Credit Bureaus in Microfinance

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Microfinance Bureaus :Balancing Vision and Pragmatic Solutions

Regional Conference on Credit Reporting in AfricaOrganized by the World Bank and the IFC

Break-out Session on Microfinance BureausCape Town, South Africa

October 6, 2006

Mehdi Dutheil, Regional Director

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AGENDA

THE CASE FOR CREDIT REPORTING IN THE MICROFINANCE SECTOR

INTEGRATED CREDIT BUREAUS: LONG TERM VISION AND PRESENT DAY REALITIES

CASE STUDIES: INDUSTRY-LED VS. GOVERNMENT-LED MICROCREDIT BUREAUS

PERSPECTIVES

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AGENDA




PERSPECTIVES

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ARE CREDIT BUREAUS REALLY USEFUL IN MICROFINANCE ?

Banks make consumer loans using credit-bureau data for salaried borrowers with an automated, “high-tech” credit scoring approach

Quantitative data are essential, hence credit bureaus are a priority

On the contrary, microfinance enterprise loans are based on an individualized, labor-intensive “high-touch” approach to get data directly from the applicant and analyze the cash flows and personal character of the microentrepreneur *– self-employed poor cannot document income and credit history– to compensate, MFIs send out credit officers to applicants’ homes

Consequently, credit reporting and credit bureaus used to be deemed secondary in the microfinance sector

(*) Hans Dellien, WWB, and Mark Schreiner, MRM, December 2005

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In the late 1990s there was a crisis in the Bolivian microfinance sector due to over indebtedness of the clients

The main cause for the crisis was the lack of information sharing tools.

BEFORE CREDIT BUREAUS: THE BOLIVIAN CRISIS

IMPACT OF NOT HAVING CREDIT REPORTING: THE EXAMPLE OF BOLIVIA

Bad Debt Rate - Bolivia

COOPERATIVES

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HOW IS CREDIT INFORMATION USED?

To identify bad borrowers

To price risk accordingly

To use automated / semi-automated underwriting tools like credit scoring

In pre-selection

In credit underwriting

In portfolio management

To identify deterioration of existing borrowers

To avoid aggregation of bad debt among a number of financial institutions

To collect the most risky debt first

To sort out bad borrowers up-front

To offer better conditions to good borrowers

To reduce the cost of credit

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Increased efficiency in the evaluation of a loan can result in faster loan processing

Clients with a good record can get preferential services and lower prices

Clients are empowered to apply for credit in another location

Default prone clients have the desire to obtain a good report and will hence be encouraged to pay their bad debts

Lower risk of over-indebtedness by clients

AT THE CLIENT’S LEVEL

BENEFITS OF CREDIT BUREAUS IN THE MICROFINANCE SECTOR

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More reliable decision making Minimizing risk because of a better visibility on borrowers’ past and

ongoing default history and on their current outstanding balance of payments in different institutions

Reducing transaction costs as it facilitates the analysis and quantification of credit risk

Avoiding the aggregation of bad debt by borrowers among a number of financial institutions

Increasing the number of loans granted as potential borrowers who were before excluded from the system because of the lack of information on their concern become beneficiaries

AT THE INSTITUTIONAL LEVEL:

BETTER INFORMATION SHARING AND DECISION MAKING


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Facilitates financial sector’s supervision (Public Credit Registries in particular)

Provides data for economic research and microfinance regulation improvement

Facilitates the entry of new players in the market, such as banks willing to downscale into microfinance

AT THE SECTOR LEVEL:

BETTER REGULATION AND INCREASED COMPETITION


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BENEFITS OF SHARING NEGATIVE AND POSITIVE INFORMATION

Simulated credit defaults assuming an acceptance rate of 60%

3,35

1,9

Negative information

only

Negative & positive

information

Percent decrease in default rate

12% decrease in default rate

REDUCTION OF DEFAULT RISK AT THE INSTITUTIONAL LEVEL

39,8

74,8

Negative information

only

Negative & positive

information

Percent of applicants who obtain a loan

90% increase in access

Simulated credit availability assuming a target default rate of 3%

INCREASED ACCESS TO CREDIT AT THE CLIENT’S LEVEL

Source: Barron and Staten (2000)

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CB SELF-FINANCING

INITIALFUNDING

SETTING UP A CREDIT BUREAU

IMPROVEMENT OF MFIs

FINANCIAL VIABILITY

INCREASE IN THE TOTAL NUMBER OF

MICROLENDING BENEFICIARIES

INCREASE IN THE PROPORTION OF

BENEFICIARIES WITH REPAYMENT CAPACITY

MFIs’SUBSCRIPTION TO CB

SUSTAINABILITY OF THE CREDIT

BUREAU

REDUCED POVERTY

REPAYMENT

CREDIT BUREAUS AND SUSTAINABLE POVERTY ALLEVIATION

Source: Développement de la première Centrale des Risques sur Internet pour les Institutions de MF

au Bénin, PlaNet Finance


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AGENDA




PERSPECTIVES

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THE VISION OF AN INTEGRATED CREDIT BUREAU

• Full information sharing between financial (banks, consumer credit institutions, MFIs) and non financial institutions (retailers, telecom operators, utilities, etc.)– prevents clients over-indebtedness– fosters profitability at the financial system level

• In the long run, global and specialized private operators should be better positioned to ensure maintenance and evolution of the credit reporting system and bring technological and marketing innovations: real time updates, mobile access, applicant scoring, payment default alerts, etc.

• Depending on countries, the supervision of the credit bureau can be taken care of either by the industry itself or by a public entity (Central Bank, Supervision Commission, etc.)

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THE CASE FOR INTEGRATED CREDIT BUREAUS

Lowest predictiveness

(e.g. Morocco, South Korea)

Lower predictiveness

(e.g. Poland, Czech Republic)

“Fragmented”

(e.g. information shared among banks only or retail only)

Lower predictiveness

(e.g. Australia, Brazil)Highpredictiveness

(e.g. US, UK, Italy, South Africa)

“Full”

(information shared by banks, retailers, NBFIs, mobile operators)

Sources ofInformation

“Negative

Only”

Types ofInformation “Positive

& Negative”

Source: Microfinance and Credit Bureaus, Peer Stein (IFC)

THE IMPORTANCE OF SHARING INFORMATION ACROSS SECTORS

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PRESENT DAY REALITIES OFTEN HAMPER INTEGRATED CREDIT BUREAUS IMPLEMENTATION

• Many MFIs have very basic information systems (some are simply not computerized), which cannot compare with those of banks

• Microcredit bureaus business models are usually based on a big number of inquiries for small loans. Therefore, the amount charged /inquiry cannot be the same as the one charged for banks

• Because of short term loan cycles, MFIs need more frequent data updates and payment default after 30 days, rather than 6 months

• A large part of MFIs’ staff being poorly educated, the ease of use of the Credit Bureau’s application is more important than the number of functionalities

• The key for inquiries is different between MFIs (informal businesses identified by name and ID number) and banks (mostly formal businesses identified by corporate number)

• In a multi-sector credit bureau initiative, achieving a wide-ranging buy-in by all the players in a country is possible only if credit reporting has already reached sufficient maturity

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AGENDA




PERSPECTIVES

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INDUSTRY-LED VS. GOVERNMENT-LED MICROCREDIT BUREAUS

The role of the National Regulator differs widely according to countries:• In many countries, Microcredit Bureaus initiatives stem from the industry

and do not require investments in IT in the short run :– In Mali’s « Fleuve Niger » region, MFI executives hold an informal

meeting and exchange their lists of delinquent clients. No software was developed

– In Haïti, MFIs have developed an Microcredit Bureau based on an Access database restricted to negative information

• In Mozambique, there is both:– a Credit Bureau based on SAP and supervised by the Central Bank,

to which leading MFIs contribute monthly as well as banks, and– an informal exchange of delinquent clients lists (Excel) between MFIs’

directors (more-up to-date)• In Jordan, Tunisia and Egypt, legal difficulties impede the set up of

banking / microfinance credit bureaus

18Source: World Bank 2002

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CASE STUDY: BENIN MICROCREDIT BUREAU IMPLEMENTATION

CONTEXT OF MICROFINANCE IN BENIN

400,000 microfinance beneficiaries out of a total potential number of 4,000,000 beneficiaries

High level of competition with around 400 MFIs competing on the same segments of the market risks: over-indebtedness of clients and increased default on payments

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The idea of a credit bureau was first launched by 5 local MFIs including PADME, FINADEV and Vital Finance which realized in 2001 that their portfolio was deteriorating

The objective was to consolidate portfolio quality by sharing information on payments overdue for more than 30 days via an internet system

INTRODUCTION TO THE CREDIT BUREAU CREATION PROJECT

A PIONEERING INITIATIVE

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PROJECT ROADMAP Office set-up and equipment Design of the data base Establishment of procedures Training of credit bureau’s administrator Creation of the website Training of MFI personnel Choice of legal statute and registration

of the statute Maintenance of the website Awareness campaigns to convince other

MFIs on the advantages of becoming a member of the credit bureau

MAIN AREAS OF ACTION IN THE PROJECT

MAIN CHALLENGES ENCOUNTERED

Technology challenge: not all MFIs in Benin are equipped with the adequate technology (internet…) necessity to provide relevant technology and diversify the information channels

Data collection challenge: it took time to make sure that the MFIs had a common vision on the information they need and the way to collect it

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Monthly filling and actualization of INFORMATION GRIDS listing the number of overdue payments of more than 30 days.

3 tools to access information Internet CD-ROM PDA (Personal Digital Assistant)

Files are sent to the CB

Centralization of the information Consistency check of the information collected Information processing Information storage in the CB database

CREDIT BUREAU

Confidential information gathered on each borrower Personal information on each borrower Occupation Number of credits obtained Nature of outstanding credit

MFIs

Transmission of the information required

MFIs

HOW THE BENIN CREDIT BUREAU WORKS

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EARLY TANGIBLE RESULTS

The number of applications rejected has significantly decreased Participating MFIs have reported better discipline amongst the clients, as they

became aware that a bad credit history will deny them future access to credit

An average of 150 inquiries per loan officer each month

LOAN OFFICERS Better knowledge of the

applicants enabling a better decision making

MFIs Better quality of lending portfolio

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MFI Jan. Feb. Mar. Apr. Comments of MFIs

PADME 2% 1% 0.5% 0.5%« Beneficiaries are more

disciplined »

FINADEV 6.8% 3% 1% 0% ‘’

CFAD 5% 3% 1% 0% ‘’

DECREASE IN REJECTED APPLICATIONS AFTER THE IMPLEMENTATION OF THE CREDIT BUREAU

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The World Bank has granted the budget required to extend the project to 17 MFIs in 2002

Following the success of this experiment, it was decided to further develop the credit bureau in a 3-year program, with the objective of bringing it to financial viability and increasing the number of members to 40

Today, the ownership and responsibility of the project has been transferred to Consortium Alafia, the Benin Microfinance Association

The Credit Bureau is now operating in 6 provinces, through local agencies In July 2006, there were 20,000 clients in the database Discussions have been held with the BCEAO in order to transfer the Credit

Bureau in the context of a regional Credit Bureau project

CONSEQUENCES OF THE SUCCESS OF THE PROJECT

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Microfinance credit bureaus are effective tools to prevent delinquency, even when the budget allows only for the sharing of negative information

Very basic technologies can be sufficient in the short-to-mid-term Progressive buy-in of MFIs can be ensured by

offering a highly professional service using technologies adapted to MFIs capacity proposing an adequate fee structure

In case of management of the credit bureau by the professional association and moderate maintenance costs, the fee can be included into the membership fee to the association

Ownership and leadership issues must be tackled at the start of the project

KEY LEARNINGS

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CASE STUDY: THE MOROCCAN CREDIT BUREAU IMPLEMENTATION

CONTEXT OF MICROFINANCE IN MOROCCO

12 MFIs in Morocco, with a microfinance market characterized by a high rate of repayment: 99% average

This rate is deteriorating due to increased competition between MFIs covering the same areas and an increase in the number of cross-debts

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The Moroccan Credit Bureau, which began its operations in 2005, is mostly aimed at preventing crossed loans to clients whose loans are not delinquent yet. Hence the need for

negative and positive information enabling access to the database for all the Moroccan MFIs (from

the largest to the smallest) The project was supervised by a work group comprising the MFIs, their

federation (FNAM) and PlaNet Finance Maroc. The Grameen Foundation USA and USAID also took part to the project design

An estimated 1,000,000 yearly inquiries are needed to make the project viable

INTRODUCTION TO THE CREDIT BUREAU CREATION PROJECT

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Development phase Analysis of each of Morocco’s MFIs capacity to provide the Credit Bureau

with the required data, and identification of the actions needed to develop this capacity (beg. 2004)

Identification of information that can be exchanged Establishment of the conditions of contract Evaluation of the financial viability of the CB / business plan Call for tender for the choice of an information system provider of services Choice of the IS service provider in cooperation with the MFIs Parameter settings (beg. 2005)

CREDIT BUREAU DEVELOPMENT: INITIAL STEPS

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CRITERIA USED IN THE CHOICE OF AN INFORMATION SYSTEM SERVICE PROVIDER

Choice of a provider with existing experience in the management of data Choice of a provider not using sub-contractors, which guarantees the

continuity of the assistance Choice of a partner proposing an IS capable of evolution, in order to

process one million loans in the near future Choice of simple tools that can be used by all MFIs even with basic IT

equipment

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HOW THE MOROCCAN CREDIT BUREAU WORKS: ARCHITECTURE

DatabaseCredit Bureau Server

MySQL 4.1Software: - Application server TOMCAT 4.1 - Application CB-ADMIN - FTP SERVER

Software: - Application server TOMCAT 4.1 - Application CB-CLIENT - FTP SERVER

Clients

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Initially: up-loading of all relevant information by all MFIs participating in the project

Regularly:• Entry of all new borrowers and loans• Changes in current borrowers and loans details• Loan cancellation

How :• From the MFI Head Office or authorized branch locations• Interactive : direct uploading of information from MFIs’ databases by

the Credit Bureau• Batch : Preparation and sending of data by the MFIs for treatment by

the Credit Bureau • Follow-up of operations by delivery of notification with identification

number

HOW THE MOROCCAN CREDIT BUREAU WORKS: UPDATES

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The credit Bureau can be searched at all times from the Head Office or authorized MFIs branches

• The National Identification Number is the default search key• Inquiries can be carried out:

• On the web• By batch : after information is sent to the Credit Bureau by the

MFIs, detailed reports are sent back• By SMS

• Contents of Results Page : Identification of the borrower’s information Identification of loan information

• Various tools for visualization of results

HOW THE MOROCCAN CREDIT BUREAU WORKS: INQUIRIES

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• Security Login and encrypted password Verification of contents Encrypting of exchanged information Server protected from external intrusion

• Level of Interaction: The role of each user is clearly specified: manager,

administrator, updater, enquirer

• Archives of exchanged information

• Reporting on Credit Bureau usage frequency

HOW THE MOROCCAN CREDIT BUREAU WORKS: ADMINISTRATION

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Operational phase

Once the project is fully operational, PF Morocco will help institutionalize the Credit Bureau and will share the code with the selected CB manager

Options of management for the

CB

Consortium of member MFIs (“Economic Interest Group”)

Central Bank

National Federation of Microcredit Associations

Specialized private entity or third party (Experian, etc.)

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The institutional framework must be set up precisely even before setting up the technical framework

The technical side of it is quite simple The buy-in from MFIs top management is essential The ease of use of the Credit Bureau’s application is important, as a large part

of the MFIs’ staff is not highly educated

KEY LEARNINGS

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AGENDA




PERSPECTIVES

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CREDIT SCORING, A POTENTIAL FOR MICROFINANCE

A quantitative method used to predict repayment risk based on the performance of past loans with characteristics similar to current loans. By use of a scorecard, points are assigned to the attributes of an applicant, and the sum of the points is the “score”, with more points meaning more risk.

DEFINITION

Evaluate the risk from all potential customers when applying for credit, through the forecast of delinquent accounts or default of payment

OBJECTIVES

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BENEFITS OF CREDIT SCORING (1/2)

Clients are evaluated on non-subjective data through a well defined methodology

Better pricing of loans Increased efficiency in evaluating loans can result in faster loan

processing Default prone clients who wish to obtain a good report will have

an incentive to pay their bad debts Lower risk of over-indebtedness by beneficiaries

AT THE CLIENT’S LEVEL: A FAIR EVALUATION SYSTEM

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AT THE INSTITUTIONAL LEVEL

More reliable decision making through better knowledge of the clients’ past behavior

Better pricing of loans and provision against loan losses through the analysis of individual client risks

Clear segmentation of population by score and delinquencies that helps design better strategies for delinquency prevention and for marketing

Increase in the transferability of borrowers from one institution to another

BENEFITS OF CREDIT SCORING (2/2)

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Mexican MFI with more than 100,000 clients.

40 branches Assets over 100 millions USD

Consolidated MIS Commitment of Top Management

PRECONDITIONS FOR THE SUCCESS OF THE PROJECT

CASE STUDY OF CREDIT SCORING: MEXICO

THE CONTEXT

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A fragmented credit process Lack of standardization in decision making Authorization delays (up to 10 days) Impossible to measure ex - ante risk

SITUATION BEFORE SCORING


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The scorecard can identify ex-ante risk from groups where the ratio of good to bad clients is almost 35/1 to those high risk groups where the ratio is 2/1

Scoring efficiency

0

5

10

15

20

25

30

35

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

# G

oo

d /

# B

ad c

lien

ts

Low Risk Medium Risk High Risk


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A scorecard was implemented in the MIS of the MFI The MFI also have an Excel tool for testing the model


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Credit in 24 hours 80% of the applications with immediate results Reduction of 35% of credit cost Reduction of bad debt rate as analysts only focus on relevant applications

(medium or high risk, leaving the rest to the score) Standardization of risk

RESULTS OF THE CREDIT SCORING PROJECT


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Ensure that MFIs are ready for a credit bureau based on their IT systems and credit underwriting processes

Work with experienced credit bureau operators and consultants

Ensure that MFIs are given sufficient support and training to include credit reports and value-added services into their credit underwriting processes

Collect both positive and negative information about borrowers in order to reduce information asymmetry

Adjust credit bureau inquiry prices to the MFIs financial capacities

CONCLUSION: KEY SUCCESS FACTORS

KEY SUCCESS FACTORS FOR MICRO CREDIT BUREAUS

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Ensure that the information is actively shared between all involved institutions

To foster the Credit Bureau’s success, a law requiring its use by all relevant players can be put in place

To ensure coherency in policy and administration, a Credit Bureau should have one single overseeing body

KEY SUCCESS FACTORS FOR MICRO CREDIT BUREAUS

CONCLUSION: KEY SUCCESS FACTORS

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Like in Benin or Morocco, the objective of PlaNet Finance is to be technical and institutional advisor to the Credit Bureaus project teams.

Our philosophy is to build sustainable credit bureaus managed by local operators using open-source technologies. Our credit bureau software has been designed in order to be easily adapted. The technologies used are widely known.

PlaNet Finance carefully selects the local technical operator for the project development and administration through a formal invitation to tender followed by a transparent process of bid selection.

PlaNet Finance also ensures that MFIs are given sufficient support and training.

Implementing a credit bureau is a long process (over one year usually) but not necessarily a very costly one. Most often, the major issues are not the technology but the institutionnal framework. Once this solved, PlaNet Finance can lobby to help gather the needed financial support from potential partners and donors.

CONCLUSION: PLANET FINANCE CONTRIBUTIONS

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To know more, feel free to contact PlaNet Finance:

[email protected]

www.planetfinance.org

Thanks for your attention.

Economy & Finance

Credit Bureaus in Microfinance