcustomerswhileenhancingthecustomerexperiencethroughsophisticatedandevolvinguserinterfaces.Value-added services (VAS) comprise a broad classof products thatmore sophisticated credit bureaus canoffer. (Based on the functional differentiation betweenbureaus and registries, discussed in chapter 2, value-added services generally fall within the domain ofbureaus, although some registries, such as those inFranceandPalestine,dooffercreditscoringproducts.)Such services entail themanipulation, processing, andanalysisofrawcreditandfinancialdatatoproducetoolsthatcanbeeasilyintegratedintootherfinancialproductsandtools.Therangeofpotentialvalue-addedservicesisextensiveandincludes,butisnotlimitedto:

● Marketingservices ● Creditscoring ● Applicationprocessing ● Portfoliomonitoring ● Fraud detection ● IDverificationthroughdigitaltechnology ● Collections ● Businessinsights ● Consumerproductsandservices

● Commercial credit reporting products and services,suchasbusinessinformationonenterprises(referencedata), ratings, financial ratios of companies,informationonshareholdingpatternsandshareholders,economicgroupscomposition,balancesheets,ad-hocinvestigations,andmore

Raw credit data can be useful in each of these areas;however, significant time, resources, and expertise isrequiredforproperanalysisandinterpretation.Avarietyof techniques, ranging from simple data aggregationandcross-referencingtocomplexstatisticalalgorithms,can provide lenders with a simple interpretation ofinformation(suchasariskscore).

6.1. Automated Decision-Making Systems Given the volume of decisions typically required tomanage a retail portfolio (for example, grant/rejectfacility,over-limitauthorization,crosssell/upsell,pastdue action required),many lenders turn to automationfor efficiency. Credit information as raw data can beextremely difficult to integrate into such systems, butfortunately, many types of VAS (such as applicationprocessingsystemsandbehavioralriskassessment)lendthemselveswelltoinclusioninautomatedsystems.Themajorbenefitofautomateddecision-makingsystemsis that they allow users to manage many customerdecisionson an exceptionsbasis rather thanhaving torevieweachcase.Thisreducestheneedtoemployhighlyexperienced,oftenveryexpensive,individualstomakemundaneorrudimentarydecisionsandallowslenderstochanneltheirexperienceintomoreproductivetasks.

CHAPTER

6.

82 CHAPTER 6. DEVELOPING VALUE-ADDED SERVICES

Larger financial institutions operating in developedmarketstypicallydevelopcustomizedvalue-addingtools,eitherusingin-houseanalyticalteamsorbycontractingwithoneof themanyspecializedcompanies thathaveemerged to service this market. Smaller financialinstitutions,particularlyinemergingmarkets,mayhavecustomer databases too small for such solutions to bestatisticallyreliableormayfinditdifficulttojustifytheup-frontcapitalcostofdevelopment.In emerging markets, therefore, the credit bureau canplayanimportantroleinmakingtheseservicesavailabletoabroaderaudiencebypoolingdataacrossarangeofcustomers and by spreading the cost of developmentacrossitsuserbase.Althoughusersstillmustpayfortheseservices,typicallyona“payasyougo”or“click”basis,theygetimmediateaccesstothebenefitsofimprovedlendingmethodologies,morecost-effectiveprocesses,andincreasedoperationalefficiency that, under other circumstances, would beavailableonlytolargerinstitutions.

6.2. International Industry Trends in Developing Value-Added ServicesThe range of value-added services offered by creditbureaushasbroadenedsignificantlyoverthepastthreedecades, fueled both from the demand side—userswanting increasingly sophisticated products—and thesupply side—bureaus trying to increase or maintainincome margins in an environment of downwardpressureoncommodityprices(thecostoftherawdata).The scope of products offered is a function of theenvironmentinwhichthecreditbureauoperates:thatis,theextenttowhichtherawdatacanbeused.Thetrendindevelopedmarketshasbeentocreateasuiteofvalue-addingproductsalignedtowhatissometimesreferredtoasthe“customerlifecycle.”Figure6.1displaysthecorebusiness functionsmost lenders applywhenmanagingcustomers: prospecting and marketing, new businessacquisition (loan processing), customer relationshipmanagement,andcollections.Thecreditbureau,typically,buildsproductsorsolutionstohelpitscustomersineachofthesebusinessfunctionsmakebetteror fasterdecisionsbyusing thepredictivenatureofbureaudata.Ineffect,thebureauisrecyclingitsdatabasessousersaccessfilesbeyondjustatthepointofaninitialloaninquiry.Abehavioralscoringsystemmayaccessacustomer’screditfilemonthlytoidentifyupdates,forexample,ratherthanonlyatthepointofapplication.

Figure 6.1. Customer Life Cycle: Offering Value-Added Services

Source: IFC.

SomeVASmaybenomorethanenhancedbureaureports,suchasanalertservicethatproactivelyadvisesalenderofachangetoacustomer’sfileandrequireslittleintheway of analytical expertise. Having introduced theseservicesatarelativelyearlystage,mostcreditbureausaim to move up the value chain to add increasinglymore sophisticated tools, such as scoring and creditinformationmanagementsoftware.Thesemorecomplexsolutions have the dual benefit of generating greaterrevenues for the bureau and also of locking clients into bureau services (that is, users becomemore relianton thesupplyingbureauand thus less likely to turn tocompetitivesourcesofinformation).More mature bureaus tend to use specialized internalanalytical teams to develop andmaintain these value-added services. More frequently, however, bureausoutsource their development, often to the samespecializedvendorsthatsupplycustomservicesdirectlyto the lenders.The critical issue, however, is notwhodevelopstheservices,butwhentheycanbeoffered.Thecreditbureaudatabasesinmostdevelopedcountrieshavehadmanyyearstodevelop,arerichininformation,and usually offer high-quality data, thus providing anidealbasefordatamininganddatamodeling.Thecreditbureaudatabases inmanyemergingmarkets,however,areconsiderably less rich:Theymayhave informationonlyfrombanksandmaynothaveoperatedlongenoughtohousehistoricinformationandbuildthediversityofinformationsourcesrequiredforvalue-addedproducts.

ProspectingWorkout

CustomerManagement

CustomerAcquisition

Marketing Services:

Customer profiling

Geodemographics

Prospect lists

Mail screening

New Business:

Application Processing

Bureau Scores

ID Verification

Fraud Detection

CustomerRelationshipManagement:

Portfolio Management

Behavioural Scoring

Monitoring &Evaluation

Collections:

Skip Tracing

Debt Management/ Acquisition

File Access(Consumers) ProspectingWorkout

CustomerManagement

CustomerAcquisition

ProspectingWorkout

CustomerManagement

CustomerAcquisition

Marketing Services:

Customer profiling

Geodemographics

Prospect lists

Mail screening

New Business:

Application Processing

Bureau Scores

ID Verification

Fraud Detection

CustomerRelationshipManagement:

Portfolio Management

Behavioural Scoring

Monitoring &Evaluation

Collections:

Skip Tracing

Debt Management/ Acquisition

File Access(Consumers)


In these circumstances, it may be difficult, or indeedimpossible, to build some of the more sophisticatedsolutions,suchascreditscoring.Planning forVASdevelopment requires understandingthestagesrequiredforacreditbureautomature.

Stage 1: Initial Deployment

At inception, a new credit bureaumustwork to buildup its database of records. In some instances, no datamaybeavailable,andthebureaumustessentiallystartfrom scratch to build up a records database. In otherinstances, particularly in the case of consumer creditbureaus, the regulatorcanstep inandmandate thatallregulated entities collect consent from their borrowerstosharehistoricalandnewcreditdatawiththebureau.Thisprocess,whichshouldoccurpriortodevelopingthebureau,enablesthebureautopopulateitsdatabasewithhistoricalrecords.

Stage 2: User Acquisition

Although not necessarily the case in all countries,the trend in many emerging markets is for the initialdevelopment of credit bureaus to take place withinthe banking community. The main driver behind thisapproach is that the banks are themajor providers ofcredit and have one clearly defined supervisory entity.The first step is to upload the data from the initialmembers,thatis,thelenders.

Stage 3: Data Diversification

In parallel with Stage 2, the bureau attempts toaugment thebasiccredithistorydatawithother formsof information that may be beneficial to users, suchas electoral rolls, identity records, court judgments,telephone numbers, and company registration records.Thistypeofdatacanbeparticularlyusefultomembers:Itmaybepredictiveof futureborrowerbehavior,or itmaymaketheirprocessessimplerbyprovidingaportaltoaone-stopdatashop.Thedataalsoprovideavaluablesourceofinformationfordataminingandmodeling.

Stage 4: User Diversification

Even if banks take aproactive role in establishing thecreditbureau,itisoftenclearfromtheoutsetthat,atsomepoint, theuserbaseshouldexpand to includenonbankcreditors, such as telecommunications companies andmicrofinance lenders. The introduction of new userscan have a profound effect on the composition of thebureaudatabasesand,therefore,onthepredictivenatureof the data. In several countries, expanding to include

telecommunications providers has had a significantimpactonthepredictivepoweroftheinquirydatabasebecause the pattern of telecommunications paymentsmaybeindicativeoffuturedefaultsonbankcredits.With the explosion of new data sources and types,consumer bureaus are looking at capturing data fromthese new sources, depending on their reliability andpredictiveness. All data relevant to making creditdecisions should be shared across different marketplayers. In reality, however, as different actors amasslargedatabases,likethetelecomproviders,theytendtoguard thedata andnot share anyof it, leading todatafragmentation.Whileacceptanceisgrowingoftheneedto integrate alternative forms of data, like data fromtelecoms, utilities, and others, with credit informationsharing platforms, the number of the alternative dataproviderssharingdataisstillfairlysmall.Forthemostpart,theincentivesforsharingdataarenotwellarticulated.A whole host of other challenges to integrating datafrequentlyarise,amongthem:databasesmaynotrecordinformation systematically; thequalityof datamaybesuspect; platforms may not be interoperable, creatingintegrationissues;noclearmandateprevailsforsharingdata;theorganizationsarenotsetuptocollectandsharedata and do not have relevant resources assigned forthese purposes; and the supervisory bodies overseeingthese providers are frequently not the same ones thatsupervise the traditionalfinancialsector. In thecaseofthenewgenerationofdata,includingbigdata,however,examples exist of nonservice providers that leveragesuch data and successfully build digital identities andcredithistories,particularlyformarginalizedsegmentsofsociety.Althoughtheregulatorylandscapesurroundingthesenewplayersandtheuseofthesenewdatasourcesremainsunclearatthisstage,itcouldpotentiallyplayabigroleinhowthesesourcesgetmainstreamed.Adding new bureaumembers also has implications interms of reciprocity, namely access to the informationon the basis of their level of data contribution. Therulesofreciprocityextendtothedesignanddeliveryofvalue-addedproducts.Abureauscorethat incorporatespositivecredithistoryinformation,forexample,shouldnotbemadeavailable toamember thatprovidesonlynegativeinformation,evenifthememberneveractuallyseesthepositivedata.

Stage 5: Database Maturity

Credit bureau databases change over time as theavailabilityofdatasourcesandthenumberandtypeofuserschange.Databasestypicallytendtogrowinboth


depthandbreadth—butnotalways.Privacyrestrictionscanresultinchangestotheavailabilityofcertaintypesof information,aswas seen in theUnitedKingdom in2000,whenrestrictionswereplacedonusingelectoralrollinformation.In general, the core bureau database needs a periodof time to mature through the stages of developmentoutlined above before its data can be predictive of afutureoutcome(seesection6.3.1). Theever-changingnature of the database explains why value-addedproducts and services require continuous monitoringand fine tuning. Estimates based on today’s datamaynotapply12monthsfromnowastheoveralleconomicenvironmentmaychange.

Stage 6: Service Expansion

No rules apply as to when VAS can be introduced.Simpleservices,suchasexpandedcreditreports,canbeintroducedat lowcost at a relativelyearly stage, evenduringStages2and3.Bureaustypicallydevelopmoresophisticatedproducts,suchascreditscoring,whichareusuallymoreexpensivetobuildandmaintain,whenthedatabaseandtosomeextenttheuserbasehavereachedalevelofmaturitywheretheresultingproductswillbebothrobustandhaveareasonableshelflife.ThislevelismostlikelytooccuroncethebureauhasreachedStages3or4.ItisonlywhenthebureauhasreachedStage5,however,thatabroadsuiteofproducts,asdescribedinFigure6.1,canbecontemplated.TwootherkeyfactorsthatabureauwouldtypicallytakeintoconsiderationwhendevelopingVASare(i)returnoninvestmentand(ii)users’capacitytoadopttheservice.

● Return on investment. AclearbusinesscasemustexistforthedevelopmentofaVAS.Theprojectedrevenuefromthesalesoftheservicesmustcovertheinvestmentcost and produce positive return. The pricing andmarketingstrategyoftenincludesbundlingVASwiththesaleofcoredata.

● Capacity of users to adopt the service. Memberswillonlydemanda service if theyhave thecapacityto use the service to improve some element of theirownprocesses.Abureauscore,forexample,addsnovalue unless the lender is able to integrate it into itscreditunderwritingprocesstolowerthecostsofcreditapproval. User-side constraints have a significantbearing,especiallyinemergingmarkets,onwhowillusetheservicesandinwhatquantities.

Even in developedmarkets, the uptake of newbureauproducts and services is not guaranteed and typically

requires a highly proactive sales and marketingdepartment/staff to promote the product. In emergingmarkets, the problem of acceptance is even morepronounced. Except for the international banks, manylendersinemergingmarketslackanunderstandingofthelendingmethodologies that can be implemented usingVAS and of the information technology infrastructureneededtodeploythem.Credit bureaus in emerging markets should notunderestimate the need for in-house outreach training,market development, and sales functions.As productsbecomemoresophisticatedandmoreanalytical,bureausshouldalsorecognizetheneedtohaveinternalspecialistresources to monitor and maintain the products and,perhapsmoreimportantly,communicatethebenefitstopotentialusers.Developing VAS can benefit both the bureaus andtheir customers and ultimatelymay improve access tofinance for the broader community.The opportunities,challenges, and ensuing benefits, however, will varyconsiderably depending on a bureau’s individualcircumstancesandthemarketinwhichitoperates.

6.3. ProductsThe following list, althoughnot inclusiveofallvalue-added products that credit bureaus, both consumerand commercial, canprovide, serves as a guide to thekey services typically available. The accompanyingexamples indicate how these products are deployed incertainmarketsandwhytheymaynotbeapplicabletoall circumstances. Both consumer credit bureaus andcommercial credit reporting companies offer similartypesofproductsandservices,broadlyspeaking,builtonthedifferenttypesofunderlyingdatatheycollect.

Bureau ScoresA credit score is a number assigned to a borrowerbasedonhisorher abilityandcapacity to repaydebt.This number falls within a range with a higher scoreindicating amore creditworthy borrower.The score iscomputed from available credit history informationusing a statistical model or mathematical algorithm.Creditscorescanbeused in the loanapprovalprocessforsimpleaccept/rejectrulesorformoresophisticatedrisk-basedpricingrulesandcreditlimits.A bureau score refers to a credit score developed onthe basis of the credit bureau data. These differ fromthe credit scores developed on the basis of the datasupplied by an individual lender. Bureau scores are


basedontheinformationpooledacrossmanycreditorsaswellaspublic informationsourcesand thus includecharacteristics otherwise unavailable to the individuallender, such as total exposure, number of outstandingloans, and previous defaultswithin the system.All ofthesearehighlypredictivemeasuresoffuturerepayment.Consumer credit bureaus typically build scores usingthreehistoricaldatafilesuniquetothecreditbureau:

● Defaultsonpreviouscredittransactions ● Positivepaymentbehavior(tradelinedata) ● Previoussearches/inquiries

Incertaincircumstances,themodelsmayincludeothertypesofdata,suchas:

● Third-party data (such as court judgments andbankruptcies)

● Demographic data (such as applicants’ personalattributes,suchasage)

● Geodemographic data, aggregated information at thegeographiclevel

Each of these components could potentially addpredictivepowertoabureauscore,butcaremustbetakentoensurethattheresultingmodelsdonotconflictwithalender’sexistingdecision-makingprocess.Forexample,abureauscorethatincorporatesthecustomer’sagemaybe incompatiblewith a lender’s custom scorecard thatalso includes age.Typically, therefore, a credit bureaumaychoosetodevelopasuiteofmodelsratherthanjustonemodeltoaccommodateasmanydifferentcustomerrequirementsaspossible.Examplesinclude:

● Positivebureauscoreforclosedusergroupmembersprovidingbothpositiveandnegativedataandtypicallyusedasaplug-inoradditiontoin-housecustomscores

● Enhanced bureau score incorporating additionalcustomer demographic data and typically used ona stand-alone basis by lenderswith no other scoringmodels

● Industry-specific bureau scores using data derivedfrom specific industry sectors, such as banking ortelecommunications

● Public domain reporting companies score using dataavailableinthepublicdomainand,therefore,availabletoallcustomers

Commercialcreditbureausofferbusinesscredit scoresthataredevelopedusingalgorithmsthatrunoffanumberofvariables,primarily:

● Credit history of the business, including tradelines, outstanding balances, payment history, creditutilization, and others

● Publicly available information, including liens,judgments,orbankruptcies

● Demographic information on the company, suchas years in business and on file, standard industryclassifications,ifany,andbusinesssize

Commercial credit reporting scores provide lendersinsightsintopotentialfordelinquency,default,risksofbankruptcy,andgenerallevelofcreditworthiness.Becausedifferentuserscanuse thescoresfordifferentpurposes, the credit bureau typically uses a variety ofdistribution channels. In its simplest form, the creditscorecanbeincorporatedintoacreditreport,usuallywithsome explanation as to itsmeaning.Alternatively, thebureaumaysupplythescoretotheuserselectronicallyso that it can be incorporated into customized scoringsolutionsorautomatedsoftwareapplications.Athirdandincreasingly popular service is a regular batch servicethat rescores complete portfolios periodically. Thechargingstructureforeachoftheseservicesalsovaries,althoughmost bureaus charge users on a per-score orper-click basis. In theUnitedStates, following reformmeasurestakeninthewakeofthe2008financialcrisis,financial institutions now offer consumers their creditscores on a monthly basis along with their financialstatements as a way of keeping consumers moreinformedoftheunderlyingfactorsthatdeterminecreditdecisionoutcomes.When adequate quantities of reliable information areavailable, bureau scores can be statistically derived,typicallybyusingsomeformofmultivariateregressionanalysis.Thetechniquesusedtodevelopthemodelsaresimilar to thoseused foranyother typeofcustomizedmodel development. Several unique challenges cancomplicate the process of building/deploying bureaumodels,however,asdescribedbelow.

Retrospective DataA key requirement of the analysis is the ability toobserve the transitionofacreditfile from thepointatwhichanapplicationwasmade,throughtheobservationperiod, to the outcome. This requires the bureau becapableofretrospectivelyreconstructingacreditfileatvariouspoints in time.With adequate archivingof thedatabase,reconstructionmaynotbeasignificantissue.Changes in customer name, address, ID numbers, andthe like, however, can cause tracking problems if notappropriatelyaddressed.


Thin File

The data files may range from extremely detailed, aswhenadata subjecthasavarietyofpreexistingcreditfacilitieswithvariousoutcomes,toverythin,aswhenthebureauhasnopreexistinginformationontheapplicant.When a bureau has only a limited amount of data onborrowerperformanceandoutcomes,standardstatisticalmultivariateanalysismaynotapplyandothermethodsshouldbeused.

Scoring Model Calibration

The bureau builds the credit scores from a broadspectrumofcustomerhistoriesfoundinitsdatabase.Thederived scores are typically calibrated for an averageportfolio;thatis,thedistributionofcustomersacrosstherange of scores reflectswhat is seen across thewholespectrumofcustomersatthebureau.Whileprobabilityofdefaultatanygivenscoreshouldremainconstantforall users, the cumulative good-to-bad odds will varyfromportfoliotoportfoliodependingontheriskprofileof the applicant base.This canhave a profound effecton theway lendersmanage theircut-offstrategies(thescoresatwhichthelenderchoosestoacceptordeclineapplicants). It is highly recommended, therefore, thatindividualportfoliosberetrospectivelytestedbeforethemodelsareimplemented.In emerging markets where either the market is toosmallorthecreditbureauisinsufficientlymaturetohaveconfidenceinthedata,thebureaumayconsiderofferingmodelsthatrelymoreheavilyoncustomerdemographiccharacteristics than on credit performance data.Although lesspredictive, thesemodelsoftenprovideausefulintroductiontothemethodologyforlenderswithlittleornopreviousexperienceincreditscoring.Inothermarkets, bureaus and new entrants are experimentingwith theuseof alternativedataor bigdata todevelopalternativecreditscoringmethods.(Seesection7.6.)

Software Applications Akeyadvantageofcreditscoringisthebureau’sabilityto establish a quantifiable measure of risk in what isotherwiseahighlysubjectiveprocess.Havinganumericvalue (ameasure of probability of default) for risk isvaluable in its own right, but it becomes increasinglypowerful when integrated into automated processesand used to proactively manage strategy and lenders’appetitesforrisk.

To help facilitate this process,many credit bureaus inmatureeconomieshavedevelopeda rangeof softwaresolutions that complement both the raw bureau dataand the scoring process adopted by sophisticatedlenders.Thesesolutionsarecommonlyprovidedeitheras software applications—customized to specific userrequirements and maintained within the client’s ownsystems environment—or as bureau solutions, moregenericinnatureandhostedatthebureau.Theavailablesolutions are many and varied, but the followingrepresentsasummaryofthemorepopularapplications.Application Processing. Akeydriverofprofitabilityinmassmarket lending environments (such as consumerloansandcreditcards)andinsmallbusinesslendingistheabilitytokeepthecostofnewbusinessacquisitiontoaminimum.Manyfinancial institutionshave turnedtoautomatedapplicationprocessingsystemsasameansof streamlining the credit-granting process. Manyexamplesofsuchsystemsexist,butthecommondesignincorporatesseveralfundamentalfeatures:

● Electronic data capture. Typically, an applicationprocessing system has a series of standardized datacapture screens. These screens allow the operator tocapturetheinformationnecessarytoprocessthedecisionand,perhapsmoreimportantly,storethecustomerdatainaformatthatcanlaterbeusedforanalysis.

● Rule/scoring engine. The system captures theapplication data electronically, then the softwareautomatically appliespolicy rules (suchasminimumrequired lending criteria) and scoring algorithms(includingscorecut-offcriteria).

● Decision output. Anautomatedapplicationprocessingsystemassimilatesalloftheinputdata,includinganyavailable online information from the credit bureau;appliestherulesandscoringmodelsfromthedecisionengine;andpresentstheoperatorwitharecommendedcourseofaction,suchasaccept,refer,orreject.Thisoutput is then queued so that the final decision ispresented to an individualwith the appropriate levelof underwriting authority. The degree of complexityof such software solutions varies depending on theuser’s technical sophistication. Advanced decisionsystems are capable of managing almost all aspectsof the decision-making process, including customersegmentation and strategy allocation (for example,terms,limits,andproductfeatures)andevenchampion/challengerstrategysettingtotestthelender’sappetiteforrisk.


Behavioral ScoringFor a variety of credit products, such as credit cards,chargecards,andoverdrafts,theinitialdecisionwhethertolendisonlythefirstofmanythatmustbetakenduringthe life of the lender-borrower relationship. Thesedynamicproductsrequireagreaterdegreeofmonitoringthan term loan products since the exposure to riskincreasesovertime.Additionalcreditdecisionsmustbetakenonavarietyofissues,suchaslimitmanagement,over-limitauthorizations,andcardreissue.Behavioral credit scoring is an adaptation of moretraditional scoring techniques specifically designed toobserve and evaluate the payment behavior patternsof borrowers. The output score changes to reflect thechangingriskprofileovertimeandcanbeusedeithertoautomateroutinedecisionsortoprovideoperatorswithanimmediateassessmentofcurrentrisk.A range of powerful software solutions has beendesignedtohostcardmanagementsolutionsandprovidestrategiccontroloverpracticallyallaspectsofcustomerrelationship management. While the complexity ofthesesystemshasacorrespondinglyhighpricetag,theyhave become almost an integral part of mass market creditmanagement.

Model Tracking and Performance Monitoring

An overlooked benefit of introducing credit scoringmethodology into the lending process is the ability tomonitor customer risk in anobjective andquantifiablemanner.Undertaking thisanalysis requiresan in-depthunderstanding of the way the models are performing.Several credit bureaus provide score diagnostic toolsthatmonitorandreportontheperformanceofscorecardcharacteristics in terms of their continuing abilityto discriminate and the way shifts in the applicantpopulationmaycreatemisalignments thatwouldaffectthequalityofthedecisions.

Collections Scoring

Collections scoring systems help lenders identify anddifferentiatebetweenclientsthathaveahighprobabilityof payment despite late payments and those that havea high probability of nonpayment. Based on thesescoringsystems,lenderscanapplydifferentstrategiesorcollectionactionsthatmoreaccuratelyreflecttheclient’srisk,asopposedtorelyingontraditionalstrategies,suchaspastduetimes(forinstance,allclientsthatare30dayslatereceivethesamecall/letter).Lendersstandtobenefitbecause a tailored strategy helps reduce delinquencies

andlosses,providesamoreproactivecollectionstrategy,andenablesmoreefficientuseofresources.

Collections Services (Receivables Management)A long and often successful association has existedbetweencreditbureausanddebtcollectioncompanies.Inseveralinstances,negativeinformationincreditbureaushasbeenderiveddirectlyfrominformationgatheredbydebtcollectioncompanies(aswasdonebyBaycorpinNewZealand,CreditReferenceBureau inEastAfrica,andInfoScoreinGermany).Many different collections products and services areavailable,withthefollowingthreeamongthemostcommon.

● Tracing.Tracingproductsusethecreditbureaudatatoidentify thewhereaboutsofacustomerwithwhomalenderhaslostcontact(“skips”).Theseproductseithertrawlbureaudatabasestoidentifycontactinformationofwhichthelendermaybeunaware(suchastelephonenumbersor anewaddress)orplaceamarkeron thecustomer file so that if the customer subsequentlymakes another application for credit, the previouslendercanbeinformed.

● Debt management. Debt collection is an expensiveand time-consuming function and typically requiresspeciallytrainedanddedicatedpersonnel.Somelenders,therefore,opttooutsourcethisfunction,sometimestocredit bureaus.These services are usually performedonafixed-feebasisoronaperformancebasisunderwhich the collector gets to keep a proportion of anymoniesrecovered.

● Debt purchase. Credit bureaus that specialize in receivablesmanagementmaychoosetotaketheultimateriskandbuydistressedornonperformingaccountsfromthecreditprovider.Inthesecircumstances,thebureaupurchasestheoutstandingbalancesfromthelenderatadiscount,assumesresponsibilityforcollectingthedebt,andkeepstheproceedsoncethedebthasbeencollected.

Collateral RegistriesFor secured loans, a lender must establish that thecollateral used for the loan actually exists and isunencumbered. Developed credit bureaus, therefore,oftenattempttobecomemorethanjustasourceofcreditdata by providing customerswith access to associatedlending information, such as collateral registries.Bureaus canprovide this service eitherbybuildinganautomatedlinktoathird-partydatabaseorbybuildingand hosting the service themselves. Whether dealing


withfixedassets,suchaslandandbuildings,ormovableassets, suchasmotorvehicles, these services typicallyprovidetwobasicfunctions:

● Inquiry. This function allows users to ascertain thebone fide nature of the asset—and whether it isencumbered—prior to purchase or acceptance of theassetascollateral.

● Registration of interest.Thisfunctionallowsthelenderorindividualtoregisteranoticeofachargeorlienontheasset.

Marketing ServicesThe use of credit bureau data, especially closed-user-group data, for marketing purposes is often ahighly contentious issue. Inmany countries, includingAustralia, for example, laws either prohibit the use ofsuchdataorseverelyrestrictittospecificapplications.Inmanyothercountries,especiallyinemergingmarketswhere lendersarealreadynervousaboutsharingcreditinformation, marketing applications are intentionallyexcludedfromthedefinitionsofpermissiblepurposeineither the industrycodeofconductor themembershipagreementbetweenthebureauanditscustomers.Bureaus can provide several value-added marketingservicesthatdonotnecessarilyinvolvetheuseofcreditbureaudata,however.Therangeofpotentialproducts/servicesthatcanbeofferedisextensive.Thefollowinglistrepresentsasampleofthemostcommon:

● Customer profiling. Historically, many financialorganizations have suffered from poor knowledgemanagement systems (for example, paper-basedcustomer records).Consequently, these organizationshave relied heavily on branch distribution channelsto obtain comprehensive information about theircustomers.Customerprofilingattemptstobridgethisknowledge gap by providing analytical services thatprofiletheattributesofparticulartypesofcustomers.This service may include augmenting the lender’sexistingcustomerinformationwithadditionaldatafromthe credit bureau. The subsequent analysis identifieshomogeneouscustomerclustersorsegmentsthathavesimilar profiles, such as young, credit-active highachievers, thatcan thenbeused tohelp thefinancialinstitutioneitherprovideamore tailored relationshiporbettertargetcross-sellandup-sellpromotions.

● Modeling. As with credit scoring, the number ofapplications for modeling services is extensive.Among the more popular are propensity modelingand responsemodeling. Propensitymodeling tries to

predict the likelihood that a particular prospect willtakeupamarketingoffer;responsemodelingmeasuresthe effectiveness of particular marketing campaignto increase the responsiveness of customers in thefutureandtherebyoptimize thecostofnewbusinessacquisition.Morecomplexformsofmodelingincludeapplicationssuchascustomerworthorcustomerlife-timevalue.Thesetechniquesanalyzecustomerpotentialnotonlyintermsofactual,currentcontribution/profitbutalso in termsofwhatacustomermaycontributeoverthelifetimeoftherelationship.

● Geodemographic analysis.Geodemographicmodelinglooksat the relationshipbetweengeographical areas,indicatedbyzipcodesorpostalcodes,and the typesof individuals/businessesthat liveorworkinagivenarea.The technique creates similar customer profilestothosedescribedabovebutdoessousingaggregatedratherthanindividualdata.

● List services.Incountrieswithmaturedirectmarketingindustries,manycreditbureaushavedevelopedproductsandservicestoassistwithcustomerprospecting.Theseservicesrangefromprovidingprospectlists(thenamesandcontactdetailsofpotentialcustomers),augmentedwithcreditbureauorgeodemographicdata, totakingon management of a client’s customer relationshipmanagementdatabase.

● Mail screening.Again,incountriesthatusedirectmailextensively as a means of acquiring customers, thecreditbureaucanbeusefulinhelpingensureefficienttargeting of potential customers. Mail screeningremovesfromamailinglistthoseapplicantswhoaremost likely tobe rejected for anofferof creditweretheytoapply.Thisscreeningsavesthelendertimeandeffort.Thisservicealsohaspositivecustomerbenefitsin countries that operate a do-not-mail database—ascreening facility for consumers preferring not toreceiveunsolicitedmarketingoffers.

Where marketing services are permissible (as in theUnited States and United Kingdom) and extensivelyused,theyhaveproventobeahighlylucrativeformofaddedvalueforthecreditbureauandasignificantvalue-addedpropositionfortheuser.Theseservicesalsohaveapositiveeffectonthebank’sriskmanagementprocessbyallowingthebanktoprescreenoffers.

Portfolio MonitoringMonitoringandmaintainingcreditqualityisataskthatall lenders undertake but one that has taken on moreprominenceinrecentyearswiththeintroductionofthevariousBasel accords.Somecredit bureaushavebeen


providingservicesinthisfieldformanyyears,usingarangeofstandardreportingandbureauscoringproducts.

● Portfolio monitoring services.Theseservicesadvisealenderofanysignificantchangetoacustomer’screditfile,suchasadefaultregisteredbyanotherlender.

● Batch screening. This service allows lenders toperiodicallyupdatetheriskprofileofentireportfoliosbyreviewingthecurrentcreditscoresofitsclients.

● Monitoring and reporting. These services typicallyhelp smaller lenders with limited internal analyticalcapacity to produce the management informationrequiredtotrackcreditquality.

With the introduction of Basel III reforms followingthe2008financialcrisis,theneedforlenderstocomplywith the best practice risk-management guidelineshas increased the focus on lenders’ ability to monitorportfolio quality. Implementing Basel II’s advancedinternalratings-basedapproachrequiresalllenderstobecapableofcalculatingnotonly“probabilityofdefault”but also “loss given default and exposure at default.”Credit bureaus with developed analytical capabilitieshaveseizedthisopportunitytouseadvancedmodeling,softwaresolutions,andconsultancytohelptheirclientswiththesecomplianceissues.

Fraud DetectionAs theworldbecomesmore interconnected, fraudandidentity theftoccurmoreandmoreoften.Measures toaccuratelyidentifyandverifyindividualidentitieshavethus gained even greater significance than in the past.EstimatesbytheWorldBank’sID4Dprogramindicatethatapproximately1.1billionpeoplearoundtheworldcannot prove their identities. Several initiatives at theglobal,regional,national,andlocallevelsaimtocreateunique identification systems for individuals. Retailcredit bureaus have traditionally used sophisticatedmatch-and-merge algorithms to accurately identifyindividuals. However, in today’s digital world, theseserviceprovidersmustgobeyondidentifyingindividualsand must help their customers proactively manageidentity-related fraud. Big data and alternative data isfindingvalueinthedevelopmentoffrauddetectionandfraudmonitoringsystems.Asaneconomy’sretailcreditmarketgrows,sowilltheincidenceoffraudulentfinancialtransactions.Fraudulentactivity can range in severity fromwhat is sometimesreferred to as soft fraud—embellishing applicationinformation to obtain credit—to hard forms of fraud,suchasidentitytheft.Avarietyofproductsandservices

canbedevelopedonthebackofthebureauplatformtohelplendersidentifyandpreventfraud.Theseproductsinclude,butarenotlimitedto,thefollowing:

● File cross-referencing. Theserelativelysimpleproductscross-referencevariousdatafilestoidentifyanomalies.

● Known/suspect fraud closed user groups. Theseindustryinitiatives,suchastheCreditIndustryFraudAvoidance Scheme in the United Kingdom, poolinformation about known or suspected fraudulentactivity.

● Fraud scoring. This product may be custom builtmodels for individual institutions or generic modelsdeveloped by the credit bureau. Some bureaus areexperimentingwiththeuseofmachinelearninganditsapplicationtowardsdetectingfraudinapplicationsandotheraspectsofthecreditinformationsharingprocess.

● Fraud detection systems.Thesesophisticatedsoftwaresolutionsuseacombinationofruleslogic,scoring,andenhanced databases to identify application fraud. Arangeofsoftwaresolutionshavealsobeendevelopedspecifically to trackcard fraudbymeansofpaymentbehavior analysis. Providers are partnering withthird-party solutions providers that provide layers ofcustomerdata, suchasacustomer’sonlinebehavior,manner and frequencies of access, social networks,actualidentification,physicallocation,andoperationalsystems use behavior, all compiled to determineincidentsoffraud.

Digital Identification Services Digital identity iswellestablishedasoneof themostsignificant technology trends in the world, and for agrowing number of public stakeholders and citizens,it is already a day-to-day reality.As a result, thewayindividualsinteractwithpublicandprivateinstitutionsisquiterevolutionary.Creditreportingcompaniesarefastgettinginontheacttoo.In 2016, national ID schemes increased in number,visibility, and reach. The UN and World Bank ID4Dinitiatives set a goal of providing everyone on theglobewithalegalIDby2030.Numerousnewnationalelectronic ID programs (including card and/ormobile-based schemes) were launched or initiated. ExamplesincludenewschemesinAlgeria, Cameroon, Italy, Jordan, Senegal,andThailand,majorannouncementsinBulgaria,Jamaica,Liberia,theNetherlands,Norway,Poland,andSriLanka,andapilotschemeinMyanmar.Mostoftheseprograms now include biometrics, the majority in theformoffingerprints.SchemessuchastheGov.UKVerify


initiative were also introduced in 2016, andAustraliaannouncedthefirstphaseofitsdigitalidentityprogramintendedtobelaunchedbyAugust2017.Inthepastfewyears,newtechnologiesandregulationsemerged,supportingandshapingthedigitaltransformationahead. Digital driver’s license projects (also knownas mobile driver’s licenses) gathered momentum incountriesincludingAustralia,theNetherlands,theUnitedKingdom,andtheUnitedStates.Earlytestsofblockchaintechnologiestookplace:inEstonia,toaiddevelopmentofagroundbreakingtransnationale-residencyprogram,and in theUnitedKingdom, to seehow it canbeusedto help make efficient welfare payments to citizens.Microsoft ismovingforwardtoimplement ablockchain-basedIDsystem. ItalsoplanstoadddigitalIDsupporttoitsMicrosoftAuthenticatorapptomanageidentitydataandcryptographickeys.Theapp,whichwaslaunchedinAugust 2016, is used bymillions of people, accordingto the company. The European Union’s ElectronicIdentification and Signature (eIDAS) regulation cameintoforceinJuly2016,requiringmandatorycrossborderrecognitionofelectronicIDbySeptember2018.In the credit reporting industry, Experian’s Prove-IDcompares the customer information entered with over1 billion records held by Experian.A decision on theauthenticityoftheidentityisprovidedinreal-timewithaneasytointerprettrafficlightsystem.Fastandconfidentdecisionscanthenbemadeastowhetherthetransactionisgenuine.Auditing facilitieshelpyou todemonstratecompliance to regulation. Creditinfo and Finpass launched a digital know-your-customer (KYC) andonboardingwebandmobileapplicationforindividualsand legal entities for digital onboarding throughvideoselfies,passportoridentifycardscanning,andcheckinginformationagainstcreditbureauandotherdatasources.Creditinfo and Shocard launched Credit Passport toshare securely consumers credit history and identityover blockchain:The app enables individuals to claimtheir identity and obtain personal credit informationthat can be sharedwith any third party, aswell as beindependentlyverifiedwithproofofcertificationusingtheblockchain.Newstandardshavealsoemergedinthepastfewyearsforfosteringcompatibilityandinteroperability.TheU.S.CommerceDepartment’sNationalInstituteofStandardsand Technology (NIST) awarded a federal grant tofurthersupportdevelopmentoftrustedidentities,basedonthedigitaldriver’slicense.

In2017someofthemostacceleratedevolutionarychangesin thefieldofsecuredigital identitysofarexperiencedtookplace indevelopedandemergingcountries.Thesechanges represent essential considerations for policymakersandauthoritieswishing tomakedigital identityand online services (particularly mobile services)defining features of their modernization processes intheyearstocome.Goingforward,itisexpectedthattheindustry will seemoremobility, increased demand forsecurity and trust,more calls for public supervision ofdigitalidentificationsystems,evenmorenationalIDcardand electronic IDprograms, andnational ID initiativesandimplementation.

Consumer ProductsBureausareincreasinglyrecognizingtheimportanceofprovidingproductsandservicestoaddresstheirbiggestasset: the underlying borrowers. Some of the morefrequently observed consumer products and servicesofferedbybureausinclude:

● Credit reports. These are generally free once a yearorincaseofanadverseevent,andavailableforafeeatallothertimes.Consumersaregenerallyadvisedtochecktheircreditreportsperiodicallytodeterminetheaccuracyof the informationcontained therein,whichhasimplicationsfortheircreditprofiles.

● Credit scores. Generally, credit scores are availabletoborrowersforafee.Thesearestaticanddescribeacertainpointintime.

● Fraud alerts and monitoring.Giventheriseofdigitalhacks and incidentsof identity theft, severalbureausoffer products and services that enable consumers toreceive alerts regarding suspicious activity affectingtheir accounts, to freeze their credit accounts, and to protectthemselvesagainstidentitytheft.

● Dispute portal. Most bureaus offer consumers anopportunity to dispute errors or inaccuracies in theircreditreportsorotherwisefiledisputes.

● Education.Creditbureausoffer educationalmaterial,primarily online, that explains the basics of creditreportingandhowitscarefulmanagementisimportantforconsumers.

In the case of commercial credit reporting companies,similar products are offered for businesses, includingbusiness credit reports; education on how to managecreditasasmallbusiness;theabilitytomonitorbusinesscreditcontinuouslyforadverseeventssuchasbusinessidentity theft and fraud; tools to manage cash flows,


includingmonitoringsuppliers,customers,andpartners;anddebtcollectionandmanagementservices.

6.4. The Use of Credit Information Data for Prudential Supervision14

Becausebanksandotherfinancialinstitutionsarehighlyleveraged,severalinternationalguidelineshavebeensettocontrolthesystemicrisksthattheseinstitutionsposeto the economy. These standards are captured by thevariousBaselaccords.15

The2007–2008subprimecrisisshowedthatthemarket,ononehand,andthefinancialinstitutions’supervisors,on the other hand,were poorly equipped to dealwithsystemic risk issues stemming from widespread andconcentrated exposure to credit risks in the financialmarkets. Supervisory authorities did not have accessto broad, timely, and reliable information, especiallyabout off-balance-sheet exposures, which tend to beunregulated,andtheywerealsonotadequatelypreparedtoassessall the risksassumedby thefinancialmarketplayers dealingwith complex and innovative financialinstruments (such as derivatives, options, and asset-backedsecurities).Thetoolssupervisorsusedtoconducton-siteinspectionsandoff-sitemonitoringofregulatedinstitutions—econometric models, stress testing,accounting criteria—were outdated and inadequateto preemptively identify the potential risks assumedby the system as awhole and recommend appropriatepreventiveaction.Withthecrisis,recognitiongrewoftheneedfornotonlymicroprudentialsupervisionandregulation,butalsoforamacroapproach to supervisionand regulationof thefinancialmarkets,giventheinterconnectivityoflendersand borrowers in creditmarkets. Credit data collectedonaregularbasisbydifferenttypesofcreditreportingservice providers can also be used to help performanalyses like the following for detecting the potentialbuild-upofrisksforsystemicfinancialstability:

● Credit growth in the financial sector:forexample,atthe level of individual credit institutions, by type ofcreditinstitution,atthelevelofthesectorasawhole,and so on

● Credit growth by nonfinancial sector lenders ● Building of asset bubbles: for example, trends in thevalue of residential and commercialmortgage loans,changesinthevalueofrealestatepropertypledgedascollateral,changesinthevalueofotherassetspledgedas collateral, and so on

● Concentration risk:shareoftotaland/ornewlendingto specificeconomic sectorsoractivitiesorcommonborrower entities, growth rates of lending to thoseeconomicsector,activitiesorcommonborrowers,andso on

● Contagion (spillover) risk and interconnectedness: from/to/withother institutions in thefinancial sector,from/to the real sector or interconnections with realsectorentities, from/toothercountries throughcross-borderlendingactivity,andsoon

● Credit risk transfer: forexample,theinstrumentsusedandthecircumstancesinwhichtheyareused

● Estimates of debt service ratios of households and corporations and other risks for loan repayment

● Magnitude and relevance of nonperforming loans: theirshareinthetotalloanportfolioofbanksandothercreditinstitutions,changesandrecenttrends,andsoon

● Currency, original maturity and product type of loans as well as data on guarantees and collateral received, includingthetypeofcollateralanditsvaluation

● Individual performance of systemically important credit institutions

Inadditiontodetectionofrisks,analysisofcreditdatacanhelpindefiningandsettingindicativethresholdstoguidepolicydecisionsonwhenapreventiveinterventionfrom the authorities responsible for financial stabilitymaybecomenecessary.Creditregistriesand,increasinglynow,creditbureausandcommercialcredit reportingcompanieshave importantroles to play in supporting the prudential supervisionandriskmonitoringfunctionofsupervisorybodies.Tobeeffective,however,creditregistriesandbureausmustcontainaccurate,complete,andup-to-daterecords,andsupervisors must be able to access credit informationdata from a comprehensive range of credit providers,includingbothbankandnonbankcreditors.Tobeusefulforprudentialsupervision, thedatashouldinclude,but

14. While the section on value-added services speaks specifically to products developed by consumer and commercial bureaus, this section on prudential supervision relates directly to a function performed by regulators using credit registry databases or data provided by credit bureaus.

15. As this Guide deals specifically with credit reporting and its use for various functions, the various capital and provisioning requirements set by international frameworks such as the Basel Accords are not discussed in detail. For more information on these accords and the prudential supervision function of supervisory bodies, see the website of the Basel Committee of Banking Supervision (BCBS; http://www.bis.org/list/bcbs/index.htm).


notbelimitedto,borrowertypeandidentificationdata,current risk classifications, credit information data,and collateral and guarantee information, all ofwhichwouldenablesupervisorstomodeldifferentborrowers’probabilityofdefaultandcalculateandmonitorpotentiallossgivendefaultsofthevariouscreditors.Supervisors can use the information contained incredit registries or bureaus to monitor the credit riskundertakenbyanindividualinstitution,byapeergroupofinstitutions,orbythefinancialsystemaswhole.Theinformationcontainedinregistriesallowssupervisorstoassess the quality of credit assets and to get a holisticpictureoftheconcentrationofriskexposures(bysector,geographic distribution, type of borrower, or type ofcredit).Thus, supervisors can assesswhether financialinstitutions meet capital adequacy requirements asstipulatedbytheirownrelevantlegislationortheBaselframework,whichinturnisanindicatorofthesystemicrisklevelintheeconomy.Systemicrisklevelsrisewhena large number offinancial institutions are exposed tothesamerisks.Supervisorscankeeptrackovertimeofthe losses incurred in every single credit, compare thelevel of risk and credit classification for a particularborrower across the financial system, and comparelevelsofprovisionsand,consequently,capitalallocationaccordingtotherisklevel.Supervisorstypicallyuseoff-sitesurveillanceandon-siteinspectionstomonitortheoverallhealthofthefinancialinstitutionsthattheysupervise.Dataincreditregistries,credit bureaus, and commercial credit reportingcompaniescanserveasimportantinputsintothevarioustoolssupervisorsusewhileundertakinginspectionsandsurveillance. On-site supervisions can be costly andtimeconsuming.Moreover,supervisorsareunlikely tobeabletoanalyzeeverycreditrecordintheportfolioofthefinancialinstitutionbeinginspected.Creditregistryor bureau data can provide useful “sample data” thathighlight key trends and characteristics in a financialinstitution’s portfolio, including changes in portfolioqualityduetotheintroductionofnewfinancialproducts.Supervisors can use the information from the sampledatatodeterminewhatareasofaninstitution’sportfoliorequirescloser reviewand thusallocate their timeandresourcesmoreeffectively.Samplesobtainedfromcreditreportingserviceproviderscanalsoflagdiscrepanciesinthefinancialinstitution’sriskclassificationsandborrowerratingsandwhetheradequateloan-lossprovisionshavebeenmade.

While frequent on-site inspections cannot feasiblybe conducted, off-site surveillance tools can supportsupervisors in continuous supervision andmonitoring.Onceagain,datafromcreditreportingserviceproviderscanbevaluableinputsintosomeofthetoolssupervisorsuse in conducting off-site surveillance. These toolsincludethefollowing:

● Indicators.Supervisorscanusethedataobtainedfromserviceproviders to create regular reports containingdifferentindicatorssummarizingtheexposuretocreditriskofdifferentfinancial institutions.Suchindicatorsincludeconcentrationexpressedasapercentageoftotalriskexposure,concentrationexpressedasapercentageand origin of funds, exposure by economic sector,volumeof nonperforming loans, credit classification,level andevolutionof credit provisioning,growthofcreditportfolio,growthbycredit lines,andhistoricalloss for each line of credit (eventual adjustmentof regulation and capital requirement), at both theindividuallevelandtheinstitutionalandsystemlevel.Theindicatorscanhelpsupervisorsverifywhetherthefinancialinstitutionsareincompliancewithprudentialregulation for borrower risk classification and alsoindicate the level of interlinkages among differentfinancialinstitutions(whichraisesthelevelofsystemicrisk). These indicators canprovide a framework forcomparison of borrower ratings across differentfinancial institutions in an economyandflagoutliersor aberrations to the authorities. Itmay also providevaluable confirmation that regulated entities arecomplyingwithanymandatoryrequirementstosubmitdatatocreditreportingserviceprovidersandtoconsultthisdatabeforeextendingcredit.

● Early warning systems.Theindicatorsdevelopedusingdatafromcreditreportingserviceproviderscanbeusedinearlywarningsystemmodelsthatenablesupervisorsto focus on vulnerabilities and critical levels ofexposure in themarket.This in turnenables them tofocustheirsurveillanceandinspectioneffortsandthusoptimizetheallocationofsupervisoryresources.Earlywarningsystemscanpromptearlyactiononthepartofthesupervisorybodieswithminimaldisruptionstothefinancialmarkets.

● Stress testing.Supervisorsusestresstestingmodelstounderstand the impact of different economic shockson financial market players. Based on the variousscenarios developed and the results of the stresstesting, supervisors can recommend adequate capital


levelstoabsorblossesassociatedwithlarge,andoftenunpredictable, shocks. For instance, supervisors canstress test the impact of a downgrade of one, two,or more levels of borrower risk classification in aportfolioandcomparetheeffectsofsuchdowngradesfromafinancialinstitutionorinthesystemasawhole.The results would demonstrate potential impact oncapitalrequirementsandprofitabilityduetoadditionalprovisioningrequirements.Supervisorscanalsostresstest theactual levelofprovisioningagainstdifferenteconomicconditions, aswell as the consistencyandrobustnessof ratingsystemsandcreditclassificationmodels used by financial institutions over a period oftime.

● Transition matrices.Anothertoolusedbysupervisorsis the transition matrix. Banks and other creditorsgenerallydeveloptheirowninternalborrowerratingssystems, which classify borrowers by their riskprofiles.Supervisorsareincreasinglydevelopingsuchrating systems to validate the systems developed bythefinancialinstitutionsthattheyregulate.Transitionmatricestrackmovementofborrowerratings,basedonindividualcreditoperations,fromoneleveltoanother(upgrade or downgrade) over different periods, suchas threemonths, sixmonths, oneyear, orfiveyears.Datafromcreditreportingserviceproviderscansupplyvaluableinputsintotransitionmatrices.Supervisorscananalyze ratingswithdifferences acrossdifferent timeperiods,geographicalareas,oreconomicsectors;withdifferentlevelsofvolatility;orwithdifferentaveragedefault rates forborrowersgroupedbysimilarities incredittype,financialinstitutiontype,orotherfactors.Over time,seriesofobservationsofbehaviorsacrossa transitionmatrixprovidessupervisorswith insightsintotheprobabilitiesofdefaultandthelevelofriskinthesystem.

● Financial regulation.Anotherkeytoolregulatorscandevelop based on credit data obtained from creditregistries, bureaus, or commercial bureaus includesregulation around the financial sector, primarily tosupportfinancialstability,competition,andconsumerprotection. Based on credit data, for instance,supervisorsmaybeabletodefineparameterssuchasprobabilityofdefault,lossgivendefault,andloanlossprovisioning requirements, all ofwhich the financialinstitutions need to develop internal ratings systemsandensurecompliancewithnationallimitsandBaselAccords. Such data can also be helpful in designingpolicy measures and mitigation strategies aimed atsupportingmacroprudentialsupervision.

Althoughthepossibilitiesofusingcreditreportingdatatosupporttheprudentialsupervisionfunctionarelimitless,challenges remain. Whereas supervisors oversee onlyregulated financial institutions, financial marketscomprise other types of creditors that are unregulatedandyetmaybeinterconnectedwiththeformalbankingsystemasmajorcustomersof thebankingsectororasentitieshavingthesameexposuresasthebankingsector.Usingcreditregistrydatathatonlyprovidesinformationon regulated lenders limits the supervisor’s ability toassesstherisksposedtothesystemasawholefromthisinterconnectivityofdifferentregulatedandunregulatedlenders. Against the backdrop of the 2008 financialcrisis, many countries have made efforts to optimizetheircreditregistries’datacollection,aimingtocollectdatafromabroadrangeoffinancialmarketparticipantsandthustoensurethatsignificantexposuresacrossthefinancial system are adequately captured. Since creditbureausgenerallycollectawiderrangeofinformation,incorporatingdatafromcreditbureauscancomplementthedatafromcreditregistries.


Case Studies

7.1. Reforming Credit Reporting Systems in Central AsiaIFC’s financial infrastructure development projectwas initiated in 2009with the objective of enhancingfinancial infrastructure in the CentralAsian countries,includingAzerbaijan, theKyrgyzRepublic,Tajikistan,and Uzbekistan. In the Kyrgyz Republic, the creditbureau was initiated as a local noncommercial entityand had been functioning for 10 years without aclear indication of further development in terms ofproducts or services. In Tajikistan, the developmentof a credit information sharing systemwas started bya localcompany inpartnershipwithCRIF, theend-to-end knowledge company that includes 70 subsidiarycompanies serving over 50 countries, including thedeliveryand/ormanagementofcreditbureausolutionsinover20countriesacross4continents,andwithlocalfinancialinstitutionstakeholding.IFC’sinvolvementwasrequestedinboththeKyrgyzRepublicandTajikistantoenhance corporate governance practices to ensure thelong-term sustainability of the credit bureaus and theefficiencyofthecreditreportingsystemsineachcountry.Thisexperienceshowedthatnosilverbulletcanresolveall challenges: Rather, customized approaches arerequired. Nevertheless, experiences in both countriesshow that applying proper mechanisms of corporatepractice might be the means for mitigating the mostchallengingrisks;complexapproacheshavebeentakeninbothcountries,includingrevisingcurrentgovernancestructure and documentation, providing continuouscapacity enhancement activities, and establishing anindependentboardwithinthegovernancestructure.

ContextInTajikistan,thecreditbureaubeganwithamemorandumofunderstandingbetween leadingfinancial institutionsand the selection of the requirements for a preferredpotential technical partner. During the selection andnegotiationprocess,ACAFIprovidedneutral guidanceon selecting the appropriate technical partner.A creditbureaucompanywasestablishedin2010,completewitha management team and corporate governance rules.Theworkofestablishingthebureauhaditsfairshareofchallenges,aslocalstakeholderslackedrelevantexpertiseoncreditreportingbusiness,thetechnicalpartnerlackedsufficient country knowledge, management lackedexpertiseinthecorebusinessofcreditreporting,andtheregulatory frameworkwasweakbecause itwas anewarea for the regulator and themarket lacked sufficientoversightorregulations.Followingtheefforttoidentifyandformthebureau,themanagement team changed as did the composition oftheoversightbodyandtheboardofdirectors.Theworkand expectations of management were set and basiccorporate governance rules were accepted, yieldingpositiveresults; thenumberofdataprovidersrose, theinquiries increased, and the quality of the reports andservicesimproved.TheimprovedcreditreportingsystemoversightanddatatransparencyhelpedtheNationalBankslowly reduce system-wide Non Performance Loans(NPLs)from56%atitspeakto34%.Thispositivetrendalso reflected increased lendingvolume in themarket,butitstillwasnotenoughforthecompanytobreak-evenandgeneratereturnsoninvestment.

CHAPTER

7.

96 CHAPTER 7. CASE STUDIES

Since late 2015,Tajikistan, like several othermarkets,has faced severe financial sector turmoil caused by acombination of factors, including a decreased volumeof international remittances,which in turnaffected thefinancial sustainability of thefinancial institutions thatarethecreditbureau’sstakeholders.Aslendingfell,sodidthefinancialcapacityofinstitutions,leadingfinancialinstitutions to prefer cost-cutting measures to newinvestments.Giventhesecircumstances,itwasdifficultto introduce new products or services. Furthermore,financial institutions, including bureau stakeholders,requestedthatthebureaulowerthepricesofitsproducts,whichrancountertothebusinessrationale.Atthesametime, thedeepdevaluationof the localcurrency to theU.S.dollar severely impacted thecreditbureau,whichhad solution andmaintenance costs in dollars butwasearningrevenuesinsomoni.Thissituationbroughttothesurface an inherent riskof internal conflictof interest;thelocalfinancial institutionsoccupydualpositionsasboth users of the service and stakeholders, while thetechnologicalpartner isbothaninvestorandthecreditbureau’s service provider. These internal conflicts ofinterest among the stakeholders made the corporategovernancestructureofthecreditbureauvulnerabletoexternalfactorsaswellascausedcomplicationswithinthecompanyandthemanagementteam.

Mitigation

The credit bureau stakeholders sought assistancewith the ongoing situation with corporate governanceand staking. The project, leveraging IFC’s expertise,providedtechnicaladvicebyconductinganassessmentandface-to-faceinterviewswithallthestakeholders.Thereportwasissued,andthecorrectiveactionssuggested.Among others, the recommendations included therevision of the corporate governance documents,including thecharter; changing thecompositionof theboardofdirectorsandintroducinganindependentboardmember; establishinga formaldocumentationprocess;and hiring a corporate secretary.The recommendationthat an independent board member be selected andappointedwas implemented.The goalwas to have anindependentboardmemberwhoisclosetothesectorbutnotinvolvedinit, toavoidfurtherconflictsofinterest.Tension among other board members subsequentlyeased, giving stakeholders confidence that balanceddecisionswouldbetaken.Also,thetechnicalproviderwasallowedtopurchasethesharesoffinancial institutions thatelected to leave thecompany.Itbecamethemajorityowner,thuseliminating

theinherentconflictofinterestbetweenshareholderandtechnical provider as accounts were consolidated. Asa result of the project involvement, the credit bureaudeveloped and accepted new strategic and operationalplans, reshaped themanagement team, introducednewproducts, and increased its visibility in themarket, allactions resulted in strengthenedfinancial sustainabilityofcompany.In 2017, the Project initiated a study to examine theimpact of the credit bureau data & scoring productson banks’ lending practices, including operationalefficiency, improved decision-making, etc. A surveyof Tajikistan’s 8 major banks found that nearly 90%ofloanswereissuedwiththeuseofthecreditbureaudata.Inadditiontoprovidingevidence-baseddecision-making tools, the bureau’s automated technology &modelshavecompletelyre-engineeredloanapplicationprocessing,byeliminatingpaperwork, redundantdataentry and offering a more responsive service. Thisfurther translated into reduced operating costs andhigher efficiency as total time to collect, analyze andprocess borrower information shrank by 1-3 days onaverage. Similarly, customer credit history inquiriessurgedtwelve-fold,asborrowersincreasinglybecomeaware of the benefits of loan repayment discipline.Insomebanks,goodcredithistoryqualifiedapplicantsfor up to 4% interest rate discount and comparedto 2013, the share of long- term loans rose by 20%,givingborrowersmore time to fulfill their repaymentobligations,decreasingborrowerdefaultrates.

Statement of Facts Concerning the Kyrgyz Republic The situationwith the Kyrgyz Republic differed fromthatofTajikistan, although theoutcomeswere similar.Here a well-established noncommercial credit bureauhadbeenfunctioningsmoothlyandservingitspurposefor some time.Totalmembership (shareholders) in thecredit information bureau (CIB) stood at 52 and wasbased on a one-share, one-vote principle, however,creating bottlenecks in the strategic decision-makingprocess, since participants competed with each other.Theproblemwascompoundedbyshareholders’effortstoinfluencethemanagementteam,regardlessofindividualshareholder’s size or financial standing, and refusingto give in to the majority’s opinion. This inefficientcorporate governance and organizational structurewasexacerbatedbypoorlydefinedandcumbersomeinternalprocesses and procedures yielding poor quality creditbureaudataandnocommercialincentivesforsustainable


development. The proposed solutionwas to transformthecreditbureau intoacommercialentityand inviteastrategictechnicalpartner.

Challenges

Leaving its comfort zone and giving up the nominalpowerofdecisionmakingforthesakeofbetterserviceswas a key challenge for the country. Transformingthe bureau into a commercial entity meant that somefinancial institutions, the stakeholders (mainly thesmallerones),wouldlosecontroloverthecompanyduetolackofresources.Asaresult,thesmallerstakeholderstriedtoblockthestrategicsolution.Oncethesolutiontothisfirstchallengewasimplemented,otherchallengesarose;thenegotiationprocessbetweenstakeholdersonestablishinganewcommercialentityanddefiningrolesandresponsibilitiesaswellasanoperatingmodel became subjects of long-lasting disputes anddraggedonforalmost twoyears.Andas inTajikistan,the inherent risk arose of internal conflicts of interestbetweenstakeholdersasusersandasserviceproviders.

Mitigation

The methods of enforcing the transformation to thecommercialmodeofoperationwasmostlysupportedbyreformingthelegislativeandregulatoryenvironment;thenewmodelestablishedbythenewregulationredefinedthe scope of the decision-making chain by trimmingmanagerial layers andmaking themmore transparent,with a clear separation of shareholders’ interests fromthoseoftheusers.Thisforcedtheprocessofacquiescingtothenewconceptandgoingcommercial.Inadditiontoenforcingregulatorytools,thecoordinateddailyworkwith the stakeholders and themanagementteam of the newly established commercial creditbureauwas initiated.This resulted in the project teamspearheading a competitive selection process for theprospectivetechnicalvendorandstrategicpartner.Threereputable credit bureauoperatorswere shortlisted, andsite visits for the bidding committee members wereorganizedtoassisttheminmakingtheirfinalselection.Ultimately, following a long negotiation process thatspanned24months, the strategicpartnerwas selected.Amongothers,thecorporategovernancedocumentsandrulesandproceduresweredeveloped.Finally,theinitialstageofcollaborationbetweenpartnersandstakeholdersincludeddevelopinganexitstrategyclearlystipulatingtherolesandresponsibilitiesoftheparties.

Expectations

The most practical solution for instituting anindependentboardmemberistoallowallparticipantsabalancedopinion.Also,itisstronglyrecommendedtomandateperiodicrevisionsofthecorporategoverningdocuments and practices. The role of the generalmanager is also vital as its main responsibility is toensure company development. Balancing the rightsof many stakeholders, however, each of which mayhaveinterestsconflictingwiththoseoftheothers,isadifficulttask.Apracticalsolutionistoincludewrittenrules in the founding documents stipulating that acertain percentage of revenues must be allocated forinnovationsanddevelopment.

Video Clips

e-lessons

SMS text Messages

Diary of Income and Expenses

Comic Books

Radio Soap Opera

Posters

Shopping List

Flyers


7.2. The Role of Outreach and Financial Literacy in Mobilizing Credit Reporting System ReformsIn recent years, financial literacy has become animportantfactorforallfinancialmarketsandforsociety,contributing to the stability and sustainable growth ofnationaleconomies.Limitedtrustinfinancialinstitutionsand lack of understanding of financial products andservices among small businesses and the generalpopulation hampers access to finance. On the otherhand,continuousdevelopmentofnewfinancialproductsandservicesandtheiractivepromotionacrossfinancialmarketsmayresultinconsiderableriseinindebtednessandborrowerdefaults,whichcouldaffectthequalityoffinancialinstitutions’portfolios.Theseeffectsaremorepronouncedfor the lesseducatedpopulationsegments.Itiswidelyacknowledgedthatthefinancialacumenoffinancial institutions’clients,especiallyconsumersandsmallbusinesses,isrelativelylow,andless-educatedandruralpopulations,evenindevelopedcountries,areindireneedofhigherlevelsoffinancialliteracy.Tofillinthisgap, starting in 2013, IFC’s Finance, CompetitivenessandInnovationsGlobalPracticehasbeenimplementingafinancialliteracyprograminCentralAsia.Financialliteracyisbuiltonthreepillars:

● Knowledge:understandingfinancialproducts,concepts,terms,anddefinitions

● Skills: the ability to take appropriate and effectivefinancialdecisions

● Behavior: attitude towards financial organizationsand credit institutions, acceptance of individualresponsibilityforone’sownfinancialdecisions

Intermsofthecreditreportingsphere,financialliteracyencompasses increased knowledge about a creditbureau’sfunctionsandoperations,theabilitytoproperlyuseitsservices,andtheintentiontomanageone’sowncredithistory.To ensure the sustainability of and exit strategyfor the Financial Literacy Program, IFC engagedleading financial institutions and embedded financialliteracy trainings in theirKnowyour customer (KYC)procedures. Engaging reputable financial institutions,andskillshelpedtosecurethetrustofthefinancialsectorand to raise portfolio quality; to increase staff skills,preventing growth of over-indebtedness; and to fostersmartborrowingprinciples,aswellasstimulatedepositsandcross-selling.

Whiledevelopingcontentforfinancialliteracyproducts,it is important to use a tailored approach and adaptmaterialstolocalcustomsandtraditions,sothegeneralpopulationmayeasilyabsorbcreditreportingknowledgeand learn to take better care of their credit histories.Beyondimprovingfinancialplans,smartborrowing,andmoney management, the Financial Literacy Programhelped individuals to increase credit responsibility;understandtheterms,conditions,andbenefitsofvariousfinancialproducts;andchoosethebestmixofproductstofittheirfinancialstrategyforachievingtheirgoals.To reach a broader audience, awell-rounded financialliteracy toolbox was developed and customized forCentralAsiancountries,whichincluded:

● Training of trainers,whowill train staff of financialintermediaries to transfer financial knowledge togeneralpopulationlivinginurbanandruralareas

● Training for counselors (loan officers), to provideconsultationstoexistingandpotentialborrowers

● Marketing gadgets and materials for the general population, broadcast across all the countries in the region in collaboration with leading financialinstitutions

(AdditionalmaterialontheFinancialLiteracyProgrampartners can be found at www.ifc.org/ecacip.)To ensure proper penetration of financial literacyinto both urban and rural areas, the following steps arerecommended:

● Conduct quantitative surveys among the generalpopulation to determine current levels of financialknowledge,skills,andbehavior.

● Conduct qualitative surveys among financialintermediaries and existing borrowers to prioritizefinancialtopics.

● Engageleadinglocalfinancialintermediariesforsocialresponsivity and cost effective Financial and CreditReportingProgramimplementation.

● Find and fill in gaps with financial and creditreporting knowledge to increase skills and improvefinancial behavior of general population, as well toupgrade training knowledge and skills of financialintermediaries’staff.

● Develop the content of training and marketingmaterialstofocusonrelevantkeymessages,adaptedinaccordancewithlocalcustomsandtraditionsthroughregular meetings and in-depth discussions with localpartners.


● Use appropriate (country specific) delivery channelsto broadcast and disseminate marketing materialscountrywide.

● Conductasecondwaveofquantitativeresearchamongthegeneralpopulationtomeasurethefinancialliteracylevel.ThisinitiativecouldserveasatoolformonitoringtheFinancialLiteracyProgram’simplementation.

● Liaisewithlocalpartnersonaregularbasistoensuretheprogram’ssmoothimplementation.

ThisapproachyieldedthegreatestresultsinTajikistan,wheretheproject,onacost-effectivebasis,reachedmorethan380,000people,orapproximately4percentofthegeneralpopulation,throughin-depthconsultations.The financial literacy efforts required measurement,thus in 2017, the project conducted research in theCentralAsianprojectcountriestocomparetheleveloffinancialliteracyamongtheadultsversussomebaselineindicators, collected in 2013 (when the FL programstarted). In the Kyrgyz Republic and Tajikistan, acomparison of respondents’ self-assessments regardingtheir knowledge of financial terms and the proportionof the correct answers indicated that respondents tendtooverestimatetheirknowledge,atthesametime,dueto the collective efforts of credit bureaus operations,financial institutions and intensive work of financialliteracypartners.Acomparisonof the responses to the“knowledgeindicator”andthecorrectanswers2013vs2017 demonstrated 5%growth in the group of peoplewho correctly answered the question about ”what iscredit bureau”. Improvement regarding financial andcredit reporting literacy is always welcome, and theprojectanticipatesusingatailoredapproachtoextendtheFinancialLiteracyProgramcontenttoothercountries.

7.3. Overcoming the Issue of Consent: Guyana’s Credit Bureau The decision to establish a credit bureau in Guyanagrewoutof thecountry’sFinancialSectorAssessmentProgram (FSAP) of 2005/2006 and the first economicsummit of 2007, which recommended establishing aCreditBureau, among a numberof othermeasures, toimproveaccess tocapital.TheGuyanesecreditmarketsuffered from fragmented credit information sharingamongfinancialinstitutionsandfromthereluctanceofkey lenders to share credit information. Establishinga credit bureau was therefore seen as an importantelementfordevelopingthecountry’sfinancialsectorandfosteringeconomicgrowth.

TheInternationalFinanceCorporation(IFC),amemberof theWorldBankGroup,wasinstrumental inhelpingthe Bank ofGuyana (BOG) to establish the country’sfirstcreditreportingsystem.IFCassistedtheBOGwithexpertise for soliciting and evaluating potential creditbureauoperators.IFCalsoprovidedtechnicalassistancetodevelopthelegalandregulatoryframeworkthatlaidthe groundwork for licensing and operating theCreditBureauinGuyana.IntroducingacreditbureauinGuyanarequiredenablinglegislation, the Credit Reporting Act of 2010, andaccompanying regulations pertaining to licensing, feesand cost of inspections, and cross-border transfer andstorage of credit information.The law and regulationsalsoprovidedtheBankofGuyanawithregulatoryandsupervisoryoversightcapacity.The CreditInfo Group, established and headquarteredin Reykjavik, Iceland, was chosen by the BOG, withadvisorysupportfromIFC,fromafieldoffourapplicantsfollowingarigorousvettingprocessthatbeganinApril2011.TheCreditBureauinGuyanarepresentsthesecondregional presence for the group, following the CreditBureauestablishedinJamaicainMarch2012.Aleadingprovider of credit information and risk managementsolutionsinmatureandemergingmarketsandoperatingmorethan25creditbureausinmorethan40countriesonfourcontinents,CreditInfometall the requirementsofanestablishedsetofcriteria.OnJuly15,2013,theBOGlicensedCreditInfoGuyana,thefirstevercreditbureauinGuyana.Undersection12oftheCreditReportingActof2010,thefollowingentitiesweredesignatedascreditinformationproviders(CIPs):

● Commercialbanks ● Nonbankdepositoryfinancialinstitutions ● Nonbanknon-depositoryinstitutions ● LicenseesundertheFinancialInstitutionsActof1995(forexample,merchantbanksandbuildingsocieties)

● Utilitycompanies ● AnyotherentitytheBOGdesignatesasaCIPundertheCreditReportingActof2010

TodatetheCreditBureauhas21CIPs:Commercialbanks:6Nonbanklicensedfinancialinstitutions:4Utilitycompanies:3Hire-purchasecompanies:1OtherdesignatedCIPs:7


TheCreditReportingActof2010containedanumberofweaknesses,however,whichstymiedthegrowthandviabilityoftheCreditBureauinGuyana.Forinstance,itallowedtheCIPtoshareacustomer’sfinancialdataorinformationonlywiththecustomer’spriorconsent.Thisgreatlyhamperedthetransferofcustomers’informationfromtheCIPstotheCreditBureauandassuchresultedin the slow population of the bureau’s database.Additionally, theActalsoallowedcredit institutionstoprovidecustomers’credit informationto thebureauonavoluntarybasis.The Credit Bureau (Amendment) Act of 2016subsequently addressed these weaknesses in thefollowingways:

● It compelled credit information providers to pullcreditreportsfromtheCreditBureaupriortograntingor renewing credit facilities to a consumer. This isa mandatory component of the evaluation of theconsumer’screditrisk.

● Itcompelledcreditinformationproviderstosharecreditinformationwith theCreditBureauonallpersons towhomcreditfacilitieshavebeenextended.

● ItmandatedthatcreditinformationproviderssharewiththeCreditBureaudataandinformationonconsumerswithoutconsumers’priorconsent; itprohibitedcreditinformationprovidersfromsubmittingarequesttotheCreditBureauforinformationonaconsumerwithoutobtainingtheconsumer’spriorwrittenconsent;anditdiscontinued the requirement that credit informationprovidersobtaintheconsumer’spriorconsenttosharehis/herpersonalinformationwiththeCreditBureau.

As at July 2017, CreditInfo Guyana had in excessof 230,000 active consumers, while the number ofaccounts on its database was approximately 324,000.WhentheCreditBureaubeganreportingtotheBOGin2015,thenumberofinquiriesamountedtoapaltry25,while thenumberofcredit reports issuedfor thesameperiod amounted to approximately 16,000. Since theamendmentstotheCreditReportingAct2010in2016,theCreditBureauhaswitnessedanoticeableincreaseinitsoperations,withthenumberofinquiriesincreasingtoapproximately102,000andthenumberofcreditreportsissuedtoapproximately41,000fortheyear.AsofJune2017,justover53,000inquiriesweremadeandjustover26,000 credit reports were issued, an indication thatby theendof2017 thenumberof inquiries andcreditreportswillexceedthe2016figuresinthesetwoareas.Since its inception as to June 2017 theCredit Bureauhadprocessed155,317inquiriesandhadissued83,468creditreports.

According to the World Bank 2019 Doing BusinessReport,Guyanaadvanced82placestorank85in2018intheeaseofgettingcredit,upfrom167in2013atthetime of establishment of the Credit Bureau. Throughthe Credit Bureau, applications for credit are beingevaluatedatafasterrateandinstitutionsareabletomoreaccurately assess risk and determine creditworthiness.Consumers will benefit from shorter processing timefor credit applications, lower interest rates in someinstances,andgreateraccesstocredit.The proposed expansion of value-added servicesprovides additional evidence that theCreditBureau isadvancinginefficiencyandeffectiveness.Itisexpectedthat, over time, consumerswill gain confidence in theCreditBureauanditsservices,whichcanleadtoeasieraccesstocreditandgreaterfinancialinclusion.

7.4. Jamaica’s Experience in Licensing and Regulating Credit Bureaus Background

The Jamaican financial crisis of themid to late 1990saccentuated the need for overall improvement in thelegislative and regulatory framework of the country’sfinancial system. Subsequent modernization of theframework included strengthening the regulatory andsupervisory mandate of the Bank of Jamaica as wellas establishing both the Jamaica Deposit InsuranceCorporation, providing deposit insurance protection,and the Financial Services Commission, overseeingsupervision of nonbanks. These improvements in thefinancial system’s regulatory framework were gearedtowardensuringthatdeficienciesinregulatoryoversightandthesafetynetthathadbeenidentifiedintheprecrisisandcrisiseraswerenotperpetuatedunderthenewregime.Oneofthegapsidentifiedwastheabsenceofeffectivecredit informationsharingamongfinancial institutions,which contributed to high levels of problematic loansinlendinginstitutions.Inparticular,intheearlytomid-1990s,asymmetricinformationbetweenborrowersandlenderswas exploited by customers, particularly thosewith poor credit histories, contributing to significantincreases in nonperforming loans.The proliferation ofnonperforming loans triggered a regulatory responsethat required banks to increase loan loss provisioningand engage in loanwrite-offs, leading to deterioratingearningspositionsforfinancialinstitutions.Comingoutofthebankingcrisisin1996,variouslendinginstitutions and other stakeholder groups, including theJamaicaBankersAssociation,proposedthattheJamaican


governmentputappropriatelegislationinplacetofacilitatecredit information sharing and to provide a regulatoryframework within which stakeholders would operate.Afterseveralyearsofconsultation,alongwithothermajorfinancialsectorreformprograms,theCreditReportingAct(CRA)waspassedinAugust2010.TheCreditReportingRegulations,whichservedtooperationalizetheAct,werepromulgatedinJanuary2011.

The Credit Reporting Framework in Jamaica

The CRA and accompanying regulations establishedthelegalandregulatoryframeworkforthecreationandoperation of credit bureaus and the sharing of creditinformation among eligible institutions. Initially, theeligible credit information providers (CIPs) under theCRA consisted of deposit taking institutions, creditunions, securities dealers, insurance companies, hire-purchase companies, and selected government lendingagencies. Subsequently, the Minister of FinanceexercisedhisauthoritytodesignateadditionalcategoriesofCIPstoparticipateinthesharingofcreditinformationwithcreditbureaus.TheadditionalCIPsdesignatedweremicrofinanceproviders;utilitycompanies,includingthepower,water,andtelecommunicationserviceproviders;and entities that extend credit solely incidental toconductingtheirmainbusinesses.UndertheCRA,BankofJamaica(BOJ)wasdesignatedwith supervisory responsibility for credit reporting.Pursuanttothisdesignation,BOJconductedsubstantialresearchbeforedetermininganappropriateoperationalstructure and the resources necessary to effectivelyexecute its mandate in accordance with internationalbestpractices.ThisincludedstructuringandresourcinganewunitinthesupervisorydepartmentofBOJtasked

with establishing the requisite policies, procedures,and guidance under the credit reporting framework.This body of work included creating andmaintainingadatabase forcustomercomplaints.Additionally,BOJestablished a public education program to sensitizestakeholdersabouttherequirementsandimplicationsofthenewlegislation.

Operationalizing the Oversight of Credit BureausUnder the CRA, BOJ received seven applications forlicenses, of which three were approved: CreditinfoJamaica Limited, licensed March 2012; CRIF NMCreditAssureLimited,licensedApril2012;andCreditInformationServicesLimited,licensedAugust2014.As part of its effort to operationalize its mandate ofcredit reporting oversight, BOJ established quarterlyreporting requirements for credit bureaus to facilitateongoing monitoring of key performance indicatorsand assess the impact ofmarket developments on thebureaus’operations.Additionally,onanongoingbasis,BOJ conducts research andmonitors credit bureaus toensure that under the newly implemented frameworkdisclosureandcreditinformationsharingproceedsonalevelplayingfield.Currently the legislative framework does not providefor mandatory participation or reciprocity in creditdatasharing, thereforeparticipationinJamaica’screditreporting regime has been market driven. This hasnot impeded the pace of expansion under the existingregime,however,asaverycompetitivecreditreportingmarkethasemerged.SeeTable7.1belowforasummaryofselectedindicators.

Table 7.1. Select Indicators for 2013–2016 for JamaicaIndicators 2013 2014 2015 2016

Number of licensed credit bureaus 2 2 2 3

CIPs signed with credit bureaus 36 53 69 84

CIPs pulling data from credit bureaus 8 29 47 63

CIPs submitting data to credit bureaus 8 18 19 36

Credit reports issued during the year 1,722 69,939 129,698 250,122

Population coverage (percent)* 9.6 21.6 20.6** 22.6

* Percentage of population covered by credit bureaus; the credit granting population segment, ages 18 to 74 years old in 2014, was 1,807,197. (Source: Statistical Institute of Jamaica Demographic Statistics.) Data on credit granting population size data for 2015 are not available.** One bureau performed a system upgrade during 2015 that eliminated data subjects previously duplicated in the system, thereby reducing the number of data subjects reported for the year.


Achievements of the RegimeThe 2019 edition of theWorld Bank Doing BusinessReport, rated Jamaica’s ease of doing business as 75,making it thehighest-ranked country in theCaribbeanregion.Thisrepresentsasignificantimprovementfromits ranking of 94 in 2013. Jamaica’s establishment ofcredit bureau operationswas cited as one of themaincontributorstothissignificantachievement.Since the credit bureauswere established, informationasymmetry has been reduced, as evidenced by thenumberofCIPsusingcreditbureaudatainthemarket(seeTable7.1).Theincreasedroleofcreditbureaushasalso influenced consumers to rehabilitate and preserve

theircreditratingstoaccessnewfinancingfromfinancialinstitutions(seeFigure7.1).Additionally,thebankingsystemhasrecordedanotableimprovement in the trend for key credit performanceindicators,suchasthetotalnonperformingloans(NPL)ratioforcommercialbanks,whichhadincreasednotablyfollowing theglobalfinancialcrisis, improving for theperiod2012to2016,subsequent to the introductionofthe credit bureaus (see Figure 7.2).13 Increased access toborrowers’informationhasalsoenabledbettercreditunderwritingby lending institutions,which in turnhashelped bring about sharp reductions in the levels ofnonperformingloansindeposit-takinginstitutions.

Figure 7.2. Changes in Total NPLs for Period 2011–2016 for Jamaica

2011 2012 2013 2014 2015 2016

NPL ratio: Commerical Banking Sector

NPL ratio (RHS)

8.8%

6.5%5.5% 5.0% 4.1%

2.7%

3,000

2,000

1,000

2011 2012 2013 2014 2015 2016

J$Mn

Net Annual Loan Recoveries for Commercial Banks2011 to 2016

Figure 7.1. Trends in Annual Loan Recoveries at Jamaica’s Commercial Banks

13. The improvement in the NPL ratio between 2012 and 2014 was primarily due to transfers of large NPLs to special purpose vehicles (SPVs), net write-offs to large corporate borrowers, and net repayments on corporate facilities. These sources of decline in NPLs were partly moderated by growth in new NPLs (largely nonperforming loans from the personal, nonbusiness, and SME sectors).

From 2014 to 2016, new NPLs had a net decline. This turnaround in new NPL performance, which occurred against the backdrop of improve-ments in macroeconomic conditions, was largely attributable to the operationalization of the credit bureau industry, which saw a material increase in the number of credit reports issued and the number of CIPs signed with credit bureaus. For further details, see the Bank of Jamaica’s April to June 2017 Quarterly Monetary Policy Report, Box 4, page 25–27.


Success Factors and Lessons LearnedTheintroductionofregulatedcreditreportinginJamaicahas been recognized by key stakeholders as a criticalelementoffinancialsectorreformandavitalpartofthewider strategy for inclusive growth and developmentin the Jamaican economy. Jamaica’s experience hasconfirmedthefollowing:

● A good credit reporting system hinges on a stronglegal framework that provides for credit informationsharingamonglendersandrestrictsaccesstocustomerinformationwithoutthecustomers’consent.Therefore,the legal framework should adequately considerconsumerprotectionmatterssuchasprivacy,therighttolodgeacomplaintandtheavenuefordoingso,andmechanismsforappeal.Thelawshouldalsooutlinetherulesofengagementforcredit informationproviders,including their rights and responsibilities, within themarket.

● Stakeholders’confidenceinthesystemdependsinlargepartontherobustnessofthetechnologyplatformsusedbycredit informationprovidersandcreditbureaus toensuretheaccuracyandintegrityofcreditinformationbeingshared.

● Confidence in the system can be bolstered throughadequateconsumerawarenessprogramsthathighlightthepotentialbenefitsoftheregimetoindividualsandoutline the consumer protection mechanisms within theframework.

In Jamaica, incremental expansion of the number andtypes of CIPs to include nonbank entities (i) allowedsignificant growth in the credit reporting regime asmeasured by the number of credit reports issuedannually,(ii)facilitatedexpansionofthecreditbureaus’databasestocoverawidercross-sectionofconsumers,and(iii) increased thepotential foraccess tocredit forunbankedconsumers.

7.5. Establishing Credit Histories for Low-Income Women in India

History of India’s Credit BureausIndia’s credit reporting industry grew on the back oftheAsianfinancialcrisisof1997,whichwascatalyzed

by a boom in borrowing during which short-termforeign borrowings were extensively used for long-terminvestmentsinSoutheastAsianeconomies.WhileIndia’s stringent capital account restrictions preventedlarge volumes of capital flows, the 1997 foreignexchangecrisisdidpromptareexaminationofexistingcredit information infrastructure across Asia and theadverse impacts of excess lending.TheReserveBankof India (RBI) recommended a framework for settingupcreditbureausthroughaWorkingGroupestablishedin1999.Until this time,no institutionalmechanisminIndia collected and furnished information on existingandprospectiveborrowers.Accordingly, Credit Information Bureau (India) Ltd.(CIBIL)wasincorporatedinAugust2000andlaunchedoperationsin2004.Alandmarklegislationwasenactedin 2005 (the Credit Reporting Act, or CICRA) witha view to regulating credit information companies(CICs),sinceprovisionsofmultiplebankinglegislationsprohibited disclosure of borrower information. Theroll out of individual and commercial reporting wasinitiallyslow,butitpickeduppacebyendofthe2000s.In 2009, RBI licensed three more bureaus (privatelyownedbytechnologypartnersandfinancialinstitutions)toprovide credit information services,which added to themomentum.Credit reporting emerged as a tool for streamliningcredit flow to low-income borrowers in India, whenmicrofinanceinstitutions(MFIs)steppeduptheiruseofcreditreports.Thispracticegainedmomentumfollowinga regulatory directive issued in the aftermath of theIndianmicrofinancecrisis.16Theexampleofonecreditbureau,CRIFHighMark,demonstratestheremarkablepace of growth of India’s credit reporting industry,especially given the initially low levels of awarenessaroundcreditreportingamongmanylendinginstitutions,particularly MFIs. High Mark, now known as CRIFHighMark,startedoperationsinearly2011andwithinjustfourmonthshadreceived35millionrecordsfrom30lenders.In2017,CRIFhad3,600memberscoveringallpublic/privatebanks,MFIs,housingfinancecompanies,regional rural banks, and many nonbanking financialcompanies(NBFCs)andcooperativebanks.Itmaintainsthe histories of more than 80 million microfinance

16. Easy liquidity and low barriers to entry led to instances of multiple lending and client over-indebtedness among Indian MFIs. Concerns about this came to the fore in 2010, when mass instances of loan nonrepayment occurred in the state of Andhra Pradesh, following allegations of coercive practices by some MF players and related political pressure. The AP state government issued an ordinance with stringent operational controls over MFIs, including on new lending and recovery, leading to large-scale defaults and increased NPLs in MFI portfolios. This had spillover effects across the country when bank lending to MFIs came almost to a standstill.


borrowersandmorethan360millionborrowersoverall,and it has supported more than 200 million lendingdecisionstodate.So how did a new industry create such remarkablegrowthinsuchashorttime,especiallyinbuildingcredithistoriesforlow-incomewomen?AndwhatwastheroleoftheWorldBankGroupincatalyzingthisgrowth?

Understanding the ClientIndia currently has among the largest number of low-income borrowers of financial services in the world.Thetypicalfemalemicrofinanceborrowerhasmonthlyhousehold income between INRRs1500 (US$22) andabout Rs60,000 (US$1,000).About 59 percent ofMFborrowersgenerate incomethroughmanufacturingandtradeactivities,andtherestthroughagriculture,nonfarmlabor,livestock,andservices.Rarelydotheseactivitiesfall within the formal sector. Only 6 percent of MFclientshavecompletedhighersecondaryeducation;67percent are illiterate or have below primary education(GrameenFoundation).Low-income women borrowers have largely receivedfinancing from two complementary sectors in India:the SHG (Self-Help Group)-Bank linkage program(SBLP) and the microfinance sector.16 In India, MFIs areregisteredasnonbankingfinancecompanies,not-for-profitcompanies,trusts,societies,orcooperatives.ManyfunctionasNBFC-MFIs(regulatedbyRBI)toeasethedifficulty of raising of equity. Currently, the regulatedmicrofinancemarketcovers50millionclients,servedbymorethan100regulatedinstitutions,withanetworkof10,553branchesand80,097employeesacross32statesandunionterritories.By the late 2000s, Indian MFIs achieved very highgrowth rates, but by 2010, the vulnerabilities of thesector became clear when concerns around multiplelendingculminatedinthecrisisnotedabove.ItbecamecriticaltoensurethatMFIs’underwritingpracticeswerestandardized and that client over-indebtedness wasadequatelyassessedbeforesanctioningcredit.RBIalsosteppedin,cappingtheamountlenttoborrowersatatimeandlimitingthenumberofMFIsfromwhichborrowerscould receive loans.The sensewas that growthof therequiredcreditappraisalsystemshadnotkeptpacewiththegrowthinportfolios.Theemergingchallengewastocreaterobust,standardizedtoolsofcreditanalysisfora

borrower segment for which information existed only infragments.

Catalyzing IntegrationRecognizingearlyonthepotentialformultiplelendingandrisks inherent in fastgrowthof theMFsector, theWorld Bank Group (WBG) commissioned a scopingexercisein2009,wellbeforetheMFcrisis.Theobjectivewas to assess the readiness of MFIs to share creditinformationwithbureaus.Thisanalysisunderscoredthelackofstandardizationindatacollectionandsubmissionprocesses across MFIs, challenges in identifyingand matching individual borrowers, and a limitedunderstandingamong lendersabout theneedforcreditreporting.Aspartofitskeyrecommendations,theWBGsuggested a redesign of the credit information reportto incorporate thegroup lending structureandconceptofjointliabilityloans,anditpushedthesectortoworktogetheronacommondataformat.The microfinance crisis in 2010 hastened the sectortowards reevaluating its appraisal practices,which theWBGhadbeenurging.Newregulationsweresoonputin place mandating that MFIs submit borrower datato all credit bureaus. As indicated, since regulationslimited the number of NBFC-MFIs a customer couldborrow from, credit bureau checks became importanttoolsthatcouldbeusedtoverifythis.GiventhelimitedexperienceofMFIsinworkingwithcreditinformationbureaus,what the sector neededwas a partner to helpimplement a roadmap for integrating borrower datawhileupholdingstandardsofqualityandsecurity.TheWBG, given its existing engagement with CICs since2009,emergedasakeystakeholder thatcouldsupportthe sector in this transition.Using the lessons learnedfrom this program, a new project was started tomeetthe sector’s needs. Program design was structured toinclude a multistakeholder approach, incorporatingadvisory support tonetworkassociations,CICs,MFIs,andborrowers.

Challenges and Solutions Capturing the identity of a borrower in the creditreporting system was a particularly challenging taskas demographic details usually required for buildinga borrower’s credit history were difficult for bureausto ascertain. Diversity within and across Indian statesin names, addresses, and forms of identificationmade

17. While the SBLP facilitated credit linkages between banks (primarily public sector) and SHGs (groups comprising of 10 to 20 women), microfi-nance was driven primarily by the private sector, with MFIs primarily financing joint liability groups (JLG) comprising 3 to 5 women.


it challenging to standardize data. A common namelike Lakshmi, for example, can be spelled as Laxmi,Lakshmee,Lachmi,orLakkhi,dependingontheregion.Itsoonemergedthatmanyborrowerswereignorantofbasicinformationsuchasdateofbirth.Itwascommonpracticeforanentirejointliabilitygroup(JLG)toprovidethesamedateofbirth(suchasJanuary1,1980)forallitsmembers. Itwasalsodifficulttoidentifylocations,givenduplicationofvillage/streetnames, especially inruralareas.Attimes,the“address”ofaborrowerwouldcoincidewith that of the local post office. Ifmemberswererelated,asingleaddresswouldbeprovided,evenifseparateresidencesweremaintained.Typicalidentifiersused in a credit information report were therefore notapplicableinthiscontext.Inaddition,MFIs,especiallythesmallerones,facedcapacityissues,withpoorMIS,highprobabilityoferrorindataentry,andsusceptibilityto data manipulation and fraud. To mitigate thischallenge,bureausdevelopedmorecomplexalgorithms.TheWBGprogramcame inwith timely interventions,incollaborationwithindustryassociationMicrofinanceInstitutions Network (MFIN). A technical assistanceprogram was developed for 20 smaller MFIs, withemphasisoncapturingandsubmittingrequiredborrowerinformationtocreditbureaus.Thisalsoensuredbuy-inofexistingusersand increasedusageofcredit reports.Another examplewas that of a data quality review toassessqualitycontrolprocessesfollowedbyMFIswhilecollecting and submitting data, as well as processesfollowedbyCIBsincollectingandprocessingsubmitteddata.Recommendationsincludedstandardizingrejection

criteria across CIBs and submission formats acrossMFIs,standardizingKnowYourCustomerrequirements,and identifying categories of inconsistencies to enableMFIs to investigate them. MFIs agreed to capturesevenmandatoryfields,devisedstrongerprocesses,andestablished contact points with other MFIs to gatherinformation on negative bureau matches. This helpedestablishsomebasicstandardsinthecreditinfrastructuremarket.WBGprovidedsupporttoHighMark(HM,nowCRIFHighMark)andEquifaxtoexpandcoverageanddevelop new products, under which these algorithmswere piloted. To address the end borrower, theWBGpartnered with MFIN to support creation of a CIBawarenesstoolkitforMFIborrowers.For a borrower data set to be usable for generating acredit information report, the personal data points inTable7.2arenecessary.

ImpactThis effort became theWBG’s largest credit reportingproject; it enabledoutreach toninemillionclientsandachieved six million IFC Development Goals (IDGs).During the project period, 45 million incrementalinquirieswerereceivedinCICdatabases,and150MFIswere added since inception.Through this project,HMandEquifaxdevelopedacombineddatabaseofmorethan80millionmicroclientrecords,thelargestrepositoryofsuchdataintheworld.The project demonstrated effective use of sectoralchannels to maximize institutional impact. TheWBG repeatedly convened multiple stakeholdersfor conferences or workshops, including banks anddonors, to discuss the need for robust credit reportingpractices.Alongwith awareness raising initiatives, theWBGfacilitatedsessionsbytechnicalexpertsaimedatimprovinguseandinterpretationofcreditreports.WBGthus combined broad sectoral guidance with specificoperationalsupportforenhancinguse,identifyingrisks,andimprovingdataquality.Among institutions,basedoncasestudiesdocumentedbyMFIsandHMin2013–14,multiple instanceswereobservedofwomen identified asdelinquentborrowerswho serviced their outstanding loan and returnedwithupdatedstatementstoaccessfreshcredit.Theprevalenceofcreditreportingandcitingacreditinformationreport(CIR)alsoreducedthenumberoffalsedeclarationsbyclients.With credit reports enabling 50 percent lowerdefaultratesandincreasedabilitytoidentifyoverheatedareas, lenders could target unbanked areas better andenable clients’ access to a wider range of products.

Table 7.2. Personal Data Points Need to Generate Credit Information Reports

Data Type Data FieldPrimary Header Borrower Name

Complete AddressDate of Birth

Voter’s IDRation Card/Other IDTelephone (Land/Cell)

GenderSecondary Header Marital Status

Spouse’s NameFather’s Name

AgeCenter’s Address


Lendersalsoobservedhighoperationalefficiencieswithincreasesinborrowerdisclosureandrepaymentofolderover-dues.WhenaloanwasdeniedbasedonaCIRwithalongoverdueloan,54percentwererepaid.Thus, credit history emerges as a powerful tool forthe financial inclusion of women from low-incomehouseholds. It can create a transaction trail enablingthem to graduate to higher ticket loan sizes andmovefrom credit for consumption to credit for livelihoods.Inclusion of this level of borrower data helps identifyfinancially excluded pockets and provides informationongeographieswherefinancialinclusioneffortsshouldbe targeted. It also helps identify over-indebtednessamong borrowers; consequently, it contributes toreducingNPLs.GiventhestrongvaluepropositionandsupportfromtheregulatorandstakeholderssuchastheWBG,theindustryhasbeenabletoprogressfast.

WiththepushtowardseedingforallborrowersofAadhar(India’s 12-digit unique identity number, issued to allIndianresidentsbasedontheirbiometricanddemographicdata), client identification is now more efficient andstreamlined.TheWBGprogramhasalsoexpandedfurtherand now focuses on bringingSHGmember informationintoCICdatabases.Whilethejourneyhasbeenlongandarduous,theresultsforthecreditreportingindustryhavebeenremarkable.Indiapresentsanimportantexampleofhowresponsiblelendingcanbeputintopracticethroughstronger credit infrastructure. The contributions of thisprogramwere recognizedby theWBGin2017,when itreceived the VPU award for outstanding achievementfor “enabling credit for low-income women and smallenterprises[India].

There are two types of Credit Reports: a Consumer credit report is an individual’s credit payment history across loan types over a period of time, and a commercial credit report is a record of a company’s credit history. While commercial and consumer credit reports are similar in purpose—to provide prospective lenders with credit profiles for determining credit risk—they differ in the types of information they contain and how they are used.

It’s important for business owners to establish separate credit profiles for their businesses. Until they do, they are personally liable for any loan obligations, even if the business is a separate legal entity. Without a business credit profile, lenders rely on the business owner’s personal credit profile to determine credit risk, which can limit the business’s capacity to borrow what it needs.

GAINS TO THE MICROFINANCE INDUSTRY FROM INCREASED USAGE OF CREDIT INFORMATION REPORTS

Parameters Small MFI Medium MFI Large MFI Industry

Gross loan portfolio Rs.1 billion ($16.67 million)

Rs.2.5 billion ($41.67 million)

Rs.12 billion ($200 million)

Rs.300 billion ($5 billion)

Gains due to PAR90 savings Rs.2.36 million ($39.333)

Rs.5.9 million ($98.333)

Rs.28.32 million ($472.000)

Rs.708 million ($11.8 million)

Gains from collections Rs.253,600 ($4.227)

Rs.634,000 ($10.567)

Rs.3.043 million ($50.720)

Rs.76.08 million ($1.268 million)

Total Gains Rs. 2.61 million ($43.560)

Rs 6.53 million ($108.900)

Rs 31.36 million ($522.720)

Rs 784.2 million ($13.07 million)

Average ticket Size Rs.10,000 ($166.67)

Rs.11,000 ($183.33)

Rs.12,000 ($200)

Rs.12,500 ($208.33)

No. of applications 110,000 250,000 1,100,000 26,444,000

Gains per application Rs.23.76 ($0.396)

Rs.26.14 ($0.436)

Rs.31.38 ($0.523)

Rs.29.65 ($0.494)

Source: High Mark Credit Information Services Private Limited, from research carried out in 2013–14 in partnership with WBG.


7.6. Increasing the Coverage of Commercial Credit Reports and Using Alternative Sources of Data to Reach Underserved MSMEs in IndiaLackofadequatecreditinformationonmicroenterprisesandSMEshamperseconomicgrowth.Themicro,small,andmediumenterprisesector(MSMEs)sectoriscrucialtoIndia’seconomy.(Thedesignationasamicro,small,ormediumenterpriseisbasedontheenterprise’sinitialinvestmentinplantandmachineryperIndia’sMSMEDAct, 2006.) India has 48.8millionMSME enterprisesin various industries, employing 111 million people.Ofthese,7.4percentarewomen-led,andcloseto55.3percentarebasedinruralareas.Estimatesindicatethatthemanufacturingsectoraccountsfor21percentofallMSME enterprises, while the services sector accountsfor 79 percent (India, Ministry of Micro, Small, andMedium Enterprises 2016; India, Ministry of Micro,Small,andMediumEnterprises2007;IFCIntellecap).MSMEsaremorepronetocreditconstraintsthanarelargercompanies.Lackofadequateandtimelyaccesstofinanceremainsthesector’sbiggestchallengeandhasconstraineditsgrowth.AlargenumberofMSMEsinIndiacontinuetobeunservedandunderserved;andthisisparticularlytruefortheunregisteredandtheinformalsector.ManyMSMEs,especiallythoseintheservicesector(suchasretailtrade;legal, educational, and social services; restaurants; andartisans), face serious challenges in obtaining financefromformal sourcesdue tonon-availabilityofadequateidentityorvintageidentitydocuments,non-availabilityofadequatecredithistoryorarepaymenttrackrecord,andnon-availabilityofpropertycollateral.Estimates put the sector’s informal sources of debtat Rs39 trillion (US$601 billion) or 75 percent of its

credit supply. Informal sources include institutionalsources, such as money lenders and chit funds, andnon\institutional sources, such as family, friends, andfamily businesses. Early-stage MSMEs often turn tomoneylenderswithhighcostsandunclearlendingterms.A strong correlation exists between the presence ofrobust credit information system and penetrationof formal finance in an economy. A well-developedfinancial infrastructure makes credit markets moreefficientbyreducinginformationasymmetriesandlegaluncertaintiesthatmayhamperthesupplyofnewcredit.Transparent credit reporting can support the internalrisk management of financial institutions and supplyregulators with timely information on the risk profileof systemically important financial institutions (WorldBank 2013). Credit reporting systems help ensurefinancialinclusionbyenablingaccesstofinancefortheunderserved and unbanked. Credit reporting systemsare a critical component for any country in ensuringfinancialinclusion.TheWBGDoingBusiness2019datashowthatIndia’scredit information companies cover approximately479 million individuals and 17 million firms (or theequivalentof56%ofthepopulation).CreditinformationcompaniesandcreditbureausinIndia,suchasEquifax,Experian, CRIF High Mark, and CIBIL TransUnion,provide lenders with credit scores based primarily ontheloanapplicants’pastrepaymenthistory.Thesecreditbureausarestillintheirfledglingstage.Thefirstbureau,theCentreforInformationBureau(India)Limited,morecommonly known as CIBIL, commenced operationsinAugust2000; itsConsumerBureauwaslaunchedin2004with4millionrecords;anditsCommercialBureauwas launched in 2006with 0.7million records.Whilethe consumer bureaus and records in theseCICs have

In the words of Financial Institutions and MSMEs interviewed under the WBG Project:

“Willing to pay even 3x the current cost if reliable, high-quality and comprehensive credit report is available at my perusal.”

—Business Head, Private Sector Bank

“Ready to provide any information if we are benefiting from receiving financing assistance for our business needs”

—MSME


been growing, the database for microenterprises andSMEsisnotadequatelypopulated,anddifferentiationofmicroenterprises and SMEs is inadequate. In addition,use by financial institutions of commercial creditreportingproductsremainslimited.Alternative data sources increase the effectiveness ofcreditreportsinenablingaccesstofinanceintheMSMEsegment.These additional data points are increasinglyusedtopredictriskandrepaymentbehaviors,andcreditbureausmay be able to build credit reports thatmoreaccurately reflect defaults and in turn enable financialinstitutionstograntmoreloanstoabroaderpopulation.Borrowersoftenlackthenecessaryinformationfinancialinstitutionsrequiretoassesstheircreditworthiness,suchas reliable identification, business track records, andsufficient turnover and cashflow records.This lackofinformation reduces their chances of getting financed.Moreover, credit assessment of borrowers byfinancialinstitutions are often subjective, time consuming, andexpensive, involving home visits by loan officers tointerviewapplicantsandtheirneighbors.Manysmallcompaniesmakesteadypayments(suchasrent, utilities, and cell phone bills) outside the formalcredit markets, however, and these can be used todeterminecreditworthiness.Suchalternativedatasourcesoffer a potential solution to the challenges of MSME

Figure 7.3. Commercial Credit Reporting India Project Pillars

financing.Alternativedatapoints,alongwiththeexistingdata, are already being piloted by financial institutions(globally and in India).MSMEs stand to benefit, as agoodprofileonacreditreportcouldhelpthemgainfasterandcheapercredittomeettheirbusinessneeds.Financialinstitutions are realizing the value of using alternativedatasourcesandareinvestingintechnologytodevelopadvanced credit-scoring models. Alternative credit-scoring solutions can augment the credit assessmentprocess,particularlyforsmall-ticketloans.Companiesmakinguseofalternativedatacanbridgethisgapfortheunbankedandunderbankedandplugthemintotheformalsectorthroughsophisticateduseofadvancedtechnology and available records from alternativesources. Inaddition tofinancial institutions, traditionalcredit-scoring companies are exploring partnershipswithfintechcompaniestoincludealternativedataintheircredit scores. InChile, for example, the credit-scoringagency Equifax has partneredwith a start-up, Cignifi,whichwillusecellphonedata toprovidea“PredictorInclusionScore”forpeoplewithnocredithistory.Leading alternative-scoring players in India includecompanies like Credit Vidya, an alternative credit-scoringplatformthatusesbigdataandadvancedmachinelearningtechniquestobuildcreditscores.Anotherfirm,Spotco,buildscustomermodelsusingdatatouchpoints

Sectoral Interventions

Market assessment on alternative data sources

Assessment of impact of credit reporting on SME access to finance globally

Partner with SME associations for SME awareness campaigns

Knowledge sharing/awareness campaigns to promote use of credit reporting

Work with SME Associations to determine most viable alternative data source

Facilitate sector discussions on best practice in use of alternative data

Work with credit reporting companies on inclusion of alternative data

Train the trainer for Fls on effective use of credit reporting in SME finance

Support any required legal or regulatory amendments

Financial Institution Capacity Building

SME Sector Awareness

Ongoing Monitoring and Evaluation


Figure 7.4. Potential Alternative Data Sources for India’s Underbanked and Unbanked MSMEs

Increasing Awareness on Commercial Credit Reporting

MSMEs lack awareness of their level of understanding of credit reports and credit bureaus. They lack understanding that a credit report captures the repayment conduct of the borrowing entity, which forms a key element in credit decision making by financial institutions. With this background in mind, one WBG project component has focused on increasing knowledge among MSMEs on credit reporting. The following activities were carried out under this component:

• Design of trainings modules (separate for FIs and SMEs) on credit reporting17 Trainings raise awareness on the benefits of credit reports and importance of credit bureaus.

• Collaboration with national and regional MSME associations (FISME & CII), conducted through 10 face-to-face SME trainings and 6 webinars, reaching more than 450 MSMEs.

• One workshop for more than 40 NBFCs (CXO staff) was recently conducted.

• E-modules of the credit reporting trainings, one each on FI Training and SME Training (links given below), have now been created or more widely disseminated. This content also helped lead to a global WBG CR training e-module.

4. Gas Bills

10a. GR Returns

11. E-commerce

5. Income Tax Payments

2. Electricity Bills

6. VAT Returns

3. Water Bills

10b. Bill of Entry

13. Social media

15. Trade Credits–Supplier rating (BSE listed cos.)

7. Sales Tax Returns

16b. Insurance premium payments

12. Legal suits

16a. Insurance fraudulent claims

9. Trade Credits–Defaults

1. Telephone Bills

14. Collateral details

Low Medium HighDifficulty to capture

High: effectiveness and reliability of dataAverage: effectiveness and reliability of dataLow: effectivness and reliability of data

Financial Institution’s view point on effectiveness and reliability of alternate data

Effectiveness in enabling MSME Access to Finance

Data

Reli

abilit

y

Low

Mediu

mn H

igh

Low Medium High

8. PF Deposits

17. Links for trainings on credit reports for FI and SME, respectively :https://wbg.sabacloud.com/Saba/Web_spf/NA1PRD0002/common/leclass-view/dowbt-00028867 and https://wbg.sabacloud.com/Saba/Web_spf/NA1PRD0002/common/leclassview/dowbt-00028932


such as borrowers’ location, browsing habits, socialmedia profiles, type of mobile app usage, behavioraltracking, device tracking, thus assessing individual’spersona andwillingness to pay.Other companies, likeVisualDNA (now acquired by Creditinfo and other),conductcustomerprofilingthroughpersonalityquizzes,an example of psychometric tests/scoring that try toassess thesocio-psychologicalprofileofborrowers(anintent-to-paymeasure).Manyfinancialinstitutionshavealreadystartedusingthesecreditassessmenttools,likeJanalakshmiFinancialServices(JFS),acompanyinthetop10ofIndianMFIs,whichengagedEFLinApril2013tocontrolriskandexpandindividuallending.(Seehttps://www.eflglobal.com/wp-content/uploads/2014/09/JFS-Case-Study.pdf.) In conjunction with traditional creditunderwriting tools, EFL demonstrated the ability toaccuratelymeasurecreditriskamongclients.WBG/IFCcontinuestosupportdevelopmentofIndia’scommercial credit reporting market. The WBG’sFinanceandMarketsGlobalpracticehasheldmultiplemeetings and workshops with various stakeholders aspart of itsCommercialCreditReporting IndiaProject.Keyissuesraisedincluded(a)useofonlystandardcreditinformation,(b)limitedusebyfinancialinstitutions,(c)poordataquality,and(d)lackofawarenessintheMSMEsector.Theprojecthasaccordinglyengagedwithvarious

Table 7.3. Trend of Credit Report Inquiries

stakeholders (including all the four credit bureaus,RBI, MSME associations, MSMEs, and financialinstitutions)overthelasttwoyears.Theprogramworkswith commercial credit bureaus and is the first of itskind in the emergingmarkets global portfolio. ProjectcomponentsappearinFigure7.3.A key focus of the WBG/IFC Commercial CreditReportingIndiaProjecthasbeenworkingonpushingforchangeintheexistingCreditReportingAct(CICRA)totrytointegratealternativedataintothecreditreportingsystem.As a part of this work, a research study wascarried out in 2015–16 and summarized in “TheRoleof Credit Information on Level ofAccess to FinanceforMSMEsand InclusionofAlternativeDataSourcesin MSME Credit Reporting.” Some of the potentialalternativedatasourcesforunderbankedandunbankedMSMEscapturedappearinFigure7.4.As noted in the report, “to enable access to finance, Financial Institutions want existing MSME credit reporting to be enriched with alternative data like Trade Credit Data, repayment conduct on utility payments (i.e., telecom data, electricity data, gas bills and water bills), statutory payments, tangible collateral as well as reputation collateral, etc., to enable credit decision making even in cases of unbanked /underbanked MSMEs that lack a loan repayment history.”

Month Credit report inquiries from

2017

Credit report inquiries from

2018Jan 2,510 19,042

Feb 5,561 20,242

Mar 8,017 30,103

Apr 7,846 28,957

May 9,784 34,058

Jun 12,949 36,234

Jul 15,646 50,378

Aug 19,981

Sep 17,116

Oct 19,863

Nov 18,081

Dec 16,337

!"!#

$%&

'())*

60,000

50,000

40,000

30,000

20,000

1,0000

00,000Jan Feb Mar Apr May Jun Jul Aug Jan Oct Nov Dec

Consult attions RC 2017 Consult attions RC 2018


Following discussion with the various stakeholders,severaladditionalresearchreportshavebeenprepared,coveringessentialtopics,including:

● understanding the availability and viability of tradecreditdatafromtheMSMEsegment;and

● analysis of regulatory and legal challenges/concernswhen sharing specific data from utility and insurancecompaniesandrecommendationsforintegratingthedata.

Thefindingsof these reportshavealsobeenpresentedanddiscussedwiththeregulator,RBI.Asacontinuationof this work, the project team’s next steps include anagreement with a credit bureau, already signed, toconductapilottorecordandcapturetradecreditdatafromMSME associations and e-commerce companies andquantitativeresearchtosupportinclusionofalternativedata(forexample,telco,utilities,andothers).Theresultofthesepilotswillbepresentedtoanddiscussedwiththeregulator,CICs,andotherstakeholders.Animportantconclusiontobedrawnfromthiscasestudyis that credit reporting systems constitute a dynamicindustrythatcanbeexpectedtomatureovertime,withthenecessaryregulatorychanges,toefficientlyfulfilthedemandfromfinancialinstitutionsandMSMEborrowersfor improvedservices.Credit informationreportsmustnot only be credible, reliable, and robust, they must also contain the right information to help conduct correctanalyses.Asnotedabove,akeyfocushasbeenthepushtochangeIndia’s existing Credit Reporting Act (CICRA) tointegratealternativedatainthecreditreportingsystem.The inclusion of alternative data sources in the creditreporting structurewill not only helpMSMEs receivefinancing for their many business needs, it will alsohelpfinancial institutionsmakebetter creditdecisions,increase their MSME portfolios, and decrease theirdefault rates.Although financial institutions and otherlendersalreadymakeuseofthesedatapoints,legalandregulatoryframeworksarenecessarytoachieveabetterunderstandingofprivacy issuesand the scopeanduseof this data by both the supply and demand side andto further develop the country’s credit infrastructuresystems. The various components of this ongoingproject address these aspects byworkingwith variousstakeholders,withtheobjectiveofincreasingthescopeofcommercialcreditreportinginIndia.

7.7. UEMOA: Pioneering a True Cross-Border Credit Information Sharing System

ContextThe subregion known as the Union Économique etMonétaire Ouest-Africaine (UEMOA), or the WestAfrican Economic and Monetary Union (WAMU),comprises eight countries—Benin,BurkinaFaso,Côted’Ivoire, Guinea Bissau, Mali, Niger, Senegal, andTogo—with a combined population of 122 millionpeopleandanaverageGNIpercapitaofUS$670.Withthe exception of Côte d’Ivoire and Senegal, whichare categorized as middle-lower-income nations, theUEMOAmembers are considered tohave low-incomeeconomies. The UEMOA countries participate in aneconomicandmonetaryunionwithestablishedregionalinstitutionsthatgovernseconomicandmonetaryissuesfor all the states. The regional Central Bank, BanqueCentraledesEtatsdel’Afriqued’Ouest(BCEAO),hasasoneofitsobjectivesfosteringfinancialinclusionacrossthe eight countries by supporting increased lending toMSMEsandconsumers.In2012,allcountriesinthissubregionranked126thoutof183countriesintheWorldBankGroupDoingBusinessrankingongettingcreditand1.0(outofapossible6.0atthetime)ondepthofcreditinformation.Thepercentageoftheadultpopulationcoveredbyprivatecreditbureausin2012waszero,andalthoughallcountriesintheregionhadacentralpublic registrymanagedandoperatedbyBCEAO, no private credit bureaus were operational.Coverage by the public credit registry was limited tobetween0.9percentand10.7percentacrosstheregion.Thescope,breadth,andqualityofinformationprovidedbythepubliccreditregistrydidnothelpbanksmeettheircredit risk management requirements. Moreover, onlyloandataaboveacertainthresholdwascollectedfromregulatedentities.

IssueConsumerandMSMEaccess tocredit in theUEMOAregion is hampered by a lack of robust credit data toinformlendingdecisions.Assuch,asignificantpartofthepopulation(estimatedatmorethan60percent)cannotobtain credit because they lack adequate traditionalcollateral. A credit bureau in this region would help


compile credit histories on consumers and MSMEs,thereby helping these segments to build “reputationalcollateral”tousetoobtaincredit.Giventhelimitationsin information sharing in the credit market, BCEAOrequested IFC support to establish a regional privatecreditbureau solution thatwoulduseahub-and-spokeapproach to achieve economies of scale in the regionandcreateastateoftheartcreditreportingsolutionforallmemberstates,regardlessofthesizeorthestrengthoftheirindividualnationaleconomies.Thedeploymentofaregionalcreditbureauwasseenasoneway,amongothers, to promote increased lending and financialinclusionwhilehelpingtopreventover-indebtedness.

ResolutionAsaresultofthisrequest,IFCenteredintoanagreementwith BCEAO to provide credit information advisoryservices as an independent and neutral advisor overseveral years. Specifically, the project delivered thefollowing:

● IFCundertookadetailedmarketanalysisofthecreditmarkets, credit information sharing infrastructure,and the legal and regulatory landscape in the region.Adetailed strategy reportwith recommendationswasprovided to the BCEAO, including strategic issuesfor consideration, best practice advice drawing uponinternational experiences, and a proposed solutioncustomizedfortheregion.

● Followingthelegalandregulatoryframeworkanalysis,IFC supported the BCEAO in drafting a harmonizeduniform regional credit reporting bill that could beadopted by all eight UEMOA countries. The creditreporting bill included all the important provisionsthat would ensure the development of a best practicecredit reporting system. IFC and BCEAO carried outextensiveawarenessraisingandsensitizationregardingthe contents of the credit reporting legislation throughnumerousworkshopsacrosstheregion.

● FollowingtheadoptionofthestrategyreportbyBCEAO,IFC worked with BCEAO and other stakeholders indeveloping a technical Request for Proposal to solicitproposalsfromestablishedcreditbureaustoestablisharegionalcreditbureauusing thehub-and-spokesystemfortheUEMOAregion.IFCprovidedcapacitybuildingtotheBCEAOtoevaluateandscoreproposalsbasedonanobjective score card and to select themost capableprovidertosetupabureauintheregion.

● In parallel, IFC supported BCEAO in developing itscapacity as a licensing authority and supervisor of the

credit bureau, providing numerous documents andguidanceandundertakingdetailed supervision trainingandstudytourstootherjurisdictionstovisitbureausandsupervisors.Simultaneously,IFCprovidedtrainingtothesupervisoroffinancialinstitutions(thebanks)toensurethatregulatedentitiesweremeetingtheirresponsibilitiesunderthecreditreportinglaw.

● IFC undertook two GAP analyses of the existingpublic credit registry to determine what upgrades orimprovements would be needed to ensure that theregistry would support financial sector supervisionand develop appropriate monetary and fiscal policyfortheregion.Theseanalyseswerefollowedupwitharecommendationsreport.

● IFCprovidedtrainingtoBCEAOandtheCommissionBancaire on the utilization of credit reporting data forregulators’institutionaltasks(micro-andmacroprudentialsupervision,monetarypolicy,statistics,financialstability,andsoon).

● Numerous workshops and conferences were held,including two high-level international conferencesto raise awareness about credit reporting among allstakeholdersintheregion.

● IFC provided support to the BCEAO for developingoriginalconsumerliteracymaterialsoncreditreportingtofostergreaterconsumerawarenessofcreditreportinganditsimplicationsforborrowers.Materialsincludedavideocliponthebenefitsofcreditreportingforborrowersthat is shown inside bank branches throughout theUEMOAregion.

ResultsThe project has been very successful and has thus farachievedthefollowingresults:Aharmonizedcredit reportingbillwasadoptedby theConseildesMinistres(thehighestdecision-makingbodyintheBCEAO)andadoptedandpassedbyeachoftheeightmembercountries.For the first time, uniform legislation allows the fluidsharingofinformationacrossborders.Inthatsense,theproject encompasses a true cross-border informationsharing credit reporting system.All credit informationis stored in a shared database in a central location, but thanks to the legislation,aborrower fromSenegalcanapplyforcreditinCôted’IvoireandhavethelenderinCôted’IvoireaccesshisorhercredithistoryfromSenegalorotherpartsof the region through the regionalcreditbureau.Itisworthnotingthatthisisoneofthefew,ifnottheonly,realcross-bordercreditbureauinformation


sharingsystemsestablishedsincecreditreportingbeganin1960.Itnotonlyincreasesfinancialinclusion,italsofacilitatesindividuals’mobilitywithintheregion.FollowingadetailedRFPandselectionprocess,BCEAOawardedalicensetoCreditinfoVolotooperatearegionalprivatecreditbureaucoveringalleightcountries.Sincethebureauhasbeenoperational,ithasgained192members,152ofwhichsharedatawiththebureau,italsoservesa totalnumberof3.5millionclients (asofJuly2018),thevolumeofoutstandingloansisaboutUS$27Billion and the number of inquiries is rapidly surging(as shown in table 7.3) - given the trend of inquiries,the bureau is estimated to receive more than 300000inquiries in 2018 thus far facilitating an estimated$668,887innewcredit.WithIFCsupport,BCEAOhasfinalizedandrolledoutaconsumerawarenesscampaign.Theprimaryproductisa15-minuteanimationdisplayedon thepremisesoflendersonacontinualbasis.ATVspotemployingactorsisalsobeingproduced.

Success FactorsTheroleofastrongandcommittedstakeholdertoleadand champion theprojectwasvital toproject success.In this case, BCEAOwas the primary counterpart forproject implementation, and itwaswilling to dedicatethe time and resources needed to support the roll outofaregionalprivatecreditbureausolutionacrosseightcountriesinwhatcanbeconsideredrecordtime:withinfiveyears.IFCbroughtmorethan15yearsofexperienceworkingwithover60countriesgloballytotheproject.Moreover,IFC’sroleasaneutral,independent,third-partyadvisorwascriticaltothesystem’ssuccessfulimplementation.

7.8. Credit Registry of the Bank of ItalyThe Public Credit Registry of Italy (Centrale deiRischiBankitalia)wasdeveloped in the1960swith theobjectiveofsupportingtheCentralBankofItalywithitsfinancial supervision function. Bankitalia considers itsPublicCreditRegistrya“strategicresource”tosupportbankingsupervision,monetarypolicy,financialstability,studies, research, statistics, and dissemination to thepublic.Infact,Bankitalia’sPCRisalsoopentopublicon Bankitalia website (https://infostat.bancaditalia.it/inquiry/lite/mobile/en/iq#/P2NvbnRleHQ9dGF4byZzZWN0aW9uPWxpc3Q%253D). The credit registrycontains over 2,000 data points and is an invaluablesource of information to the banking supervision

departments within the Bank of Italy as well as theregulatedfinancial institutions it supervises.Thecreditregistryoffersthefollowingservices:

● Periodicconsultationandinformationservicesonbothregisteredborrowersandeconomicgroups,aswellasvariousalertingservices

● Centralized management of the repository andcommunications to contributors and users of anyupdatedinformationfromofficialsourcesofinformation(including legal and economic connections betweenborrowersidentifiedinthedatabase)

● Creation of personalized information for eachSupervisedEntity,consolidatedacrosscustomers

● Productionofaggregatestatistics ● Extractionofspecificinformationflows(accordingtotheneedsofthevariousdepartmentsoftheCentralBankandthespecificrequestsofthesupervisedentities).

● SpecificconsultingservicesforthepublicThePublicCreditRegistrywasdevelopedasauniquepoint of data collection, which with appropriate dataextractiontools,couldbeexploitedbyeverydepartmentsofthecentralbanksthenanalyzedwithtailoredreportingbyeachofthemainfunctionsofthecentralbank.The database is in practice a data-warehouse, fed bynumerous sources of data (periodical data providedby the supervised entities but also reference data oncompanies,balancesheets,legaldata,dataprovidedbyother authorities, data on securities, external statistics,and by aggregated data periodically supplied by thecreditbureaus).More than 1,140 supervised entities supply periodicaldataonallloansaboveEuro25,000tothePublicCreditRegistry. All the other loans below the Euro 25,000threshold can be found in the Italian credit bureaus (CRIFandExperian).The Public Credit Registry also offers the followingservices to the regulated entities: monthly return flowofaggregateddataontheirownclients/portfolio,alertson large borrowers performance, messaging portfolioanalysis,portfoliore-classification,etc.ThenextstepforBankitalia’sPublicCreditRegistryisrepresentedbytheneedtoharmonizeitsplatformwiththenewEuropeanCentral Bank’sAnaCredit system,toavoidanyredundancyand tominimize theeffortofsupervised entities during contribution activities anddataexploitationactivities.


7.9. The AnaCredit ProjectThe AnaCredit project is a euro-zone-wide, cross-bordercreditinformationsharingprojectthatstartedin2014toenableinformationsharingonfirmswithcreditexposuresacrossborders.Thethresholdissetat€25,000(loan-by-loan approach), and all information relevantto thesupervisionandstatisticsneedsof theEuropeanCentralBankwillbecollectedandsharedinthisscheme.The objective of theAnaCredit project is to integrateand centralize on a single platform a wide range ofgranular information about borrowers (informationon exposures, accounting information, prudentialinformation, provisions, interest rates, and so on) thatarecurrentlysubjecttodifferentcollectionactivitiesbyvariousdevices.Theprojectispartofthestrategicvisionof adopting a uniqueEuropeanReportingFramework,bringingtogetherdifferentdatacollectioninitiativessuchAnaCredit,theFINREP(FinancialReportingintheEUandUK),andCOREP(CommonReportingFrameworkin theEU). In an initial phaseonly, legal entities datawill be collected, and the target will be enlarged in asubsequentphasetoincludealsoindividuals(withloanexposuresabovethethreshold).The2008financialcrisishighlightedthatcreditandcreditrisk data are essential formicroprudential supervision.Thecredit riskdata are considered relevantwithin theEuropeanSystemofCentralBanks (ESCB) for use inmonetary policy decisions, thus for financial stabilityandalsoforanalyticalresearchandproductionofESCBstatistics.Themainchannelsforacquiringthisdataareat the level of central credit registers (CCRs), creditratingsystems,orborrowerloanmonitoring.TheESCBhasexploredthefuturepotentialofcreditdata,seekingin particular to understand the extent to which theircontentcanbestrengthenedandadaptedtotheEurozone

and its needs for statistics and financial supervision,as well as analysis and recommendations to meet theuser requirements mentioned above while reducingthe burden of the respondents’ declarations and thus increasingtransparency.CCRsaredatabasesmaintainedbynationalcentralbanks(NCBs)thatcontainnational-levelinformationallowingtheexchangeofinformationon outstanding credit in the financial circuit; they areusedforanalysisinthesupervisionofloansatthelevelofeachborrower.AnaCredit requirementsmay pose some challenges tothe lending industry (especiallybanks),however.WithAnaCreditreporting,dataqualityanddatamanagementwill become key areas of focus. Sourcing data frommultiple and various data sources and certifying itscompleteness could be challenging. Also, NCBs willbeaskedtosubmitAnaCreditreportingtotheEuropeanCentralBank;financialinstitutionsthereforewillneedtoreporttotheirNCBs.Multi-entityfinancialinstitutionsinparticularmightstruggletotacklethismultijurisdictionalaspect of the regulation. These challenges can beapproached in two ways: (i) apply short-term tacticalfixes,and(ii)takeastrategicapproachbytakingalong-termviewof theopportunitiesunderlying thisproject.In the long term, the financial institutions will havethe occasion to improve invaluable data managementcapabilitiesaswellastheefficiencyoftheirbusinessandoperationalmodels.Anacredit, is supposed to start its official activity inNovember2018;itwillbetheonlypubliccross-borderdatasharingsystemexistinginEurope,andoneoftheonly 2 currently existing worldwide (the other is theUEMOARegional Private Credit Bureau,which linksthedatabasesof the8countriesbelonging to theWestAfricanEconomicandMonetaryUnion).


AppendixesAppendix 1. Contents of an Individual Credit ReportSectiononPersonalDetails

Personal InformationNAME

ARUN KUMARDATE OF BIRTH

14-06-1978GENDER

MALEIDENTIFICATION TYPE NUMBER ISSUE DATE EXPIRATION DATEIncome tax ID number(pan) AABBB1234C 30-07-2000 -Passport number - - -Voter ID number - - -Driving license number MH019933333 12-2-2006 11-12-2006Ration card number - - -Unique ID number (UID) - - -Additional ID#1 - - -

Note: These are some of the basic details contained in a typical report. Actual contents will vary depending on the credit bureau.

SectiononCreditFacilityandAccountDetails

Account InformationAccount detail Dates Account status

Member name Date opened/disbursed Credit limit Rate of interestAccount number Date closed High credit repayment tenureAccount type Date of last payment Current balance EMI amountOwnership Date reported and certified Cash limit Payment frequency

Amount overdue Actual payment amountCollateral StatusValue of collateral Suit filed wilful defaultType of collateral Written-off- and settled status

116

Section on Inquiries

Payment history (up to 36 months,left to right beginning with the most recent payment)

Payment history start date 28-04-2003 DD-MM-YYYY

Payment history end date 28-11-2009 DD-MM-YYYY

DPD,Days past due AC,Asset classification

DPD/AC 000 000 000 000 STD STD 000 000 000 000 000 000Month-year 11-09 11-09 11-09 10-09 09-09 08-09 07-09 06-09 05-09 04-09 03-09 03-09

DPD/AC 000 000 000 000 STD STD 000 000 000 000 000 000

Month-year 11-09 11-09 11-09 10-09 09-09 08-09 07-09 06-09 05-09 04-09 03-09 03-09


Personal Information

Member name Date of enquiry Enquiry purpose Enquiry amount

XYZ Bank 11-07-2006 Credit card 50,000

APPENDIXES


Appendix 2. Contents of a Commercial Credit ReportCompany / Entity Profile

Profile

Name Sample india limited

Short name SIL D-U-N-S Number 91-859-3443PAN Legal constitution Private limited

Class of acitivty 01101/01102/01103 Address 1/2,AB Sarkar prabhakar road,sarakham

City/Town Telephone number

District Fax numberState/Union Territory Maharashtra PIN code 400001

Country India File open date 08-May-2008

*Note: Classification of Activity/Occupation as per Reserve Bank of India, Handbook of Instruction, Basic Statistical Return 1 and 2, Latest Edition

Report Summary

Report Summary

No. of Credit Grantors 1 No. of Credit Facilities

3 No. of closed credit facilities 1

No. of Credit Facilities Guaranteed by others

0 Latest Credit Facility open date

01-Aug-2011 First credit facility open date

01-Feb-2010

Credit Facilities No. of standard

Current balance in standard

No. of other than standard

Current balance in other than standard

No. of lawsuits

No. of Wilful defaults

As Borrower 1 1,15,92,506 2 2,66,03,547 1 1

As Guarantor 0 0 0 0 0 0

Credit Facilities / Accounts Summary

Credit Type Summary

No. of Credit facilities as Borrower

Credit type Currency code

StandardSub-

Standard Doubtful LossSpecial

mention A/C

Current balance

1 Overdraft INR 1,15,92,506 1,15,92,506

1 Demand loan INR 0 0

1 Long term loan (period

above 3 years)

INR 2,66,03,547 2,66,03,547

Total 1,15,92,506 0 2,66,03,547 3,81,96,053

Asset classification

118 APPENDIXES


Enquiry details last 24 months

Credit grantor Enquiry date Credit type Enquiry amountXYZ Bank 22-May-2014 Advances against export cash incentives and duty draw back claims 1,000

XYZ Bank 17-Oct-2013 Letters of credit 1,00,00,00,00,00,000

Inquiries Summary

Enquiry Summary

Enquiry 3 months 6 months 9 months 12 months 24 months >24 months Total Most recent dateNo. of Enquiries 1 1 4 15 17 3 20 22-May-2014

Section on Relationship Details

Relationship details

Relationship 1Related entity name Sample individual Related D-U-N-S number

Relationship Promoter director Related type Resident indian individual

PAN Percentage of control

Address 1/2,AB sarkar prabhakar road,sarakham City/Town Mumbai

Section on Credit Facility / Account Details

Credit Facility DetailsCredit facility 1

Credit facility type Overdraft Credit grantor name Cibil internalAccount number Cibil 123

Sanction date Sanctioned amount Currency code Drawing power Current balance Asset classification01-Aug-2011 1,20,00,000 INR 1,20,00,000 1,15,92,506 StandardWilful default

statusWilful default date Suit filed status Suit filed amount Suit filed date Account status Last reported

dateNot wilful defaulter

*No suit reported by the member

Open 30-Nov-2011


Appendix 3. General Principles for Credit Reporting and the International Committee for Credit Reporting (ICCR)TheGeneral Principles for Credit Reporting(publishedin2011)provideguidingprinciplesforthedevelopmentof reporting systems and are intended to be used bypolicymakers, regulators, financial supervisors, creditreportingdataproviders,CRSPs,andconsumers(WorldBank2011).Inadditiontothefivecoregeneralprinciples,theoriginatingtaskforceidentifiedanddevelopedasetofspecificrolesforeachstakeholderinvolvedincreditreporting systems and recommendations for effectivesystemoversight.TheGeneralPrinciplesweredesignedto be useful for establishing and developing a creditbureau, a credit registry, or any other information-sharing institution. Based on theWorldBankGroup’sexperience, the five general principles address thechallenges most commonly faced when developingcreditreportingsystemsinemergingmarkets.ThefiveGeneralPrinciplesare:

DataGeneral Principle 1: Credit reporting systems shouldhave relevant, accurate, timely and sufficient data -includingpositive–collectedonasystematicbasisfromallreliable,appropriateandavailablesources,andshouldretainthisinformationforasufficientamountoftime.

Data Processing: Security and EfficiencyGeneral Principle 2: Credit reporting systems shouldhave rigorous standardsof securityand reliability, andbeefficient.

Governance and Risk ManagementGeneral Principle 3: The governance arrangements ofcredit reporting service providers and data providersshould ensure accountability, transparency andeffectiveness inmanagingtherisksassociatedwith thebusinessandfairaccesstotheinformationbyusers.

Legal and Regulatory EnvironmentGeneral Principle 4: The overall legal and regulatoryframework for credit reporting should be clear,predictable, non-discriminatory, proportionate andsupportive of data subject and consumer rights. Thelegalandregulatoryframeworkshouldincludeeffectivejudicialorextrajudicialdisputeresolutionmechanisms.

Cross-Border Data FlowsGeneral Principle 5:Cross-border credit data transfersshould be facilitated,where appropriate, provided thatadequaterequirementsareinplace.Inadditiontothecoreprinciples,theGeneralPrinciplesalsodescribestherolesofthekeyplayersinthecreditreporting system and provides recommendations foreffective oversight. The General Principles provideguidance,butnostandardmodelexistsforestablishingand developing a credit reporting service. Experiencesuggeststhatthemosteffectivesolutionsarethosethatapply the general principles in light of the country’sexistingmarketenvironment.Foradditionalinformation,refer to General Principles for Credit Reporting(WorldBank2011).

The International Committee for Credit Reporting (ICCR) Theinitialtaskforcethatspearheadedthedevelopmentof the General Principles for Credit Reporting hasnowbeenreconstitutedas the InternationalCommitteefor Credit Reporting (ICCR). The ICCR providesmethodologiestopolicymakers,authorities,supervisors,and regulators for assessing existing credit reportingsystemswithintheirrespectivejurisdictionsagainsttheguidanceprovidedbytheGeneralPrinciples.Inaddition,the ICCR has developed guidance around the use ofcreditreportingforsupervisionandfinancialregulation,facilitatingSMEfinance through theuseofalternativedata,andincreasingfinancialinclusion.

120 APPENDIXES

Appendix 4. World Bank Doing Business SurveysA significant amount of the work undertaken by theWorld Bank Group in reforming credit informationsystems isdrivenby informationcollected through theWorldBank’s annualDoingBusiness surveys.Amongother points, these surveys assess the status of creditinformation sharing systems across the globe throughtheGettingCreditIndicator.Doing Business surveys measure the quality of creditinformation in a region or country based on coverageand the Credit Information Index (CII). (Coverage is definedasthenumberofrecordsinthebureauorregistrydividedbythecountry’sadultpopulationaged15to64.)Currently,DoingBusinessdoesnotcollectinformationon commercial credit reporting companies, although itdoesaskexistingconsumerbureauswhethertheycollectinformationonsmallandmediumenterprisesandwhattypesofproductsandservicesaredevelopedorprovidedtomeettheneedsofcreditorstothesebusinesssegments.

Inadditiontocoverage,theDoingBusinessCIImeasurescreditinformationavailabilityinacountrybasedontheeightkeyfactorslistedbelow(seeFigure3.5forinformationonCIIbyregion;WorldBank2012).Acountryreceivesonepointforitsconcurrencewitheachofthefactors;thepointsaretotaledtoarriveatthecountry’sindexscore.

● Dataonbothfirmsandindividualsaredistributed. ● Bothpositive credit information (for example,originalloan amounts, outstanding loan amounts and a patternof on-time repayments) and negative information (forexample,latepaymentsandthenumberandamountofdefaults)aredistributed.

● Datafromretailersorutilitycompaniesaredistributedinadditiontodatafromfinancialinstitutions.

● Atleasttwoyearsofhistoricaldataaredistributed.Creditbureausandcreditregistriesthaterasedataondefaultsassoonastheyarerepaidordistributenegativeinformationmore than tenyears after defaults are repaid receive ascoreof0forthiscomponent.

● Data on loan amounts below1 percent of income percapita aredistributed.Acredit bureauor registrymusthave a minimum coverage of 5 percent of the adultpopulationtoobtainascoreof1forthiscomponent.

● By law, borrowers have the right to access their datain the largestcreditbureauor registry in theeconomy.Creditbureausandcreditregistriesthatchargemorethan1percentofincomepercapitaforborrowerstoinspecttheirdataobtainascoreof0forthiscomponent.

● Banksandotherfinancialinstitutionshaveonlineaccessto the credit information (for example, through awebinterface,asystem-to-systemconnection,orboth).

● Bureauor registrycreditscoresareofferedasavalue-addedservicetohelpdatausersassessthecreditworthinessofborrowers.

Indexscoresthusrangefrom0to8,withhighervaluesindicatingtheavailabilityofmorecreditinformation,fromeitheracreditbureauoracreditregistry,tofacilitatelendingdecisions.Ifthecreditbureauorregistryisnotoperationalorcoverslessthan5percentof the adult population, the score on the depth of credit informationindexis0.


Appendix 5. Examples of Specialized ADR service providers dealing with credit disputesThefollowingthreescenariosillustratetheflexibilityofspecializedADRserviceprovidersindealingwithcreditdisputes:(i)anADRserviceprovideroffersaspectrumofservicessuchasmediationandarbitration(FinancialIndustry Disputes Resolution Centre, or FIDReC,located in Singapore); (ii) a bankingmediation center(Moroccan Centre of Banking Mediation, or CMBB,located in Casablanca); and the (iii) Danish DisputeComplaintsBoardsystem.Singapore’s Financial Industry Disputes Resolution Centre (FIDReC).FIDReCisanindependentinstitutionproviding dispute resolution services to financialinstitution customers. It covers Singapore’s entirefinancialindustry.Sinceitslaunchin2005,complainantshavehailedfrom35foreignjurisdictionsinadditiontoSingapore. FIDReC is overseen by a board comprisedof members of the finance industry, members withnonindustrybackgrounds,andanindependentchairman.Its mediators and adjudicators come from a mix oflegalandfinancialbackgrounds,andtheyparticipateinin-house training programs and advanced seminars onADRinFinancialDisputes.FIDReChasjurisdictiontomediate any amount between consumers and financialinstitutionsandtoadjudicatedisputesuptoS$100,000per claim for claimsbetweencustomers and insurancecompanies and up to S$50,000 per claim for all otherdisputes, including disputes between banks, disputesbetween CRSPs and consumers, third-party claims,andmarket-conductclaims.Resolvingdisputesthroughmediation costs financial institutions S$50 per claimand is free-of-charge to consumers.Adjudicationcoststhe complainant S$50 and the financial institutionS$500. To emphasize fairness in the process and toinstillabetterbalanceofpower,thenumberoffinancialindustry representatives that can attend the mediationor adjudication hearing is limited. As an illustrationof flexibility of their services, FIDReChas created anadjudicationprocess that canbe conductedbyhearingor by documents only. The award of the adjudicatoris binding on the financial institution, but not on thecomplainant.Thismeansthatthecomplainantcangotocourtshouldheorshebedispleasedwiththeresults.Morocco’s Centre of Banking Mediation (CMBB).TheCMBBisanonprofitorganizationwiththemissionoffacilitating settlement of disputes arising or thatmayarise between clients and banks, CRSPs, financing

companies, ormicrocredit associations.CMBBhas aboard of directors composed of independent expertsas well as industry representatives from Bank Al-Maghrib (BKAM), the National Agency for thePromotionofSmallandMediumEnterprise(ANPME),the Moroccan Banking Association (GPBM), theProfessional Association of Financing Companies(APSF),andtheNationalFederationofAssociationsofMicroCredit (FNAM).Moroccanbanking lawmakesitmandatory for all credit institutions to adhere to amediation service (Article 158, Banking Law 103-1224/12/2014).TheCentrehasonepermanentmediatorand may require the help of assistant mediators, allofwhomareboundby aCodeofEthics.TheCentredeal with disputes in conformity with its mediationrules. It offers two services: institutional mediationandconventionalmediation.Institutionalmediationisvoluntary and freeof charge forfinancial consumers.Disputes are eligible when the amount involved islessthanorequalto1milliondirhams(approximatelyUS$110,000), including those relating to currentaccounts;termdepositsandsavingsaccounts;themeansof payment; financial assistance repayment terms;issuanceofdocumentstoclients(forexample,release,amortizationschedule,oroutstandingcertificate).Themediatorhascompletelatitudetoheartheclientaswellas the representative of the institution concerned andtoreconciletheirviewsandofferthemasolutiontheyconsiderappropriate.Conventionalmediationservicesare also offered by CMBBwhen the parties want tosettle a dispute over 1million dirhams.Mediation isvoluntary,andfeesarepayableinequalsharesonthebasisofthepercentageoftheamountindispute.The Danish Dispute Complaints Board. InDenmark,asystemof specific complaintboards (credit, insurance,mortgage, banking, investment funds, security andbrokeringcompanies,andsoon)havebeenestablishedtodealwithunsatisfiedconsumersofgoodsorservicespurchased.ThecomplaintboardsareestablishedundertheDanishActonConsumerComplaintsandapprovedby the Minister for Economic and Business Affairs.Consumersmust submit the details of their complaintinwritingandupload them to theComplaintsBoard’swebportal.Alldecisionsrenderedarepubliclyavailablethrough the Complaints Board’s website. Decisionsare delivered by a panel of three adjudicators. In theComplaint Board of Credit Services, for instance, thechair isasupremecourt judgeand the twovice-chairsare a high court judge and a city court judge. Thedecisionmakersareappointedbybodies inwhichhalf

122 APPENDIXES

thememberscomefromthecreditindustryandhalffromtheDanishConsumerCouncil.ConsumerspayafeeofDKr 200 (approximatelyUS$33), but this is refundedto the consumer if the complaints board upholds thecomplaint.ConsumersmustcomplaintotheCRSPfirst.Thecreditcompanyhasa time limitoffiveweeks forresponding.TheCRSPmusttelltheconsumerabouttheComplaintsBoard.The board’s decision is binding onthecreditcompanyunlessitdisputesthedecisionwithin

30 days; in that event, the consumer can get legal aidto take the case to court. Nominimum applies to theamount of the claim, and nomaximum applies to theamountawarded.DecisionsfromtheComplaintsBoardare enforceable, and the bailiff’s court can help theconsumerenforceaclaimifthedecisionisnotfollowedby a bank. The Danish Competition and ConsumerAuthoritymayinsomecasescoverexpensesincurredtoenforceaComplaintsBoarddecision.


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tes

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i Ar

abia

Qata

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n

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p.of

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Jord

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Med

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ac

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ATLA

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AND

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UREA

USM

iddl

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Nor

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Reg

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itive

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e bur

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ive

Nega

tive

No in

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IBRD

396

06 |

APR

IL 2

018


Mau

ritius

Mad

agas

car

Seyc

helle

s

Com

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Leso

tho

Sout

hAf

rica

Swaz

iland

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alia

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o

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p.Ca

mer

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Suda

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IN

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AN

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N

AT

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NT

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POSIT

IVE A

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T BUR

EAUS

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No cr

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: Pos

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IBRD

3960

2 | J

ULY 2

018

126 APPENDIXES

Vanu

atu

Fiji

Papu

aNe

w G

uine

a

Solo

mon

Islan

dsTu

valu

Naur

u

Mar

shal

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ands

Fede

rate

d St

ates

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icron

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Pala

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Tim

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este

Indo

nesia

Mal

aysia

Phili

ppin

es

Rep.

of

Kore

aCh

ina

Bhut

anNe

pal

Indi

aBa

ngla

desh

Mya

nmar

Lao

P.D.

R.

Thai

land Ca

mbo

diaVi

etna

m

Sri

Lank

a

Mal

dive

s

Mon

golia

Kirib

ati

Sam

oa Tong

a

Pakis

tan

Afgh

anist

an

Bay

of

Ben

gal

Eas

tC

hina

Sea

Phi

lipp

ine

Sea

PA

CI

FI

C

OC

EA

N

Sea

ofJa

pan

IN

DI

AN

O

CE

AN

Ara

bian

Sea

POSI

TIVE

AND

NEG

ATIV

E CRE

DIT B

UREA

USSo

uth

Asia

Reg

ion

& Ea

st As

ia an

d Pac

ific R

egio

n

No cr

edit

bure

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ists

Posit

ive

Nega

tive

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form

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n

Note

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and n

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ta an

d are

othe

rwise

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n

as fu

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e or c

ompr

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sive b

urea

us.

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map

was

pro

duce

d by

the

Car

togr

aphy

Uni

t of t

he W

orld

Ban

k G

roup

. Th

e bo

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orld

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of a

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, or a

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ndor

sem

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of

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ndar

ies.

IBRD

396

11 |

APR

IL 2

018


ArgentinaChile Uruguay

Paraguay

Bolivia

BrazilPeru

Ecuador

Colombia

R.B. deVenezuela Suriname

Mexico

The Bahamas

Haiti

JamaicaBelize

Guatemala

El Salvador

Costa Rica Panama

Nicaragua

Honduras

Guyana

St. LuciaBarbados

Dominica

Trinidad & Tobago

Galápagos Islands(Ecu.)

Isla San Félix(Chi.)

Isla SanAmbrosio(Chi.)

Isla dePascua(Chi.)

Islas JuanFernández

(Chi.)

Falkland Islands(Islas Malvinas)

A DISPUTE CONCERNING SOVEREIGNTY OVER THEISLANDS EXISTS BETWEEN ARGENTINA WHICH CLAIMSTHIS SOVEREIGNTY AND THE U.K. WHICH ADMINISTERSTHE ISLANDS.

A T L A N T I C

O C E A N

A T L A N T I C

O C E A N

PA C I F I C

O C E A N

Gulf ofMexico

DominicanRepublic

Trinidad& Tobago

Grenada

St. Vincent &the Grenadines

Dominica

Barbados

St. Kittsand Nevis

Antigua& Barbuda

St. Lucia

R.B. de Venezuela

POSITIVE AND NEGATIVE CREDIT BUREAUSLatin America and the Caribbean Region

No credit bureau exists

Positive

Negative

No information

Note: Positive bureaus contain both positive and negative data and are otherwise also known as full-file or comprehensive bureaus.

This map was produced by the Cartography Unit of the World Bank Group. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of the World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

IBRD 39605 | APRIL 2018

128 APPENDIXES

NewZealand

Australia

Vanuatu Fiji

PapuaNew Guinea

SolomonIslands

Tuvalu

KiribatiNauru

Marshall IslandsFederated States of Micronesia

Palau

Timor-Leste

Indonesia

Singapore

Malaysia

BruneiDarussalam

Philippines

JapanRep. ofKorea

D.P.R.of Korea

China

BhutanNepal

IndiaBangladesh

Myanmar LaoP.D.R.

ThailandCambodia

Vietnam

SriLanka

Maldives

Mongolia*

Kiribati

Samoa

Tonga

Fiji


Paraguay

Bolivia

BrazilPeru

Ecuador

Colombia

R.B. deVenezuela Guyana

Suriname

United States

Mexico

The Bahamas

CubaHaiti

JamaicaBelizeGuatemala

El Salvador

Costa RicaPanama

NicaraguaHonduras

Canada

MauritiusMadagascar

Seychelles

Comoros

LesothoSouthAfrica

Swaziland

BotswanaNamibia Zimbabwe*

Mozambique

MalawiZambia

Angola

Dem. Rep. ofCongo

RwandaBurundi

Tanzania

KenyaUganda

Somalia

Ethiopia

GabonRep. ofCongo

CentralAfrican Rep.Cameroon

Sudan

SouthSudan

Djibouti

Eritrea Rep. ofYemenChad

NigerMali

Burkina FasoBenin Nigeria

TogoEquatorial Guinea

São Tomé and Príncipe

GhanaCôted’Ivoire

LiberiaSierra Leone

GuineaGuinea-Bissau

Senegal

Mauritania

The Gambia

Cabo Verde

Morocco

Algeria*

Tunisia

Libya Arab Rep. of Egypt

Oman

United Arab Emirates

Saudi Arabia

QatarPakistan

Afghanistan

Kazakhstan

Kyrgyz Rep.

TajikistanUzbekistan

TurkmenistanAzer-baijan

GeorgiaArmenia

BahrainKuwait

Islamic Rep.of Iran

Russian Federation

Jordan*Iraq

SyrianA.R.

Turkey

IsraelLebanon

CyprusGreeceMalta

BulgariaRomania

MoldovaUkraine

BelarusPolandLithuania

LatviaEstonia

FinlandSwedenNorway

RussianFed.

Iceland

NetherlandsDenmark

GermanyIrelandUnited

KingdomBelgium

Italy

LuxembourgLiechtenstein

SwitzerlandAndorra

France

MonacoSpainPortugal

Turks and Caicos Islands (UK)

NewCaledonia

(Fr.)

Guam (US)

N. Mariana Islands (US)

Mayotte (Fr.)

La Réunion(Fr.)

West Bank and Gaza

Gibraltar (UK)

Channel Islands (UK)

Isle of Man (UK)

Faroe Islands(Den.)

Greenland(Den.)

Bermuda (UK)

French Guiana (Fr.)

Cayman Is. (UK)

AmericanSamoa (US)

Cook Is. (NZ) French Polynesia (Fr.)

WesternSahara

DominicanRepublic

Trinidad andTobago

Grenada

St. Vincent andthe Grenadines

Dominica

Barbados

St. Kittsand Nevis

Antigua andBarbuda

St. Lucia

R.B. de Venezuela

PuertoRico (US)

British VirginIslands (UK) Anguilla (UK)

St.-Martin (Fr.)

St.-Barthélemy (Fr.)

Guadeloupe (Fr.)

Martinique (Fr.)

St. Maarten (Neth.)

Aruba(Neth.) Curaçao

(Neth.)Bonaire(Neth.)

Montserrat(UK)

U.S. Virgin Islands (US)Saba (Neth.)

St. Eustatius (Neth.)

Poland

Romania

Serbia

Bulga

riaGreece

FYRMacedonia

KosovoMontenegro

Albania

Croatia Bosnia andHerzegovina

Ukra

ine

Germany

Czech Republic

Austria

Slovenia

Italy

SanMarino

VaticanCity

Slovak Republic

HungaryBoth credit registries and credit bureaus exist

Only credit bureau exists

Only credit registry exists

No information

OVERVIEW OF CREDIT REGISTRIES AND CREDIT BUREAUS AROUND THE WORLD

* Credit bureau/credit registry is in the process of being developed/becoming operational.


IBRD 39582 | JULY 2018

Overview of Credit Registries and Credit Bureaus Around the World


NewZealand

Australia

Vanuatu Fiji

PapuaNew Guinea

SolomonIslands

Tuvalu

KiribatiNauru

Marshall IslandsFederated States of Micronesia

Palau

Timor-Leste

Indonesia

Singapore

Malaysia

BruneiDarussalam

Philippines

JapanRep. ofKorea

D.P.R.of Korea

China

BhutanNepal

IndiaBangladesh

Myanmar LaoP.D.R.

ThailandCambodia

Vietnam

SriLanka

Maldives

Mongolia*

Kiribati

Samoa

Tonga

Fiji


Paraguay

Bolivia

BrazilPeru

Ecuador

Colombia

R.B. deVenezuela Guyana

Suriname

United States

Mexico

The Bahamas

CubaHaiti

JamaicaBelizeGuatemala

El Salvador

Costa RicaPanama

NicaraguaHonduras

Canada

MauritiusMadagascar

Seychelles

Comoros

LesothoSouthAfrica

Swaziland

BotswanaNamibia Zimbabwe*

Mozambique

MalawiZambia

Angola

Dem. Rep. ofCongo

RwandaBurundi

Tanzania

KenyaUganda

Somalia

Ethiopia

GabonRep. ofCongo

CentralAfrican Rep.Cameroon

Sudan

SouthSudan

Djibouti

Eritrea Rep. ofYemenChad

NigerMali

Burkina FasoBenin Nigeria

TogoEquatorial Guinea

São Tomé and Príncipe

GhanaCôted’Ivoire

LiberiaSierra Leone

GuineaGuinea-Bissau

Senegal

Mauritania

The Gambia

Cabo Verde

Morocco

Algeria*

Tunisia

Libya Arab Rep. of Egypt

Oman

United Arab Emirates

Saudi Arabia

QatarPakistan

Afghanistan

Kazakhstan

Kyrgyz Rep.

TajikistanUzbekistan

TurkmenistanAzer-baijan

GeorgiaArmenia

BahrainKuwait

Islamic Rep.of Iran

Russian Federation

Jordan*Iraq

SyrianA.R.

Turkey

IsraelLebanon

CyprusGreeceMalta

BulgariaRomania

MoldovaUkraine

BelarusPolandLithuania

LatviaEstonia

FinlandSwedenNorway

RussianFed.

Iceland

NetherlandsDenmark

GermanyIrelandUnited

KingdomBelgium

Italy

LuxembourgLiechtenstein

SwitzerlandAndorra

France

MonacoSpainPortugal

Turks and Caicos Islands (UK)

NewCaledonia

(Fr.)

Guam (US)

N. Mariana Islands (US)

Mayotte (Fr.)

La Réunion(Fr.)

West Bank and Gaza

Gibraltar (UK)

Channel Islands (UK)

Isle of Man (UK)

Faroe Islands(Den.)

Greenland(Den.)

Bermuda (UK)

French Guiana (Fr.)

Cayman Is. (UK)

AmericanSamoa (US)

Cook Is. (NZ) French Polynesia (Fr.)

WesternSahara

DominicanRepublic

Trinidad andTobago

Grenada

St. Vincent andthe Grenadines

Dominica

Barbados

St. Kittsand Nevis

Antigua andBarbuda

St. Lucia

R.B. de Venezuela

PuertoRico (US)

British VirginIslands (UK) Anguilla (UK)

St.-Martin (Fr.)

St.-Barthélemy (Fr.)

Guadeloupe (Fr.)

Martinique (Fr.)

St. Maarten (Neth.)

Aruba(Neth.) Curaçao

(Neth.)Bonaire(Neth.)

Montserrat(UK)

U.S. Virgin Islands (US)Saba (Neth.)

St. Eustatius (Neth.)

Poland

Romania

Serbia

Bulga

ria

Greece

FYRMacedonia

KosovoMontenegro

Albania

Croatia Bosnia andHerzegovina

Ukra

ine

Germany

Czech Republic

Austria

Slovenia

Italy

SanMarino

VaticanCity

Slovak Republic

HungaryBoth credit registries and credit bureaus exist

Only credit bureau exists

Only credit registry exists

No information

OVERVIEW OF CREDIT REGISTRIES AND CREDIT BUREAUS AROUND THE WORLD

* Credit bureau/credit registry is in the process of being developed/becoming operational.


IBRD 39582 | JULY 2018

Overview of Credit Registries and Credit Bureaus Around the World


References

Adams, Susan. 2016. “How Tala Mobile is UsingPhone Data to Revolutionize Microfinance.” ForbesTrep Talks, Forbes.com. August 29. https://www.forbes.com/sites/forbestreptalks/2016/08/29/how-tala-mobile-is-using-phone-data-to-revolutionize-microfinance/2/#66b4c6f1c1f1.Barron,J.M.,andMichaelStaten.2003.“TheValueofComprehensive Credit Reports: Lessons from the USExperience.” http://www.privacyalliance.org/resources/staten.pdf.Black, Henry Campbell, and BryanA. Garner. 1999.Black’sLawDictionary,7thed.St.Paul,MN:West.BusinessLoans.2015.“WhatYouNeedtoKnowAboutthe 3MajorBusiness Credit Bureaus.”Businessloans.com (website). January 21. https://www.businessloans.com/article/need-know-three-major-business-credit-bureaus/.Carbajo, Marco. 2009. “The Top 10 Business CreditBureaus.” Business Credit: Business Credit for SmallBusinesses(blog),November21,https://businessblogger.com/2009/11/21/top-10-business-credit-bureaus.Cowley, Stacy. 2017. “Deal Book:Your Credit ScoreMaySoonLookBetter.”New York Times,June26.https://www.nytimes.com/2017/06/26/business/dealbook/your-credit-score-may-soon-look-better.html.Credit2B.Pressrelease.Credit2b.com(website).Credit2b,SouthPlainfield,NJ.https://www.credit2b.com/.Demirguc-Kunt, Asli, and Leora Klapper. 2012.“Measuring Financial Inclusion: The Global Findex.”World Bank Policy Research Working Paper 6025,WorldBank,WashingtonDC.

Dun&Bradstreet.2017.“Dun&BradstreetTeamsUpwithMicrosoft toReimagine thePowerofData in theCloud.”Press release.Jul19.https://www.prnewswire.com/news-releases/dun--bradstreet-teams-up-with-microsoft-to-reimagine-the-power-of-data-in-the-cloud-300490370.html.ECB (European Central Bank). 2015. “What IsAnaCredit?” European Central Bank (website).November 11. https://www.ecb.europa.eu/explainers/tell-me-more/html/anacredit.en.html.FICO.“ANewWaytoScoreCreditRisk:PsychometricAssessments.” Fico Financial Inclusion Initiative,FICO.com (blog). http://www.fico.com/en/blogs/risk-compliance/a-new-way-to-score-credit-risk-psychometric-assessments/.The Financial Brand. “Top 10 Trends Impacting theFuture of Payments.” The Financial Brand (website).https://thefinancialbrand.com/68528/top-payment-trends-banking-p2p-digital/.FintechFutures.2018.“RegTech:AnaCredit—TurningComplianceintoOpportunity.”FintechFutures(website).February 16. https://www.bankingtech.com/2018/02/anacredit-turning-compliance-into-opportunity/.Francis, Eilin, Joshua Blumenstock, and JonathanRobinson.2017.Digital Credit in Emerging Markets: A Snapshot of the Current Landscape and Open Research Questions. Berkeley, CA: Digital Credit Observatory.June 27. http://www.digitalcreditobservatory.org/uploads/8/2/2/7/82274768/dco_landscape_analysis.pdf.

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