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Developing a Successful Credit Bureau Case of Kazakhstan USAID/The Pragma Corporation Financial Sector Initiative 2001-

Developing a Successful Credit Bureau Case of Kazakhstan USAID/The Pragma Corporation Financial Sector Initiative 2001-2005. Regional Conference on Credit Reporting in Africa October 5-6, 2006 Cape Town, South Africa Javier M. Piedra The Pragma Corporation. Kazakhstan

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Developing a Successful Credit Bureau Case of Kazakhstan USAID/The Pragma Corporation Financial Sector Initiative 2001-

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  1. Developing a Successful Credit Bureau Case of Kazakhstan USAID/The Pragma Corporation Financial Sector Initiative 2001-2005 Regional Conference on Credit Reporting in Africa October 5-6, 2006 Cape Town, South Africa Javier M. Piedra The Pragma Corporation

  2. Kazakhstan GDP Growth (Percent) ………….……..10% Population, total (millions) ……………… 15.0 Surface area (sq. km, 1000’s) …………. 2,724.9 South Africa GDP (Percent) …………........5% Population, total (million) ……….47.0 Surface area (sq. km, 1000’s) ...1,220

  3. Kazakhstan's economy has performed strongly over the past half decade. A rapid expansion in hydrocarbons production, supported by a prudent macroeconomic policy framework, has led to major economic and social gains. Bank lending has increased by over 50% in each of the last two years. Sources: The National Bank of Kazakhstan and the Agency of Statistics of the Republic of Kazakhstan. 1The Gini index is a measure of inequality, with 0 representing perfect equality and 100 representing complete inequality.

  4. Kazakhstan Credit Bureau The Historical Record

  5. USAID/The Pragma Corporation – Financial Sector Initiative • Objective: Develop a best practice state-of-the-art • private credit bureau • Fulltime in-country staff hired • Legal, Corporate Finance, IT Departments + Administrative Support • Full-time Senior International Consultant • Additional International Consultants, when needed • Partners – Identify key market drivers • National Bank of Kazakhstan (Primary) • Financial Supervisory Agency (Primary) • Association of Financiers (Primary) • Private Banking Sector • Non-Banking Sector • Multilateral Banks Staffing and Partners Target 95/75 Rule

  6. Major Benchmarks & Timeline 2001 - 2006 • Law Passes (July 2004) • established (July 2004) • Tender Process Begins (August 2004) • International Technical Operator Selected (January 2005) • Begin to draft Regulations (November 2004) • Pilot credit report (October 2005) • receives Operating License (November 2005) • sells first Credit Report (January 2006) • USAID/The Pragma Corporation and National Bank of Kazakhstan (September 2001) begin activities • Feasibility Study (November 2001) • Business Plan (Fall 2002) • Central Asian CB Conference (January 2003) • Negotiations with Government (2002-3) regarding law • Parliamentary Debates (2004) • Investor In-country “Road Show” (April 2004) • Business Plan update (spring 2004)

  7. Key Selling Points for Success • Financial Sector Initiative • 100% independent • No interest in ownership or “pushing” US business • Professional qualifications and staff • Leadership role within the market, managed overall process and executed a “Dual Track” parallel implementation strategy. • Follow through consistent and on-going • In Kazakhstan, no one in the market said: “FSI, you make good points about CBs but what are you really selling?” FSI had enormous credibility

  8. Market faced with Serious Barriers (2001 – 2003) • No clear legal basis for data sharing and/or for the protection of consumer privacy. • No law existed and early drafts envisaged mandated transfer of personal data to CB without consumer consent – a non-optimal solution. • Regulatory “overreach”, as appeared in early drafts of the law, threatened a private CB’s operational viability. • Data sharing viewed as impossible. • Bank Secrecy and reluctance to share proprietary client data for competitive reasons. Data fragmentation a huge problem • The Government initially decided to take a stake in a private credit bureau to facilitate data sharing. Ownership would have been temporary – a non-optimal solution.

  9. Our Message Credit BureauA powerful stimulus to internally-generated growth through removed information asymmetries in consumer lending. Increased access to credit Reduction in interest Rates Reduction in collateral requirements Increase loan term Lower default rates More responsible borrowing Better Risk Management Message repeated constantly in different ways

  10. Primary Beneficiaries: “the economically less fortunate, small businesses, the young and elderly, and those located in farming areas and villages”. Primary Message to Government and Elected Officials Source: Dr. Michael Staten, Testimony before US Congress, May 8, 2003

  11. Legal Challenges • Removed government’s tendency for legal and regulatory “over-reach” • Balanced a) the need to protect the confidentiality and privacy of information with b) the need for adequate information flows • Removed the government’s initial inclination to own the credit bureau • Private Sector does a better job than the government in providing clients with CB services • Banks will share information without the NBK taking an ownership position in the CB We spent much effort on these issues and insisted to our counterparts “to get it right or the Law will not work”

  12. Passage of CB Law • Various versions of a new Credit Bureau Law • Draft and Sign-off from GOK Ministries for Presentation to Parliament (24 months) • “Final” draft in March 2004 • Parliamentary Debate • Working groups • Visit to Experian (UK) headquarters • Presentations to Parliament • Cont’d Working groups to remove “viruses” Most “Viruses” in the Law were removed in long working group meetings with the National Bank and the Supervisory Authority before it reached Parliament.

  13. Credit Bureau Law Approved (July 2004): • 100% private in a free market competitive system; • Consumer consent required • Data sharing of positive and negative data permissible; • No data fragmentation; • Open system – all major sectors of economy may participate • Supervisory body will implement “minimum requirements” for data regulation; • If consumer “Opts-in” then bank mandated to transfer data to CB We argued that the Law should conform to international best practice and to EU Directive 95/46 at a minimum. Set high benchmarks which were eventually accepted.

  14. established July 2004 • Strategic Objectives • To Become the Leading High Tech Credit Bureau Provider in Kazakhstan & Central Asia • Maintain healthy bank portfolios; • Increase access to credit • Protect consumers by helping them manage risk • Enhance information sharing and bridge lenders and borrowers • Improve portfolio management • Limit fraud • Profitability and return on capital for investors (“Road Show 3/2004) Launched “Road Show” to convince investors

  15. Ownership Process • Banks Signed MOU • Banks commit to invest without specifying the amount • Banks assured will be professional technical management • Banks assured will be continuing TA from USAID/Pragma • Timing – MOU signed immediately after: • the CB Law passed, • Investor “Road Show” completed • “established” as legal entity • Ownership differences settled before established: HOW? • Are you “in” or “out”? – because we are moving forward! • Hold outs realized that they couldn’t develop a CB on their own • All major banks sign MOU thus avoiding ownership issues and data fragmentation

  16. of Kazakhstan Founders: 7 major KZ banks + 1 Fin. Co. + CreditInfo Ownership 100% private Data sharing: Positive & negative Coverage: All Kazakhstan No equal distribution of shares although that was original idea

  17. Tender Process for International Credit Bureau Operator • Bidding Process August 2004 • Participants: CreditInfo Group, D&B, Experian, KSV/SHUFA Proposal’s • Deadline October’15 • Presentations: October 25 – 30 • Shortlist November’04 • Site visits December’04 • Final decision January’05 Conveyed the idea that technical assistance is absolutely necessary and that TA should be priced on a commercial basis. No need to “cut corners”.

  18. Building the November’05 CB received License December’05 – to the present Loading data from the clients (currently covers 10% of active population + 5% of companies) January’06 First Commercial Contract signed (currently 35) March’06 First Commercially Credit report Sold Managed Creditor expectations: Data loading process is difficult and time consuming. FCB has excellent management team.

  19. Sources of Data: Financial Institutions Mandated to Provide Data – if customer “opts-in” Public/Government Info Information Private Business Phone & Utilities, Satellite & Cable, TV Providers, etc. Insurance companies and others Users (Clients) Any company or organization extending credit (Banks, Retail, Phones & Utilities providers, etc.) Marketing oriented companies Insurance (Fraud Detection), Mortgage Lenders (KMC)

  20. Product Offerings by • Consumer Credit Profile • I.D. Confirmation, Inquiries, application processing • SME/Micro-Finance Credit Profile (Commercial) • Insurance Profile (expected 4th Q 2006) • Fraud Alert and Prevention Services (in development) • Credit Scores (over time) • Enhanced Credit Profile (specialized products)

  21. Estimated Breakeven (US $) for According to BP Capital Paid off Breakeven 2009 2006 2007 2008

  22. Construction Continues Banks State Institutions Others 2008 2005 2006 2007 Contract Negotiations with Data Providers and Data Users, Shareholders, and Government Ministries On-going Process: Need to maintain professional excellence and provide products and services to the market.

  23. Suggested Targets and Success Put in place the essential elements so that a credit reference bureau has passed from being merely established to a more advanced, mature and self-sufficient stage. Regulatory framework key Success may occur when the following is in place: • At least 95% of the financial sector has included “customer consent” clauses on credit application forms; and • 75% of historical credit data has been collected in a single location and public record information accessible to a credit bureau; The 95/75 Rule

  24. Lessons Learned • Form full-time independent team with unbiased approach • Convey consistent message and repeat • Identify key market players and secure buy-in at conceptual level • Draft, if possible, stand alone CB Law and supporting regulations with law-makers. • Include customer consent requirements. • Be patient and try not to agree to less than optimal solutions.

  25. Thank you for your attention Questions Success based on proven methodology, management skills and marketing. Anvar Akhmedov, Director The First Credit Bureau Almaty, Kazakhstanemail: info@1cb.kzwww.1cb.kz The Pragma Corporation Falls Church, VA, USApragma@pragmacorp.com www.pragmacorp.com

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