Credit Bureau Perspectives for Developing Markets


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Credit Bureau Perspectives for Developing Markets

  1. 1. Credit Bureau Perspectives for Developing Markets Presented at:Peking University International Academic Conference On Personal Credit System 2008 Presented by: Frank Lenisa, MBA (Director) Email:
  2. 2. Agenda: Background To Compuscan Experiences And Considerations For A Developing Market CB Systems/Technologies Telecommunications Data Reporting Analytics Value Added Products CB Staffing Needs Awareness of CB Legal and Regulatory
  3. 3. Introductory Statement: The establishment of a Credit Bureau (CB) entails much more than technical considerations Business acumen, strategic vision and strong management are required
  4. 4. Background to Compuscan: Due to South Africa’s history of racial oppression, it has what may be called a dual economy One extremity is comparable to industrialized nations and the other to developing markets The developed economy operates in information rich environments, with formal procedures, higher-value added products and linkages The developed economy was served by a international CB
  5. 5. Background to CompuScan (Cont’d): Prior to 1992, South African consumers in the developing market wanting to borrow small amounts of money, had to rely on the unregulated informal credit sector  informal township based moneylenders (also knows as Mashonisas)  loan sharks  Pawnbrokers During 1992, new rules governing the provision of credit evolved, which saw the rapid evolution of a new credit industry, known as the micro credit industry Legislative changes saw the growth of this sector during 1992 to 1999 From 1999 to date, an era of commercialization continues in a regulated environment
  6. 6. Background to CompuScan (Cont’d): By 1994, there was still a distinct lack of a credit reporting system for the micro credit industry in South Africa Absence of information sharing, caused weakening performance of the institutions and a high default rate prevailed Lenders perceived the micro credit sector risky, because lenders could not properly price the risk involved due the state of asymmetric information The founders of Compuscan saw the opportunity in the market to create a credit reporting system Full-file (positive and negative information) was collected from the start
  7. 7. Background to CompuScan (Cont’d): Today, CompuScan is a full service CB, servicing formal banks, credit institutions, and retailers whilst remaining the leader in the micro credit industry CompuScan currently employs more than 100 staff members  Delivering more than 1 million credit reports per month  Managing more than 58.2 million accounts  With more than 20 million borrowers registered on the databases CompuScan has 3500 subscribing lenders; including banks, public and private companies, NGO’s and Cooperatives/Credit unions CompuScan currently operates in South Africa, Namibia, Botswana and Uganda
  8. 8. Background to CompuScan (Cont’d): The CB data available consists of: Demographic information on borrowers to ensure proper identification and analytics Information that is pertinent to the borrower’s creditworthiness, (accounts history, repayment profiles, judgment information, fraud information, collections information) Contains indications of the overall risk relating to an applicant with regard the repayment of newly established credit, inquiries by other lenders with a permissible purpose and credit scores An avenue for the verification or validation of any information that may be questioned or disputed by the borrower is available
  9. 9. Experiences And Considerations for a DevelopingMarket: Lenders in developing markets often lack formal procedures, appropriate technology, internal structures, and methodical approaches when compared to a developed institutions in industrialized countries The modus operandi of a CB therefore needs to adapt to this environment, as attempts to import CB methodologies from other contexts may have mixed results
  10. 10. CB Systems/Technologies: The CB system need to be robust, world-class and highly customizable / adaptive The CB system needs constant refinement to ensure ongoing improvement in the collection, verification, hosting and distribution of credit data/information Consider managing the IT requirements of the CB system in-house; this provides control over the entire process and enables the rapid evolution of functionalities and features
  11. 11. CB Systems/Technologies (Cont’d): Functionalities and features include:  Configurable business rules  Data loading engine that validates data against business rules, loads data into staging servers, then production servers, and provides administrators/lenders with full data loading reports  Member/Subscriber/Contract management module  User administration module to allow permissible access to features based on their roles and authorization levels  Audit trails facilities  Custom MIS reports  Data packets (XML, CSV, others) can be delivered and received by online (CPU-to-CPU) and dialup (internet) services.  Can be integrated into institutions lending system
  12. 12. Telecommunications: Cost of telecommunications is high in developing countries is high and  Of limited bandwidth  ISP’s infrastructure limited  Power supply issues CB system and technologies need to cater for these limitations:  Employ data compression technologies  Limited unnecessary real-time reporting of data  Use batch processing  Back-up power systems
  13. 13. Data: Obtaining data presents major challenges to the CB Lenders often do not have the required data easily available Data in different formats, database structures, and not necessarily available in electronic format Identifying information, such as ID numbers, names, addresses and dates of birth is often not available or reliable (e.g. same names, mis-spelt) CB’s make use of sophisticated matching algorithms to correctly match and merge separate records belonging to the same individual
  14. 14. Data (Cont’d): These algorithms traditionally use a combination of name, address and date of birth and other such indentifying information The ability to use such algorithms is however significantly restricted in emerging markets where other crucial information, such as names, addresses and date of birth are unreliable CB needs to make use of a unique identifier – consider Biometrics In Uganda, Compuscan implemented a biometric Identification system as well a financial card for all borrowers, as Uganda does not have a national ID system
  15. 15. Reporting: Need agreement with all institutions on data layout. Develop data manuals and data submission guidelines Receiving the required data timely, regularly and complete are not without its challenges, despite putting the appropriate systems in place Loans terms shorter in developing countries, therefore data reporting needs a higher frequency – consider daily/weekly Institutions and their branches in almost every region/state, therefore data collection may be need to be online (CPU-to-CPU) or dial-up (internet); If done manually it would be become exceedingly cumbersome
  16. 16. Reporting (Cont’d): Reporting methods include: Dial-up (Internet)  System needs to be effective and fast. Careful consideration in what data is reported – consider reporting only needed data. Consider reporting only new data e.g. reporting only payment data and update accounts details on database with payment data received Online (CPU-to-CPU)  Preferred method; seamless/automated, and less prone to data capture errors, but implimentation needs a lot of support from CB  Many lending institutions lack the required development capacity to integrate the CB reporting system. CB need to support institution technically. CB also needs knowledge institutions lending system
  17. 17. Reporting (Cont’d): Providers of commercially available lending systems can be target to integrate the CB reporting system. However, its not without problems Providers do not always perform the required integration properly Release software upgrades sometimes results in the system not reporting the data correctly Providers often do not inform the institution of system changes, nor train institutions staff on CB functionalities  Compuscan has to provide the technical support capacity in many cases  Audits of integration prior to the release of the software, or an upgrade  CB needs knowledge of lending system to support institution
  18. 18. Reporting (Cont’d): A way Compuscan managed to reduce these isssues was to purchase a lending system. System is commercially available to institutions and fully supported by CompuScan. Available as a value add product Manual data extracts – data extracted by institutions and submitted to CB. Best for large volume CB supplies a Data Quality Summary Report for lenders to sign-off before data is loaded into production database – encourages lenders to get involved in data quality
  19. 19. Analytics: CB data elements of developing market versus developed markets are very similar. However, in developing markets, the emphasis is far more towards data being recent  A judgment 2 years ago holds little weight, were in a more developed market it might hold weight  Since the loan terms are generally shorter, the trends on variables will differ – a worst arrears of 3 on a short term loan has a different weight of evidence to a worst arrears of 3 on a longer term loan Data quality and analytic value from developing markets is not great  Status codes are often not updated  Payment information is often not supplied past the loan being granted
  20. 20. Analytics (Cont’d): I do not think lenders have a full appreciation of the value of the data, which is why they tend not to bother reporting correctly. The lenders need to be educated to appreciate the potential value of the data for them to report correctly An ongoing challenge we face is in educating lenders to report correctly and for them to understand the analytical value of the data they report Consider making credit score easy to interpret
  21. 21. Analytics (Cont’d):
  22. 22. Technical Support and System Training: Institutions lack hardware, software, and networking capabilities Lack of strong, competent human capacity Therefore, support and training of institutions is key to the business model of the CB Common problem is that institutions often neglected to report timely and/or regularly through  Neglect  Not knowing how  Concern about predatory lending practices of other institutions
  23. 23. Technical Support and System Training (Cont’d): Compuscan provides ongoing on-site support and training. Each branch visited by CB staff every 6 weeks  Support and training on CB system  Support and training of insitiutions computer and network system Ongoing training seminars are regularly scheduled in the different regions
  24. 24. Technical Support and System Training (Cont’d): Call centre is operational 6 days week.  Inbound calls support:  Lenders needs on the CB system  Lenders needs computer and network system  Outbound calls are directed at lenders who do not use the CB system correctly or report correctly
  25. 25. Technical Support and System Training (Cont’d): Insitiutions who do not report correctly are often placed in an incubation programme, where  Lenders are placed under “high-care” and undergoes intensive training  Lenders are monitored until such time as all requirements are met and is able to function optimally Support and training often more than just technical; CB staff are mentors/coaches on just about anything about credit management, compliance, computer and networks
  26. 26. Credit Skills Training Institute: Compuscan establiched a credit management skills training instituite and consultancy to improve the skills, knowlegde and ablities of the industry South African Qualifications Authority Accredited Focus area:  Credit management  Business and personal development  End-users computer training  Consultancy services on credit management issues e.g. credit policy, best practices, compliance
  27. 27. Value Added Credit Information Solutions Compuscan’s value add products /services where developed to improve the lenders abilities, but also to strengthen the CB.  E.g. improve the ease of reporting and thus the data quality improved.  Getting lenders to understand the analytical value of data through credit scores and analytic work  Improving the skills, knowledge and abilities of the institutions staff through skills training and development  Identity solutions to improve data matching Value added offerings include: Credit Decision Engine  Allows credit institutions to easily implement automated decisioning into their credit granting process
  28. 28. Value Added Credit Information Solutions (Cont’d): Credit Application Processing Software  Automates the origination process into a customer focused, multi- channel, and cost-efficient operations Loan Management System  The loan administration software program manages the entire loan cycle and ranges from capturing new accounts to performing collections on outstanding loans Fraud & Identity Management Solutions  Solutions for a wide range of business needs from securing work stations and sensitive credit information, to the identification of people
  29. 29. Value Added Credit Information Solutions (Cont’d): Credit Scoring and Analytics  A range of techniques and processes for the interpretation of credit data leading to valuable insights to make decisions with confidence.  Creation of customised scorecards Credit Skills training  Outcomes based skills training that provides learners with the knowledge, skills and abilities to effectively function within the lending operations
  30. 30. CB Staffing Needs: The staffing requirements of a CB are vast and required skills typically include  Information technology; database administrator, systems & network architect, web & applications developers, network engineers  Data management; statisticians and analysts  Legal and compliance officers  Sales and telesales personnel  Technical support staff; computer and networks  Marketing and research assistants
  31. 31. CB Staffing Needs (Cont’d):  Credit Scoring Analysts and statisticians  Finance and administration personnel  Strong management and leadership Its is important that all staff have knowledge, skills and abilities not only of the CB environment, but also of credit management, computer and networks, all application legislation and regulations of the industry sector
  32. 32. Awareness of CB: Public in emerging markets likely to resist the concept of sharing financial information Authorities that are unfamiliar with financial information sharing may also be resistant for political reasons Fragmentation, competitive fears and secrecy often characterize such economies Lenders fear that other lenders may poach their good clients by learning of positive financial information Credit if often a scarcity
  33. 33. Awareness of CB (Cont’d): CB needs to change these perceptions through education of the benefits of credit and financial information sharing Lenders need to overcame their distrust of competition Borrowers must be assured of the security of their financial information Therefore essential that the CB focus on building awareness among lenders, their clients, the general public, government officials, policy makers, regulators and other potential stakeholders in the CB
  34. 34. Awareness of CB (Cont’d): Round tables and workshops were held with all the institutions CEO’s and the central bank in Uganda to ensure buy-in and to work though the entire concept of the CB Suspicions were eased, the benefits were understood and potential concerns and problematic issues were identified and addressed An extensive public awareness campaign was launched in conjunction with the central bank, and is currently under way in order to address the awareness of the CB Awareness initiatives are ongoing in South Africa. There are some would like to close the CB down.
  35. 35. Legal and Regulatory: The primary objective of legislation to enable credit information sharing and reporting is to balance the ability of lenders to exchange credit information, whilst at the same time protecting the individual’s rights to privacy Positive and Negative Information Sharing - consider mandatory sharing of data  South Africa – lenders mandated to report, but optional on enquires – mandated to conduct a affordability assessment; only proper way to do this is via CB report  Uganda - lenders mandated report, but optional on enquires – lenders have options, but non adherence means that the debt must be provisioned as a sub-standard loan immediately
  36. 36. Legal and Regulatory (cont’d): Explicit borrower consent is generally sufficient to allow a lender to share the information  If borrower does not consent – no loan  Only issue is retro data Consumer Protection - Grievance and dispute resolution mechanisms  Borrowers are CB clients too  Additional mechanism to improve data quality Legal and regulatory bodies, two broad approaches - Strong Supervisory Body - Industry Self Regulation  South Africa has both. Started with self-regulation. More compliance through supervisory Body (as long as body conducts audits and forces compliance)
  37. 37. Thank you!Questions?