SECURED TRANSACTIONS AND COLLATERAL REGISTRIES PEER TO PEER LEARNING EVENT Presentation Title: Overview of Credit Reporting Worldwide Moyo Violet Ndonde Accra, Ghana - 3-5 July, 2012 -Session no. 2
Summary of Presentation Overview of Credit Reporting worldwide Issues and challenges Linkages & Synergies between credit reporting and collateral registries 2
Background Firm level Approx. 300m MSMEs (70% of all) are unserved and the total need for credit exceeds $2 trillion* *Sources: (i) IFC & McKinsey & C 2010 (iii) Global Findex (2011) Household Level Over 60% of people remain unbanked and underserved in emerging markets* and only 50% of adults worldwide have an account at a formal financial institution*
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50-60% MSMEs in emerging markets are unserved or underserved Percent of formal and informal MSMEs that are unserved or underserved <40 40-59 60-89 >90 Central Asia & Eastern Europe 9-11 million MSMEs High-income OECD 3-4 million MSMEs 29-35% Latin America 25-30 million MSMEs 47-57% Total # of unserved or underserved MSMEs: 184-225 Mn Middle East & North Africa 9-11 million MSMEs 45-55% 44-54% Sub-Saharan Africa 61% 20-24 million Mn MSMEs 50-46- 56% South Asia 33-41 million MSMEs 43-52% East Asia 84-103 million MSMEs 45-55% Total # of unserved or underserved MSMEs excluding high-income OECD: 181-221 Mn 45-55% SOURCE: MSME database 2011, McKinsey & Company
Call for Action Various Initiatives to scale up SME finance: Global Partnership for Financial Inclusion (GPFI) formed in 2010 SME Finance Forum and SME Finance Initiative 2012 IFC designated as one of the implementing partners for GPFI SME Finance Policy Guide, 2011 Role of Credit Reporting in SME finance(sme Policy Guide, 2011). Scaling up SME access to financial services. 6
Section 5.1: Recommendations for Policymakers Establishing a solid financial infrastructure should be a priority in the financial development agenda of most developing countries. The aim should be to develop a comprehensive credit reporting system that covers both personal and commercial credit information. positive as well as negative. From all relevant players. 7
Responsible Finance The Counter Balance More than 2.7 billion people and over 400 million businesses still lack basic financial services in the developing world. Enormous growth in the financial sector, especially microcredit Versus Over-indebtedness and coercive credit collections (India, Bosnia, etc) Ongoing Financial Crises in Europe and the importance of transparency and accountability. 8
Benefits of Credit Reporting Reduce information asymmetries between borrowers and lenders. Move away from granting credit based on subjective judgment/relationship lending to more automated processes based on quantitative models. Facilitate expansion of credit to the underserved as borrowers can use reputational collateral. Credit reporting (including negative and positive data) reduces default rates and increases approval rates. 9
Private Credit Bureau Coverage Across Regions LAC continues to lead other emerging markets Average Private Bureau Coverage (% of adults) OECD Latin America & Caribbean 34.2 Eastern Europe & Central Asia 29.4 East Asia & Pacific 18.1 63.9 1. LAC continues to lead, being the second strongest region after OECD in the extent of private credit bureau coverage 2. Sub Saharan Africa has the lowest coverage Middle East & North Africa South Asia Sub-Saharan Africa 9.3 5.9 5 0 10 20 30 40 50 60 70 Percent of Adults 3. MENA significantly improved over the past 7 years, jumping from 6 th place to 5 th place ahead of SSA 10
% of coverage of adults Coverage of Bureaus and Registries 70 63.9 60 50 40 30 20 10 0 34.2 9.5 10.1 29.4 16.2 PCBs are generally more prevalent that PCRs 18.1 10.3 9.3 8.1 5.9 5 1.7 3.2 PCB PCR Source: Doing Business 2012 11
What has changed in 7 years? A glance at state of coverage of private credit bureaus Average Private Bureau Coverage (% of adults) OECD 59 63.9 Latin America & Caribbean Eastern Europe & Central Asia 6.6 31.2 34.2 29.4 East Asia & Pacific 9.6 18.1 2005 Middle East & North Africa 1.7 9.3 2012 South Asia Sub-Saharan Africa 0.6 5.9 3.5 5 0 10 20 30 40 50 60 70 Percent of Adults ECA, EAP and MENA are big reformers demonstrating significant leaps in improving the coverage of private credit bureaus Source: Doing Business 2012 12
High Income OECD Europe & Centr Latin Americ a & Middle East & Nort South Asia East Asia & Pacific Sub- Sahara n Credit Information Index(max=6) Regional Comparisons for Credit Information Index similar to OECD, ECA leads ECA is the best performer out of all emerging market regions Credit Information Index 6.0 5.0 5.0 5.0 4.0 MENA is ahead of LAC, which demonstrates the big progress in reforms in MENA region for the past years EAP and SSA lag significantly behind as the lowest performer in credit information sharing market 4.0 Components of the Credit Information Index Both firms and individuals are listed Both positive and negative information 3.0 3.0 3.0 Retailers and/or utilities submit data 5 or more years of 2.0 2.0 2.0 historical data All loans included above 1.0 1% GNI per capita Consumer right to inspect 0.0 is guaranteed by law Source: Doing Business 2012 13
Credit Information Index A Glance at the State of Credit Information Sharing Across Regions Credit Information Index: 2005 vs. 2012 6.0 5.0 5.0 5.0 5.0 4.5 4.0 4.0 3.0 2.5 3.0 3.0 2012 2.0 2.0 2.0 2.0 1.8 1.8 1.5 2005 1.0 0.0 High Income OECD Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia East Asia & Pacific Sub-Saharan Africa Sub Saharan Africa and East Asia & Pacific have made small progress on improving the credit information index. Europe & Central Asia and MENA are the regions with the biggest progress over the past years. At the same time there is a slight decline (DB11=3.3) rate in LAC region. Source: Doing Business 2012 14
% of PCBs receiving information from each source Contributors of Data to Private Credit Bureaus Over 50% of bureaus reportedly receive information from MFIs KG: Figure 2 Data quality and coverage of the MFI market remains an issue, as most bureaus capture only data from regulated MFIs (if any) 100% 90% 80% 70% 60% 50% 91% 69% 55% 61% More PCBs started to get information from additional sources, like employers, statistic agencies, ID, bankruptcy agencies 80% 71% 47% 47% 47% 54% 48% 40% 30% 20% 28% 21% 31% 19% 10% 0% Source: Doing Business 2012 : Data based on 105 PCBs that provided information
What has changed in 7 years? A glance at types of data contributors for PCBs % Total 2012 % Total 2005 Increased participation of MFIs in credit reporting over the past 7 years by 46 percentage points 100% 90% 91% 90% 80% 70% 60% 69% 60% 55% 61% 80% 79% 79% 71% 65% 58% 54% 50% 40% 30% 20% 39% 46% 47% 47% 47% 43% 28% 25% 21% 31% 19% 48% 10% 8% 0% Private Commercial Banks (90) Public Commercial Banks (65) Development Banks (49) Credit Union/Coops (53) Finance Corps (78) Credit Card Issuers (66) Firms prov loans/trade Creditors (46) Retailers (45) Utilities Providers (40) Other Credit Bureaus (25) Microfinance Institutions (49) Employer (14) 0% 0% 0% 0% Courts (20) Statistical agencies (11) Other (29) Source: Doing Business 2012
% of PCRs receiving information from each source Contributors of Data to Public Credit Registries KG: Figure 16 120% 100% 99% Compared to private bureaus, public credit registries are significantly less inclusive in obtaining data from alternative sources (e.g. retail, utilities ) and obtaining data from microfinance institutions 80% 70% 67% 71% 60% 40% 36% 23% 32% 26% 20% 0% Private Com Banks(96) Public Com Banks (64) Dev Banks (64) Credit Union/Coops (34) Finance Corps (69) Credit Card Issuers (22) 0% 1% 1% Firms prov loans/trade Creditors (0) Retailers (1) Utilities Providers (1) 10% Credit Bureaus (9) Microfinance Institutions (30) 2% 7% 5% Employers (2) Courts (7) Stat agencies (5) Other (23) Source: Doing Business 2012 : Data based on 101 PCRs that provided information
% of Countries Surveyed Laws regulating Private Credit Bureaus 70% 60% 50% 63% Data Protection laws are most common due to a rising use of data sharing and increasing importance of regulating data sharing 40% 30% 20% 32% 29% 38% 21% Bank secrecy laws persist with 50% countries reporting that credit information data cannot be shared with NBFIs 10% 72% of bureaus report that banks can share credit 0% Special Credit Bureau Law Central Bank Regulation Data Protection Code of Conduct Other Laws information with private firms outside the industry, with borrower s consent Source: Doing Business 2010. According to survey data for 68 countries with PCBs.
% of PCB surveyed responding affirmatively Other provisions to protect borrower rights 100% 90% 80% 92% In most countries, borrowers have the legal right to inspect their own credit report 70% 60% 50% 64% In more than half of the countries surveyed, borrowers have the legal right to view the list of their credit report requestors 40% 30% Laws that guarantee access to list of parties include: law on credit 20% information, personal data protection 10% law, data protection law, credit information act, the credit bureau law, 0% Law guarantees access to list of parties requesting borrower information Law guarantees that borrowers can inspect their data act on credit information usage and protection, banking law Source: Doing Business 2010
% of bureaus surveyed Liability and measures in case of provision of erroneous information 50% 45% 40% The majority of countries surveyed state that the liability for erroneous information falls on the data provider (i.e. banks, retailers, FIs all that report to the bureau) 44% Penalties for provision of erroneous information include: 35% Fines 30% Imprisonment 25% 21% None Lawsuit / legal action 20% 15% 14% 11% Free credit report Contractual penalties Termination of contract 10% 5% 0% Credit Bureau Credit Grantor / Supplier Data supplier Data supplier and/or credit bureau Source: Doing Business 2010
% of bureaus surveyed 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Additional services & products offered by PCBs 46% Bureau Credit Score 40% 24% Fraud Detection Debt Collection 38% Marketing Services 42% Other Selected other services, as reported by the surveyed countries include: - Portfolio statistical analysis - Statistical data mining - Risk management support - Investigative business reports - Scorecards for banks and FIs - Pre-scoring - Financial Education - Identity verification services - Business Information - reports Source: Doing Business 2010
Madagascar São Tomé and Príncipe Eritrea Congo, Dem. Rep. Seychelles Sudan Mauritania Burundi Gambia, The Ethiopia Mozambique Lesotho Comoros Guinea Cape Verde Sierra Leone Malawi Mali Burkina Faso Senegal Togo Côte d'ivoire Zimbabwe Angola Niger Benin Guinea-Bissau Tanzania Liberia Equatorial Guinea Gabon Cameroon Congo, Rep. Central African Republic Chad Mauritius Nigeria Botswana Ghana Uganda Swaziland Namibia Rwanda Zambia Kenya South Africa SSA Country Rankings (DB12) GETTING CREDIT COUNTRY RANKINGS (OUT OF 183) 50 45 40 Countries with most reform potential 35 Highest performers 30 25 20 15 10 5 0 Source: Doing Business 2012
Global Standards for Credit Reporting Need for global standards to define parameters for C.R. What is best practice? How can we balance the needs of the market with the rights of consumers/businesses? What are the roles of the various players? What can policy makers do to improve the flow of information but maintain control? World Bank with support from the Bank for International Settlements establishes task force 23
Relevance and Rationale of the General Principles Rationale Objective Growing relevance and interest of credit reporting activities- public interest; Policy makers, central banks and other financial and consumer protection authorities seek guidance Contribute to financial stability, access to finance and responsible lending; Guide Policy makers, system operators, data providers, users and data subjects; 24
Public Policy Objectives and key considerationsppoicy Objectives and Key Considerations Credit reporting systems should be safe and efficient, and fully supportive of consumer rights and (i) effectively support the sound and fair extension of credit in an economy; (ii) serve as the foundation for robust and competitive credit markets.. Information quality Security, reliability and effectiveness Governance arrangements to deal with operational, legal and reputational risks Legal and regulatory framework Globalization and access to credit across borders 25
General Principles on Credit Reporting I II III IV V Data Data collection and retention Security & Efficiency Security Measures Reliability & Efficiency of Data Governance & Risk Managemen t Accountability Transparency Effectiveness Fair Access Legal & Regulatory Framework Clarity & Predictability Non- Discrimination Proportionality Consumer rights and data protection Dispute resolution Crossborder Data Flows Pre-conditions Requirements
Some of the Challenges Reluctance/resistance by lenders to share positive data. Lack of capacity/ appreciation of the value of credit bureau data for risk management. Data quality issues. Lack of enabling environment legislation, sometimes where it does exist Lack of enforcement of credit reporting regime by regulator/self-regulation by industry. Small size of credit markets. 27
SECURED TRANSACTIONS AND COLLATERAL REGISTRIES PEER TO PEER LEARNING EVENT Presentation Title : Credit Reporting & Collateral Regimes: Linkages & Synergies Speaker s name Moyo Violet Ndonde Accra, Ghana - 3-5 July, 2012 -Session n. 2
STR and Credit Bureaus similarities Similar Tombstone data Name, address, contact details Same creditors, debtors Same financial transactions Both institutions are considered as vital pillars of financial infrastructure Both have ability to provide valuable statistical data for policy makers Trusted 3 rd party Technology platform 29
Collateral Regimes and Credit Bureaus differences Credit Bureau Purpose & Function Governed by principles of secrecy (legislation; licensing/oversight; codes of conduct; membership agreements). Providing data in an informational way No warranty on accuracy of match or info provided Positive and negative info + public information Multi products and services Business Model private = commercially oriented Publicly or private owned or mixture May be more than one in any jurisdiction 30
Collateral Regimes & Credit Bureaus differences Collateral Registry Purpose & Function Govern by principles of publicity STR search criteria is a legal test evidentiary proof Result from search can be utilized to enforce priority Can be paper or electronic via internet Mission Critical App registration tied to disbursement of money Business Model government service not for profit Government Owned 31
Potential Synergies Advanced credit bureaus have potential to include information from collateral registries & provide this info as service to their clients. Credit Bureaus have potential to develop own collateral database and perform functions performed by collateral registries. Credit bureaus could be more than a source of credit reports and provide clients with two functions in the sphere of STR: 32
Potential Synergies Inquiry allows lender to ascertain the nature of an asset offered as collateral (whether or not encumbered) prior to acceptance of the assets; and Registration of interest: allows a lender to register a security interest in the asset. 33
How can Credit Bureaus do this? Either Establishing & hosting a collateral registry as part of its value added services; OR By Joining with an already existing collateral registry database and using the link and sharing the technology resources 34
Benefits In emerging markets where there may be inadequate technical infrastructure or local capacity to support the development of both a credit bureau and collateral registry. These markets are exploring the possibility of a credit bureau and registry co-habiting within the same private sector institution or public/private institution or within one government agency. 35
Challenges Credit Bureaus are governed by secrecy, collateral registries operate on the premise of publicity. Challenges can be resolved by a suitable governance model, suitable and transparent service level agreement between the Government and private sector bureau Respective data elements could be maintained in separate partitions within the same shared infrastructure and benefit from same disaster recovery facilities and business continuity plans 36
Possible way forward Empirical evidence shows that PCBs promote higher level of information quality, coverage and credit penetration and seen as trusted third party. In an appropriate environment laws and procedures that deal with collateral and creditor rights could be developed in a way that does not exclude participation of the private sector in the delivery of services to what could be held o be public property type information 37
Thank You! 38