What has Worked in Credit Information Sharing?

May 04, 2015
Specific practices help increase credit coverage and encourage the use of credit information systems. Among the most common measures are 1) expanding the range of information shared, 2) collecting and distributing data from sources other than banks and 3) lowering or eliminating minimum-loan thresholds (figure 7.8). Reporting positive as well as negative information Credit information can be broadly divided into 2 categories: negative and positive. Negative information covers defaults and late payments. Positive information includes, for example, on-time loan repayments and the original and outstanding amounts of loans. A credit information system that reports only negative information penalizes borrowers who default on payments-but it fails to reward diligent borrowers who pay on time. Sharing information on reliable repayment allows customers to establish a positive credit history and improves the ability of lenders to distinguish good borrowers from bad ones. Sharing more than just negative information also ensures that a credit information system will include high-risk borrowers that have accumulated significant debt exposure without yet defaulting on any loans. Sharing full information makes a difference for lenders. A study in the United States simulated individual credit scores using only negative information and then using both negative and positive information. The negative-only model produced a 3.35% default rate among approved applicants while the use of both positive and negative information led to a 1.9% default rate[16]. A study of Latin American economies suggests that where private credit bureaus distribute both positive and negative information and have 100% participation from banks, lending to the private sector is greater-at least 47.5% greater[17]. Collecting and distributing data from retailers and utility companies One effective way to expand the range of information distributed by credit registries is to include credit information from retailers and utility companies-such as electricity providers and mobile phone companies. Providing information on the payment of electricity and phone bills can help establish a good credit history for those without previous bank loans or credit cards. This represents an important opportunity for including people without traditional banking relationships. A recent study across 8 global mobile money operators found that 37% of their customers lacked a bank account[18]. But including this information can be challenging. Utilities and retailers are regulated by different institutions than financial companies are. They also might have to be convinced that the benefits of reporting bill payment outweigh the costs. A utility in the United States has clearly benefited. In August 2006, DTE Energy, an electricity and natural gas company, began full reporting of customer payment data to credit bureaus. DTE customers with no prior credit history-8.1% of the total, according to a recent study-gained either a credit file or a credit score. And customers began to make payments to DTE a priority. Within 6 months, DTE had 80,000 fewer accounts in arrears[19]. A study in Italy looked at the effect of providing a credit bureau with payment information from a water supply company[20]. The credit bureau, CRIF, set up a credit scoring model, the "water score," which took up to 3 years of payment of water bills into consideration. More than 83% of water customers who previously had no credit history now have a positive one thanks to paying their water bills. This has made it easier for them to obtain credit. Those benefiting most include young entrepreneurs and families with only one income-2 of the groups that tend to lack bank accounts in Italy. Today, credit bureaus or registries include credit information from sources other than banks in 6 economies in the Sub-Saharan Africa region (...). In these 6 economies, coverage of borrowers is 24 percentage points higher than in those where credit bureaus or registries do not include information from retailers or utility companies. After 1 year of operation, Rwanda's first private credit bureau expanded the range of credit information distributed and included data from 3 non-financial companies. In April 2011, 2 mobile phone companies (MTN and Tigo) and an electricity and gas company (EWSA) started providing credit information to the private credit bureau. The results were rewarding: after just a couple months collecting the data from new sources, the credit bureau's coverage increased by 2%. Lowering or eliminating minimum loan thresholds Where the thresholds for loans included in a credit bureau's database are high, retail and small business loans are more likely to be excluded. This can hurt those that could benefit the most from credit information systems-namely, female entrepreneurs and small enterprises, whose loan values are typically lower. Because women make up 76% of all borrowers from microfinance institutions[21], credit bureaus and registries that collect and distribute data on microfinance (typically low value) loans are more likely to support female entrepreneurship. Note that public credit registries usually set relatively high thresholds for loans-$34,260 on average- since their primary purpose is to support bank supervision and the monitoring of systemic risks. Private credit bureaus tend to have lower minimum loan thresholds-$418 on average. Today, 19 Sub-Saharan African economies (...) have minimum-loan thresholds below 1% of income per capita. Over the past 7 years, 5 economies in the region eliminated their minimum loan threshold (...). Rwanda's public credit registry eliminated its minimum loan threshold to open itself up to more credit information. The minimum loan reported was 500.000 FRW ($1,400) in 2010; now all loans are reported to the registry. Other EAC economies could follow suit. * If you find value in this Excerpt, you may enjoy reading the full publication, Doing Business in the Eastern African Community 2012.
Doing Business in the Eastern African Community 2012.© The International Bank for Reconstruction and Development / World Bank.
License: Creative Commons Attribution license (CC BY 3.0 IGO license)
------------------------------------------------------- [16] Barron and Staten. 2003 [17] Turner and Varghese. 2007 [18] CGAP and World Bank. 2010 [19] Turner and others. 2009. Turner. 2011 [20] Preliminary findings of an ongoing internal study at the credit information services firm CRIF SpA, Italy. [21] World Bank. 2010.

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