Credit Bureaus in Microfinance

  • 2,646 views
Uploaded on

An informative presentation about Microfinance (Credit) Bureaus, prepared by Planet Finance. …

An informative presentation about Microfinance (Credit) Bureaus, prepared by Planet Finance.

Source: Dutheil, M. (2006). Microfinance Bureaus : Balancing Vision and Pragmatic Solutions. Available: info.worldbank.org/etools/library/latestversion.asp?235943. Last accessed 2, April, 2010.

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
2,646
On Slideshare
0
From Embeds
0
Number of Embeds
1

Actions

Shares
Downloads
151
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Microfinance Bureaus : Balancing Vision and Pragmatic Solutions Regional Conference on Credit Reporting in Africa Organized by the World Bank and the IFC Break-out Session on Microfinance Bureaus Cape Town, South Africa October 6, 2006 Mehdi Dutheil, Regional Director 1
  • 2. 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 2
  • 3. 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 3
  • 4. 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 4
  • 5. BEFORE CREDIT BUREAUS: THE BOLIVIAN CRISIS IMPACT OF NOT HAVING CREDIT REPORTING: THE EXAMPLE OF BOLIVIA Bad Debt Rate - Bolivia 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. COOPERATIVES 5
  • 6. HOW IS CREDIT INFORMATION USED? In pre- In credit In portfolio selection underwriting management  To sort out bad  To identify bad  To identify borrowers up-front borrowers deterioration of  To offer better existing borrowers  To price risk conditions to good accordingly  To avoid aggregation borrowers of bad debt among a  To use automated / number of financial  To reduce the cost semi-automated institutions of credit underwriting tools  To collect the most like credit scoring risky debt first 6
  • 7. BENEFITS OF CREDIT BUREAUS IN THE MICROFINANCE SECTOR AT THE CLIENT’S LEVEL  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 7
  • 8. BENEFITS OF CREDIT BUREAUS IN THE MICROFINANCE SECTOR AT THE INSTITUTIONAL LEVEL: BETTER INFORMATION SHARING AND DECISION MAKING  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 8
  • 9. BENEFITS OF CREDIT BUREAUS IN THE MICROFINANCE SECTOR AT THE SECTOR LEVEL: BETTER REGULATION AND INCREASED COMPETITION  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 9
  • 10. BENEFITS OF SHARING NEGATIVE AND POSITIVE INFORMATION REDUCTION OF DEFAULT RISK AT INCREASED ACCESS TO CREDIT AT THE INSTITUTIONAL LEVEL THE CLIENT’S LEVEL Percent decrease in default rate Percent of applicants who obtain a loan 3,35 74,8 12% decrease in 90% increase default rate in access 1,9 39,8 Negative Negative & Negative Negative & information positive information positive only information only information Simulated credit defaults assuming an acceptance Simulated credit availability assuming a target default rate of 60% rate of 3% 10 Source: Barron and Staten (2000)
  • 11. BENEFITS OF CREDIT BUREAUS IN THE MICROFINANCE SECTOR CREDIT BUREAUS AND SUSTAINABLE POVERTY ALLEVIATION IMPROVEMENT OF INITIAL SETTING UP A MFIs FUNDING CREDIT BUREAU FINANCIAL MFIs’ VIABILITY SUBSCRIPTION TO CB CB SELF- REDUCED POVERTY FINANCING REPAYMENT SUSTAINABILITY OF THE CREDIT BUREAU INCREASE IN THE INCREASE IN THE PROPORTION OF TOTAL NUMBER OF BENEFICIARIES WITH MICROLENDING REPAYMENT CAPACITY BENEFICIARIES Source: Développement de la première Centrale des Risques sur Internet pour les Institutions de MF 11 au Bénin, PlaNet Finance
  • 12. 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 12
  • 13. 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.) 13
  • 14. THE CASE FOR INTEGRATED CREDIT BUREAUS THE IMPORTANCE OF SHARING INFORMATION ACROSS SECTORS Types of Information “Positive “Negative Sources of & Negative” Only” Information “Full” Lower predictiveness High (information shared by predictiveness (e.g. Australia, Brazil) banks, retailers, NBFIs, (e.g. mobile operators) US, UK, Italy, South Africa) “Fragmented” Lower predictiveness Lowest (e.g. information (e.g. Poland, Czech predictiveness shared among banks Republic) (e.g. Morocco, South only or retail only) Korea) Source: Microfinance and Credit Bureaus, Peer Stein (IFC) 14
  • 15. 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 15
  • 16. 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 16
  • 17. 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 17
  • 18. Source: World Bank 2002 18
  • 19. 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 19
  • 20. A PIONEERING INITIATIVE INTRODUCTION TO THE CREDIT BUREAU CREATION PROJECT  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 20
  • 21. 21
  • 22. MAIN AREAS OF ACTION IN THE PROJECT PROJECT ROADMAP MAIN CHALLENGES ENCOUNTERED  Office set-up and equipment  Technology challenge: not all  Design of the data base MFIs in Benin are equipped with  Establishment of procedures the adequate technology  Training of credit bureau‟s administrator (internet…)  necessity to provide  Creation of the website relevant technology and diversify  Training of MFI personnel the information channels  Choice of legal statute and registration of the statute  Data collection challenge: it took  Maintenance of the website time to make sure that the MFIs  Awareness campaigns to convince had a common vision on the other MFIs on the advantages of information they need and the way becoming a member of the credit to collect it bureau 22
  • 23. HOW THE BENIN CREDIT BUREAU WORKS MFIs MFIs  Monthly filling and actualization of 3 tools to access information INFORMATION GRIDS listing the number of  Internet overdue payments of more than 30 days.  CD-ROM  PDA (Personal Digital Assistant) Files are sent Transmission of the to the CB information required CREDIT BUREAU Confidential information gathered on each borrower  Centralization of the information  Personal information on each borrower  Consistency check of the information collected  Occupation  Information processing  Number of credits obtained  Information storage in the CB database  Nature of outstanding credit 23
  • 24. 24
  • 25. 25
  • 26. 26
  • 27. EARLY TANGIBLE RESULTS LOAN OFFICERS  Better knowledge of the An average of 150 applicants enabling a better inquiries per loan officer decision making each month MFIs  Better quality of lending portfolio  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 27
  • 28. DECREASE IN REJECTED APPLICATIONS AFTER THE IMPLEMENTATION OF THE CREDIT BUREAU MFI Jan. Feb. Mar. Apr. Comments of MFIs « Beneficiaries are more PADME 2% 1% 0.5% 0.5% disciplined » FINADEV 6.8% 3% 1% 0% „‟ CFAD 5% 3% 1% 0% „‟ 28
  • 29. CONSEQUENCES OF THE SUCCESS OF THE PROJECT  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 29
  • 30. KEY LEARNINGS  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 30
  • 31. 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 31
  • 32. INTRODUCTION TO THE CREDIT BUREAU CREATION PROJECT  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 32
  • 33. CREDIT BUREAU DEVELOPMENT: INITIAL STEPS 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) 33
  • 34. 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 34
  • 35. HOW THE MOROCCAN CREDIT BUREAU WORKS: ARCHITECTURE Clients Credit Bureau Server Database Software: Software: MySQL 4.1 - Application server - Application server TOMCAT 4.1 TOMCAT 4.1 - Application CB-CLIENT - Application CB-ADMIN - FTP SERVER - FTP SERVER 35
  • 36. HOW THE MOROCCAN CREDIT BUREAU WORKS: UPDATES 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 36
  • 37. HOW THE MOROCCAN CREDIT BUREAU WORKS: INQUIRIES 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 37
  • 38. HOW THE MOROCCAN CREDIT BUREAU WORKS: ADMINISTRATION • 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 38
  • 39. 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 Central Bank Options of National Federation of Consortium of member MFIs management for the Microcredit Associations (“Economic Interest Group”) CB Specialized private entity or third party (Experian, etc.) 39
  • 40. KEY LEARNINGS  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 40
  • 41. 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 41
  • 42. CREDIT SCORING, A POTENTIAL FOR MICROFINANCE DEFINITION 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. OBJECTIVES Evaluate the risk from all potential customers when applying for credit, through the forecast of delinquent accounts or default of payment 42
  • 43. BENEFITS OF CREDIT SCORING (1/2) AT THE CLIENT’S LEVEL: A FAIR EVALUATION SYSTEM  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 43
  • 44. BENEFITS OF CREDIT SCORING (2/2) 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 44
  • 45. CASE STUDY OF CREDIT SCORING: MEXICO THE CONTEXT  Mexican MFI with more than 100,000 clients.  40 branches  Assets over 100 millions USD PRECONDITIONS FOR THE SUCCESS OF THE PROJECT  Consolidated MIS  Commitment of Top Management 45
  • 46. CASE STUDY OF CREDIT SCORING: MEXICO SITUATION BEFORE SCORING  A fragmented credit process  Lack of standardization in decision making  Authorization delays (up to 10 days)  Impossible to measure ex - ante risk 46
  • 47. CASE STUDY OF CREDIT SCORING: MEXICO 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 40 35 Low Risk Medium Risk High Risk # Good / # Bad clients 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 47
  • 48. CASE STUDY OF CREDIT SCORING: MEXICO  A scorecard was implemented in the MIS of the MFI  The MFI also have an Excel tool for testing the model 48
  • 49. CASE STUDY OF CREDIT SCORING: MEXICO RESULTS OF THE CREDIT SCORING PROJECT  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 49
  • 50. CONCLUSION: KEY SUCCESS FACTORS KEY SUCCESS FACTORS FOR MICRO CREDIT BUREAUS  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 50
  • 51. CONCLUSION: KEY SUCCESS FACTORS KEY SUCCESS FACTORS FOR MICRO CREDIT BUREAUS  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 51
  • 52. CONCLUSION: PLANET FINANCE CONTRIBUTIONS 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. 52
  • 53. Thanks for your attention. To know more, feel free to contact PlaNet Finance: mdutheil@planetfinance.org www.planetfinance.org 53