Microfinance Focus, December 12, 2011: International Finance Corporation (IFC) Global Credit Reporting Program provides advisory services and expert advice on the development of credit reporting infrastructure through feasibility studies, legal and regulatory advice, long term coaching and research.

Since its inception in 2001, the global program has created or significantly improved credit reporting service providers in 20 countries, drafted or contributed to the drafting of new credit reporting laws and regulations in 19 countries, organized and supported over 110 credit reporting seminars, conferences, and outreach events in more than 70 countries, and assisted in monitoring of the credit reporting environment of 183 countries through Doing Business Report.

In South Asia, IFC has been working with Central Banks and Bankers Associations as well as the microfinance sector. It is holding a ‘South Asia Regional Workshop on Microfinance Credit Reporting’ in New Delhi on December 14, 2011.

IFC and co-sponsors Omidyar Network launched phase one of MFI Credit Bureau project in India in June 2009 working closely with MFIN and the existing Credit Bureaus, as a result of which about 45 MFIs have started reporting to a Credit Bureau and 55 million client records have been uploaded as 2011 draws to a close.

Phase two started in October 2011 and is focused on increasing the reach of MFI reporting to Credit Bureaus, greater use of credit information and client awareness regarding credit reporting.

In Bangladesh, after a joint DFID and IFC technical assistance project, the Bangladesh Bank (Central Bank) Credit Information Bureau went live in July 2011 and IFC has begun scoping with key industry players to link MFIs with a Credit Bureau.

IFC also assisted the Maldives Monetary Authority to launch their Credit Bureau in February 2011. It is currently assisting the Credit Bureau in Nepal to upgrade their technology and modernize their operations, including initial discussions on linking with MFIs.

Microfinance Focus recently interviewed Colin Raymond, IFC’s Credit Bureau Advisor on Financial Infrastructure for South and East Asia. Edited excerpts

Microfinance Focus: Tell us about IFC’s involvement in microfinance credit reporting across the globe and in Asia.

Colin Raymond: Microfinance credit reporting is fairly new in the Asian region although globally microfinance has been incorporated in the mainstream credit reporting regime for a number of decades. Mainly in South America, where it has been a part of the regime for a very long time.

IFC has been involved for the last two and a half years in India focussing on the inclusion of microfinance into credit reporting. Some of the other MFI CB projects we have been involved with are in Egypt, Morocco, Pakistan and Bangladesh.

Microfinance Focus: What are you working on in Bangladesh?

Colin Raymond: We are working with the microfinance institutions and the regulator - Microfinance Regulatory Authority to explore the options of setting up a microfinance credit bureau. There is a credit reporting agency already in operation but it is run by the Central Bank and is exclusively for the banking sector. Microfinance institutions don’t have any such facility and they want to explore if something similar could be established for them. They too are concerned about similar issues like overindebtedness, multiple borrowings etc - the ones which happened in India.

So we are conducting a diagnostic of the situation. We are assessing what the institutions are doing themselves and how we can assist them in the same way that we did in India.

Microfinance Focus: What are the advantages of credit reporting and why should MFIs subscribe to it?

Colin Raymond: Whether it is for microfinance institution or any other type of financial institution which provides credit, the benefits are similar. The first is to be able to help identify individuals who are more risky than others in not being able to repay their debts. Anyone who is over indebted to multiple borrowers or has a history of late repayments can be identified. So it helps lenders in the prevention and ongoing management of bad debts.

The other beneficial aspect of credit reporting is also to help expand the access to credit. Lenders can identify individuals who have good credit histories so that can be provided with more credit as long as they have the capacity to repay.

Financial institutions who are going into new geographical areas or introducing new credit products will find themselves not having any history of these new customers. But they may be able to use the credit bureau which has a history on those customers and thus be able to make better informed credit decisions.

So it is really in two areas whereby credit bureaus can benefit lenders, one is in avoiding and managing non-performing loans, and the other is to increase their access to credit.

Microfinance Focus: What are some of the challenges of building credit bureaus in the microfinance sector? What role is IFC playing in addressing those challenges?

Colin Raymond: There are a number of challenges. In developing markets there usually does not exist any regulation or legislation. So one of the first things we do  is to ascertain what legal framework is available if any, and if not then we work with legislators to enable this kind of information to be shared. There typically exists a bank secrecy act or some other confidentiality requirements which doesn’t allow any financial institution to share information of their borrowrs with anybody else. We need to firstly address this hurdle.

Secondly, it is the ability of lenders to provide reasonable quality data and have the internal capacity to get this data into the required format for sharing with the credit bureau. So we at IFC work to assist lenders to build capacity.

We also need to address the aspect of financial awareness that the concept of sharing credit information will bring benefits. Typically when we start doing this in developing markets one concern we regularly come across is that, if I am a lender and if I share my information about my borrowers with another lender, they will poach my best customers off me. So we need to spend a lot of time on education and making them aware that with the right legislative framework and secure technology and compliance requirements, those sorts of things don’t happen. The bureau only allows the borrower information to be shared for credit assessment and not for poaching or marketing to customers of other lenders.

It is a challenge and it does take some time. Typically when we begin our work in developing countries where there is no credit reporting at all, it could easily take a number of years. We also need to work with the borrowers to make them aware of what this is about and how it is beneficial to them to repay their loans on time and keep a clean credit report . So it can be a complex and lengthy process at times.

Microfinance Focus: Indian credit bureau ‘High Mark’ holds data from NBFC-MFIs only. It has left out NGO-MFIs, Co-operatives etc. Do you think we need to be more holistic?

Colin Raymond: We had to start somewhere and in many ways what has been done in India by High Mark is quite an incredible achievement. They started over 12 months ago with not having any of these institutions participating. IFC has been involved in making the market aware and facilitating this exchange in this initiative. As a result of that we view this as a two to three phase approach going forward.

First phase is to bring onboard those MFIs  who have the capacity to participate, and typically these have been the NBFCs who have the technology, resources and the capacity to be able to share data with the bureau and to be able to get credit reports, interpret them and use them in the underwriting process. This has really been quite an achievement in such a short time. High Mark went live in mid 2011 and have been able to bring on 35-40 NBFCs on board and load 55 million accounts onto their database, this has been quite a great achievement.

In the next phase, we really need to expand the coverage to include NGOs, Co-operatives and those other MFIs who have not participated so far as you point out. That is something IFC is looking at and we are working with High Mark and other bureaus to enable them to do that.

Of course not all MFIs have the capacity. Some of them have got a lot smaller portfolios and their loan assessment processes are conducted in a manual fashion. There will have to be some capacity building done at the MFI end.

Even though a credit bureau may be online, we need to look at both sides. The lenders also need to be enabled. We are hoping that in the next 12-24 months we would be able to bring the rest of the market on board.

Microfinance Focus: Some of the innovative approaches for establishing microfinance credit bureaus that you have come across?

Colin Raymond: In terms of innovation, we need to look at what each of the local environments are. For instance, in developing countries the issue of identification is always a challenge. We have to identify individuals accurately, uniquely and quickly where there may not be identification information such as national ID numbers, voter ID cards, passports numbers etc.  Innovations have been done by a number of these bureaus to be able to match these individuals by the use of other keys and methods. For example in Africa, they utilise other demographic information such as fingerprinting. That is still new and yet to be fully proven.

As far as the delivery of credit reports are concerned, we may not be always able to deliver them as a formatted printed report over the internet to a computer. In some cases a credit report is delivered via a mobile phone.

So there have been some innovative developments done in some parts of the world to make this information easily available and transparent for both lenders and borrowers.

Microfinance Focus: IFC’s expectations from its upcoming ‘South Asia on Microfinance Credit Reporting Regional Workshop’?

Colin Raymond: We regularly run these types of knowledge dissimenation workshops around the globe. For this upcoming workshop in Delhi, we wanted to bring the legislators, the peak bodies, credit bureaus, MFIs together to share experiences from the different countries in this region so that they can learn lessons from others where it has been successful and also where it has not been so successful due to delays and hurdles in the integration of MFIs in a credit reporting stream.

We hope to bring everybody together and get some discussion going. We are also sponsoring presenters from outside of this region to share what they have done in their country in terms of incorporating microfinance into credit reporting. The idea is to share lessons and learn from each other.