Regional Credit Reporting for the Caribbean in the context of CSMEs November 2012

1. Regional Credit Reporting for the Caribbeanin the context of CSMEsNovember 2012 Maria PincetichCredit Bureau Advisor

2. In emerging markets, roughly two-thirds of the population remain unbanked and underserved • The bottom of the pyramid remains underserved: • Banking sector penetration of 5% to 25% vs. 70% to 90% in developed markets • Banks tend to focus on large commercialclients and top retail clients • Targeting the underserved: • Microfinance (up-scaling): Total reach: 70 million clients globally • Banks (down-scaling): Requires retail skills and systems • Non-bank financial institutions (diversifying):Leasing, factoring, housing, insurance Large companies and top retail clients 34% of Population Banked 66% of Population Unbanked Retail, micro andsmall businesses

3. Role of Credit Reporting in financial markets • Broader and fairer access to credit: • Decrease information asymmetries between borrowers and lenders; expand access to credit and lower the costs of credit for good borrowers • Better performing loans: • Allow lenders to accurately evaluate risks and improve portfolio quality • Prevent over-indebtedness: • Allow lenders to assess an applicant’s total indebtedness and thereby calculate a borrowers capacity to service debt (with ‘positive data’) • Improve profitability: • Support introduction of credit scoring and automated underwriting; lower lenders’ operational costs in retail & SME lending, improve their margins, capital adequacy, and provisioning requirements • Stability in the financial sector: • Positive economy wide effects

4. Establishing the Legal and Regulatory Environment • Caribbean Credit Bureau Project: • 5 year program funded by the Canadian International Development Agency (CIDA) • Engaged in The Bahamas, Barbados, Belize, Guyana, Haiti, Jamaica, OECS, Suriname, and Trinidad and Tobago • General Principles of Credit Reporting: • Joint project by the World Bank and Bank of International Settlements (BIS) • Need for Global Standards: What is international best practice? How can we balance the needs of the market with the rights of consumers? What are the roles of the various players? What can policy makers do to improve the flow of information but maintain control?

5. Consumer vs. Commercial Credit Bureaus • Commercial credit bureausreport on companies that are smaller in size and earnings than those corporations covered by rating agencies. • Commercial credit bureaus provide information on companies available through : • public sources • direct investigations • payment behavior reported by suppliers. • Consumer credit bureaus collect data on individuals and small businesses, and in some cases on larger companies. • Consumer credit bureaus collect information in a standardized format from several types of lenders, such as: • banks • credit card companies, • retail lenders, • other non-bank financial institutions, • utility company • MFI Lenders

6. Contributors of data to Private Credit Bureaus • Over 50% of emerging market bureaus reportedly receive information from MFIs • Just over a quarter of these bureaus receive information on individuals in MFI lending groups • Data quality remains an issue with respect to data provided by MFIs 100% 94% 86% 82% 75% 80% 68% 57% 60% 52% 52% 51% 44% 44% % of credit bureaus receiving information from each source 40% 23% 20% 0% Private Comm. Banks Public Comm. Banks Development Banks Finance Corp. Credit Card Firms Retailers Utilities Credit Microfinance Public Credit Unions/ Coops Issuers providing Providers Bureaus Institutions Agencies loans/Trade courts) Creditors Source: Doing Business 2012

7. Firm-level Information Collected by PCBs It is preferable to combine firm-level and owner-level information in order to obtain a more comprehensive firm risk profile, in particular for small and medium enterprises

8. Contributors of Data to Commercial Credit Bureaus • Business itself (interviews, direct investigations) • Banks/Lenders via payment history • Public records: • commercial registers, • information about lawsuits, • tax liens, • Legal Actions/ judgments • business bankruptcies • Other businesses in respect of trade credit transactions. • Data not normally considered as “confidential” as Consumer data.

9. Small firms benefit from credit bureaus Estimates based on data on 5000 firms in 51 countries % of Small Firms Reporting High Financing Constraints Probability of Obtaining a Bank Loan for a Small Firm 40% 49% 28% 27% Without credit bureau With credit bureau Without credit bureau With credit bureau Source:Love & Mylenko (2003).

10. SME Banking is difficult…. • SME market knowledge is difficult to acquire • A corporate market composed of a few hundreds of large well-known companies, vs. • A mass market composed of hundreds of thousands of SMEs in different industry sectors and geographic areas • SME risk is difficult to manage for traditional banks • Financial information on the business is scarce and often unreliable • SMEs are often under-capitalized • SMEs are often unable to provide adequate collateral • SMEs generally lack the financial management culture • SMEs banking has high cost-to-serve • One corporate transaction can generate as much net banking income as 50 individual SME transactions… • … but is not much costlier to a bank than one SME transaction

11. Success in SME finance depends on both bank and market infrastructure • Basic information services & market infrastructure accessible to lenders • Credit bureaus • Payment systems • Collateral Registries • Enforcing creditor rights • Retail skills and strategy of the financial institution • Leadership, experience, and organization • Products, delivery channels, systems • Improved risk management (underwriting, portfolio management, collections – using tools like credit scoring) Market Infrastructure Bank B Bank A Bank C Technology is critical at both levels – financial infrastructure and the individual financial institution – yet the problems and opportunities are quite different.

12. An SME Case Study The SME customer thinks… but a banker thinks… I have no clue what it is that you do or how it makes money….. Which set of accounts should I believe? You probably won’t pay so what else have you got to give me? It will cost me more to figure this out than I will make….. I prefer playing golf with Mr Big… I have no idea what you want….. I don’t like people knowing how much I earn….. I don’t have time to fill in forms and wait in queues….. Trust me, I always pay my bills…. Honestly, this idea is the best thing since sliced bread…

13. Defaults Documents of Incorporation Enquiry Log Financial Accounts Account History Investigative Analysis Individual Demographics (e.g. DOB, Employment) Collections History Trade Credits Transaction History (‘Trade Line’ data) Credit Rating Credit Scoring What a “blended” Credit Bureau looks like? Micro Small Medium Corporate Business Size ‘Virtual’ SME Linkage Database Bank & NBFI Centric Commercial Centric Individuals  Directors Directors  Companies Companies  Companies BUSINESSES CONSUMERS Court Data (Judgments etc.) Utility Companies Telco Companies Consumer Bureau Corporate Registry/Commercial Bureau

14. Evidence from Genesis Empresarial, Guatemala Financial education about the credit bureau promoted better repayment rates among Solidarity Group members 25% 51% 20.00% 20% Fraction of loans late as of last payment 15% 9.78% 10% 5% 0% Pre Borrower Training Post Borrower Training Financial education about credit bureaus has direct benefits on payment performance Source: Janvry, Alain de, Craig McIntosh, and Elisabeth Sadoulet, The Supply and Demand Side Impacts of Credit Market Information, June 2007.

15. Thank you!