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  • GLOBALIZATION OF THE FINANCIAL SERVICES INDUSTRY Globalization and technology are fundamentally changing the financial services industry worldwide Competition has accelerated and is fierce for “best credits”/corporates in most countries Margins and fees are narrowing significantly Development of securities markets is creating additional competition for banks However: There is a large untapped market – both in the retail and in the commercial segment -> in most emerging markets the banking sector penetration remains below 25% of the population…
  • New Financial Technologies Financial Technologies Global Initiative Increasing efficiency, volume and profitability of financial services for MSEs by capitalizing on innovations in financial technologies Building strategic partnerships with global leaders in small business finance and providers of key financial technologies Adapting new technologies in proven business cases to client needs and country infrastructure Promoting investments in advancing financial technologies Providing expertise for design of IFC investments and TA in FIs adapting new financial technologies
  • GLOBALIZATION OF THE FINANCIAL SERVICES INDUSTRY Globalization and technology are fundamentally changing the financial services industry worldwide Competition has accelerated and is fierce for “best credits”/corporates in most countries Margins and fees are narrowing significantly Development of securities markets is creating additional competition for banks However: There is a large untapped market – both in the retail and in the commercial segment -> in most emerging markets the banking sector penetration remains below 25% of the population…

Transcript

  • 1. The Role of Credit Reporting for Retail and SME Banking: Global Perspective Kiev, September 29, 2006 Nataliya Mylenko Program Officer Financial Infrastructure & Institution Building International Finance Corporation
  • 2. Lack of Access to Financial Services Retail, Micro and Small business market Large Co’s and “ A” Clients
    • In Emerging & Transition Markets:
    • The bottom of the pyramid remains underserved:
      • Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets
      • Banks tend to focus on large commercial clients and top retail clients
    • Targeting the underserved:
      • Microfinance (up-scaling): Total reach: 70 million clients globally
      • Banks (down-scaling): Requires retail skills and systems
      • Non-bank financial institutions (diversifying): Leasing, factoring, housing, insurance
    Well- served Under- served
  • 3.
    • Basic information services & market infrastructure accessible to lenders
      • Credit bureaus
      • Payment systems
      • Enforcing creditor rights
    • Retail skills and strategy of the financial institution:
      • Leadership, experience, and organization
      • Products, Delivery Channels, Systems
      • Improved risk management (underwriting, portfolio management, collections – using tools like credit scoring)
    Two levels of intervention for successful retail and SME finance Bank C Bank A Bank B Market Infrastructure Success of the banks in retail and SME finance is the primary objective: IFC’s involvement on market infrastructure aims to contribute its experience with financial institutions as well as with the credit bureau industry. IFC’s Work with Credit Bureaus
  • 4. Role of Credit Bureaus in Financial Markets
    • Decreases information asymmetries between borrowers and lenders
    • Allows lenders to more accurately evaluate risks and improve portfolio quality
    • Eases adverse selection problem and lowers the cost of credit for a good borrower
    • Increases credit volume/ improves access to credit
    • Supports introduction of credit scoring and automated underwriting, lowers lender operational costs and improves profitability
  • 5. Credit information sharing expands lending Note: Charts are partial scatterplots controlling for GNI, growth, inflation, rule of law, legal origin. Relationships are statistically significant at 5% level. Source: Doing Business project, International Financial Statistics Information sharing 1.5 1.0 .5 0.0 -.5 -1.0 -1.5 Private Credit / GDP .8 .6 .4 .2 -.0 -.2 -.4 -.6
  • 6. Private credit registries are associated with lower financing constraints Estimates based on data on 5000 firms in 51 countries Source: Love and Mylenko (2003) % of small firms reporting high financing constraints Probability of obtaining a bank loan for a small firm
  • 7. Growth of private credit and decreasing interest rate in Ukraine Source: World Development Indicators, World Bank 2006
  • 8. Private Credit and Credit Bureau Coverage
  • 9. Credit Information Coverage Large Corporates Mid-size Companies Small Businesses Consumers Public Private Public Registries Rating Agencies Commercial Credit Bureaus Consumer Credit Bureaus 1 2 3 1 – Purpose of public registries is banking supervision, while private bureaus seek to help lenders make better credit decisions. However, there is a need for greater differentiation and development of relevant public registries and data sources, e.g. financial statements databases. 2 – The role of public registries vs. private bureaus: What role can national loans registries play and what other public registries or data sources can provide valuable input for private bureaus, e.g. ID data (lost/stolen, unique identifier, tax header information etc.) 3 – Link between consumer and commercial credit reporting very important, in particular for owners of small businesses and directors on SMEs: Closing the gap of information coverage and developing value-added services such as small business scores
  • 10. Growth of private bureaus
  • 11.
    • High growth of retail credit in emerging markets (62% increase during 1996-2004)
    • Move towards more responsible lending following various consumer loan crises
    • Increased awareness of credit reporting (e.g. in Eastern Europe the number of private credit bureaus rose from five to twelve in 2006)
    • Falling start-up costs for credit bureaus with decreasing costs of database management software
    • Growing competition
    Drivers of Credit Bureau Growth
  • 12. Doing Business in 2006 – Credit Information Indicators
    • Credit Information Index
    • Both firms and individuals are listed
    • Both positive and negative information
    • Retailers and/or utilities submit data
    • 5 or more years of historical data
    • All loans included above 1% GNI per capita
    • Consumer right to inspect is guaranteed by law
    Average private bureau coverage (% adults) Source: Doing Business 2006
  • 13. Latin America and the Caribbean
  • 14. Asia
  • 15. Middle East and North Africa
  • 16. Sub-Saharan Africa
  • 17. Private credit bureaus in Eastern Europe and Central Asia in 2006 ... … and in 2002
  • 18. Links & Contact Information
    • Research Links
    • (1) http://www.ifc.org/ifcext/gfm.nsf/Content/FinancialInfrastructure - IFC’s Global Credit Bureau Program
    • (2) http://www.worldbank.org/wbi/banking/creditscoring - Focus on small business by WB/IFC
    • (3 ) http://econ.worldbank.org/programs/credit_reporting - Comprehensive research by WB
    • (4 ) http://rru.worldbank.org/doingbusiness - Focus on business environment
    • Contact information
    • Nataliya Mylenko, Program Manager, Global Credit Bureau Program, Nmylenko@ifc.org
  • 19.
    • Thank you!
  • 20. Using the Credit Bureau to Succeed in Retail and SME lending
    • What are the value-added services bureaus can provide? Including credit scoring, fraud detection, application processing, portfolio monitoring.
    • What are the advantages of a bureau score?
    • Prerequisites for the development of the bureau score: data and systems
    • Credit bureaus and Basel II
  • 21. Efficiency gains from using credit registry information Based on the results of 2001-2002 survey of banks in 34 countries, World Bank
  • 22. Use of positive information results in lower default rates Argentina Brazil Estimates are based on information on large loans from public credit registries in Argentina and Brazil. Graph represents predicted default rates at 60% approval rate. Based on Majnoni, Miller, Mylenko and Powell (2003) “Public Credit Information Systems: Evaluating Available Information”, World Bank
  • 23. Cost and time savings from credit reports and credit scoring
    • Some case studies:
    • A bank in Canada: processing time decreased from 9 days to 3 days , in 18 month since scoring was implemented
    • A bank in US: processing time decreased from 3-4 weeks to a few hours .
    • A bank in Netherlands: processing time decreased from 8-10 hours to 15 minutes for existing clients and 45 minutes for new clients
    • A bank in the US: average cost of processing a small business loan decreased from $250 to $100 after implementing scoring system