implementing a kenyan credit information sharing system: progress and challenges
DESCRIPTION
Presentation to the Kenyan Banker's association on December 9, 2009.TRANSCRIPT
POLITICAL & ECONOMIC RESEARCH COUNCIL
by Michael Turner, Ph.D. & Robin Varghese, Ph.D.
Nairobi, Kenya – December 9th, 2008
Implementing a Kenyan Credit Information Sharing System: Progress and Challenges
2
Introduction
Information Sharing in Theory & Practice
Legal Notice No. 97
Findings: The State of Implementation
Conclusions: Lessons and Recommendations
Agenda
3
Background:
PERC US-based non-profit, research institute Focus on development International experts on credit reporting, credit access
(retail/commercial) Advised governments in 15 countries
Australia, Brazil, Chile, China, Guatemala, Honduras, Hong Kong, India, Japan, Singapore, South Africa, Sri Lanka, Trinidad & Tobago, United States
Introduction
Assess CRB implementation process Examine business logic of credit information sharing
Provide findings from interviews with banks
Progress to date
Immediate and near-term challenges
Provide findings from interviews with bureaus
Provide recommendations based upon findings
Why are We Here?
5
Introduction
Information Sharing in Theory & Practice
Legal Notice No. 97
Findings: The State of Implementation
Conclusions: Lessons and Recommendations
Agenda
Types of Reporting Systems
NEGATIVE ONLY Applications (not approvals) Delinquencies (90+) Defaults Bankruptcies Liens Bad checks Purged 5-10 years
POSITIVE PAYMENT
All negative data All Positive (on-
time) payment data Public record data Account balance Account type Lender Date opened Inquiries Purged 5-7 years
FULL FILE (also includes) Debt ratios (revolving to total
debt) Credit limit Amount paid/balance due Portion of accounts repossessed/
written off Estimated income range Assets Interest rates (unusual) Socio-demographic Obsolete 7-10 years
Benefits of Sharing Credit Information
Consumers Reduced probability of over-extension Greater and fairer access Credit offers reflect credit risk and credit capacity
Lenders Improved loan portfolio performance Reduced provisioning and capital adequacy
requirements (Basel 2) Sustainable & affordable growth into new markets
The Economy Better financial services efficiencies Affordable growth in domestic consumption
The Economy
LendersConsumers
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Lender Benefits from Credit Information Sharing
Furnishers can reduce losses.Furnishers can reduce losses.
0%
3%
6%
9%
12%
15%
0% 15% 30% 45% 60% 75% 90%
Acceptance Rates
Defa
ult
Rate
s
100% Reporting Full File 75% Reporting Full File 50% Reporting Full File
25% Reporting Full File 0% Reporting Full File
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Borrower Benefits from Credit Information Sharing
More information brings excluded into the reporting system and thereby widen credit access.
Increases in acceptances disproportionately enjoyed among traditionally excluded: Ethnic/racial minorities Low-income Women Young
Table 5: Change in the Acceptance Rate with Reporting Regime Change
U.S., with Utility Data
U.S., with Telecom. Data
U.S.Full-File
Colombia Full-File
(without = 1.00) (without = 1.00) (Neg. only = 1.00) (Neg. only = 1.00)
Ethnicity
Asian 1.14 1.08
Black 1.21 1.11 1.28
Hispanic 1.22 1.17 1.37
Other 1.11 1.11
White 1.08 1.08 1.22
Age
18-25 1.14 1.11.47 18.31 (c)
26-35 1.06 1.06
36-45 1.05 1.06 1.22 6.48 (d)
46-55 1.06 1.06 1.21 4.54 (e)
56-65 1.06 1.06 1.203.85 (f)
>65 1.14 1.13 1.19
Household Income (000)
<20 1.26 1.22 1.36 (a)
20-29 1.15 1.14 1.3 (b)
30-49 1.1 1.08 1.24
50-99 1.06 1.05 1.21
>99 1.03 1.03 1.18
Gender
Female 1.09 1.08 12.39Male 1.08 1.08 5.91
(a) Actual Range is <15,000; (b) Actual Range is 15,000-29,000; (c) Actual Range is 18-32; (d) Actual Range is 32-42, (e) Actual Range is 42-50; (f) Actual Range is > 57.
Economic Benefits from Credit Information Sharing
* p < 0.1** p < 0.05***p < 0.01
Source: IMF International Financial Statistics; World Bank, Doing Business database
VARIABLE Model I Model IV (reduced)
Constant -142.40*** (35.31)
-130.80*** (32.20)
Log of GDP per capita (adjusted for PPP)
20.31*** (4.65)
16.85*** (3.87)
Avg. Change in G DP (1995-2004)
-1.20* (0.70)
Legal Rights of Creditors (from 0 to 10)
4.55** (2.07)
4.80** (1.97)
Credit Information1 (from 0 to 6)
-3.87 (2.88)
Private Full-file Coverage (0 to 100, as percentage of adults)
0.72*** (0.20)
0.67*** (0.16)
Private Negative-only Coverage (0 to 100, as percentage of adults)
-0.02 (0.86)
Public Full-file Coverage (0 to 100, as percentage of adults)
-0.11 (0.41)
Public Negative-only Coverage (0 to 100, as percentage of adults)
0.16 (0.46)
R squared 0.7075 0.6883 F-stat (p value)
16.93 (1.88e-012)
44.9 (1.887e-015)
Residual Standard Error 29.45 29.12 N 65 65
Lesson: what matters?• Wealth• Creditor Rights• Reporting
o Private bureauo full-fileo with widespread participation
For a country, going from no adults to having all (100% of) adults with positives and negatives in a private bureau increases private sector lending by more than 60% of GDP.
(Without the US and UK, which have high private sector lending, the estimated increase is still more than 45% of GDP.)
PERC Estimations Consistent With Harvard/World Bank Study
Study by Harvard and World Bank economists of 129 countries (for years 1999-2003)*
Private bureaus increase lending as a share of GDP by an estimated 20 percentage points
But didn’t take into account effects of participation rate or reporting system (negative only vs. full-file)
*Simeon Djankov Caralee McLiesh Andrei Shleifer, “Private Credit In 129 Countries.” National Bureau Of Economic Research, Working Paper 11078, http://papers.nber.org/papers/w11078.pdf
Established: Financial sector mobilizes savings and allocates
capital for investment and consumption growth.
Some estimates of impact.* If private sector lending increased by 33% of GDP, results for economy: +1.0% annual per capita GDP growth +0.8% annual per capita capital stock growth +0.8% annual productivity growth
Finance is Crucial to Economic Growth
*Derived from findings of Ross Levine, “Financial Development and Economic Growth: Views and Agenda” Journal of Economic Literature, Vol. 25(June 1997), pp. 688–726. Their findings are consistent with those of other studies, see Jose De Gregorio and Pablo Guidotti, “Financial Development and Economic Growth.” World Development, Vol. 23, No. 3, (March 1995) pp. 433-448. Their reported impacts were larger.
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Uses of information: Enables cheap automated application models Behavioral models for monitoring More efficient provisioning Assists with new product development Fraud detection, AML
Wide Uses in Lending
At the core of a rich information sharing system: sound business logic.
At the core of a rich information sharing system: sound business logic.
14
Introduction
Information Sharing in Theory
Institutional Framework: Legal Notice No. 97 & Credit Providers Assoc.
Findings: The State of Implementation
Conclusions: Lessons and Recommendations
Agenda
15
Given benefits, why hasn’t it emerged without intervention?
Often unmet technical preconditions ICT infrastructure
technical capacity deficiencies high coordination costs (e.g. transmission protocol)
Data practices (e.g. data dictionary)
Competitive Concerns Cream skimming, poaching Less savvy fear relatively more savvy
Institutional framework necessary: For coordination For protection of data subjects: rights of access, redress For rules that prevent unbalanced strategic manipulation by one user against others
Market failure implied
Why Regulations?
16
Key Provisions Mandated negative reporting (NPL) to all licensed CRBs
From banks, finance companies and savings and loans No provisions for MFIs and SACCOs
Licensing process for CRBs Technological requirements (security, data integrity) Sound business plans and adequate capitalization
1 February 2009 deadline for reporting of NPL data (all NPL data on books) 1 February 2009 first date to submit CRB license application
Banking (Credit Reference Bureau) Regulations 2008
17
Credit Providers Association (KBA members and others) developed additional set of industry codes to promote: Positive information sharing through practices such as reciprocity Diffusion of data reporting standards (formats, frequency, quality) Collection practices (consumer content, notification)
First industry steps are about developing business value of credit information sharing. Industry to be congratulated.
Proposed Constitution and Code of Conduct for CPA
18
Introduction
Information Sharing in Theory
Institutional Framework: Legal Notice No. 97 & Credit Providers Assoc.
Findings: The State of Implementation
Conclusions: Lessons and Recommendations
Agenda
19
Interviews with banks 1 small: < Ksh 2B in assets; < Ksh 1B in loans and advances 4 medium: Ksh 10B < x < Ksh 20B in assets; Ksh 6B < x < Ksh 17B in loans and advances 1 large: > Ksh 80B in assets; > Ksh 45B in loans and advances Survey: sent to all KBA members
Interviews of at least: Risk managers ICT Managers Credit Managers And often
Legal Other operational manager
Examination of database
State of Implementation: Approach
20
Banks interviewed about implementation efforts undertaken to date, including: Technical: Information & Communication Systems
changes to systems; interfaces with core banking systems and bank database
Operational Data extraction and data transfer formats Data collection process from loan application onward Notification--informing consumer/borrowers
Educational Awareness: Informing staff from loan officers to risk managers to IT
Bank Interviews: Topics/Focus
21
Banks were also interviewed about:Their attitudes towards a credit reporting system and what they expect from it
Generally supportive--willingness to participate Expect need for continued CBK involvement
Challenges in the implementation process: Technological—shortages of IT, skills, operational guidance on reporting to
bureaus Operational—educational materials, curricula for training, use of data Regulatory—meeting regulations, clarifications, gaps in law and codes Market--competitive concerns
Bank Interviews: Topics/Focus
22
Finding 1A: Furnishers Need Clarification
Efforts among some banks have reached impasse.
Banks need technical guidance to push ahead: Final data template (required fields and optional ones)
o Issue of existing/historical NPLs vs.o Accounts going forward (stalled also until final data template defined)
Final data exchange file format(s) Transmission structure
to central point v. to CRBs leased lines v. encrypted protocol over Internet
23
Finding 1B: Furnishers Need Clarification
Efforts among some banks have reached impasse.
Banks need guidance on CRBs to push ahead: Guidelines for CRB licensing/re-licensing
o Frequency of security audito Transparency of data security standardso Specification of other data uses, e.g., use of data for model
construction (permissibility requirements)
24
Finding 2: Challenges for Banks
IT and SkillsDevelop scripts to extract data
o Some smaller banks need modest IT investmento Some smaller banks need consulting assistanceo Medium and large ones interviewed are ready save for clarification
issues
Customer communications Working on notices; need model notices Public education concerns given potential PR fallout
BUT chiefly, how to meet the deadline for filing? Banks manually completing forms (many will not be complete) CRBs expecting delivery of physical media (DVD-ROMs) on Feb. 1
25
Finding: Need for Further Clarification for CRBs
CRBs are preparing for Feb 1…. Apply for license Ready to receive data from creditors
BUT, guidelines needed for CRB (re-)licensing Transparency of data security standards
o What are acceptable standards for data security?o What are acceptable standards for physical security?
What data will be mandated and what will not subsequently? Specification of acceptance of data disclosure requirement: Mail? Web? Specification of reverification procedures
26
Immediate Clarification v. Evolving Industry Standards
Some issues must be quickly settled through industry coordination: Reverification procedures Transmission protocols if not specified by regulators
Some issues will be settled by industry coordination but over time: Data dictionary of required fields (CRBs are coordinating to develop) What will have to be mandated, what is voluntary (innovation in system)
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Immediate Clarification Issues for CBK
Some issues must be settled by CBK quickly: Final specification of required fields Data exchange format (singular or accepted list) Transmission structure Elaboration of guidelines on permissible uses of data
oNot immediate for deadlineoBut as positive data comes in
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Perhaps Chief Finding
The implementation process underway is for a regulatory obligation, not for the implementation of a system a sound business logic. Every bank interviewed, with a single exception, discussed credit
information sharing as a compliance issue.
No unprompted discussion of:
o Identifying optimal methods to send/receive data;
o Using data for improving loan portfolio performance;
o Building scoring models
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Explaining the Chief Finding
Banks understand the value of info sharingo Aware of efficiencieso Aware of value of positive datao Aware of benefits of analytic products
But operationally, what is being instituted is compliance procedures for regulatory obligations Implementation of business enabling system is either absent or proceeding slower
o Issues such as sharing data while addressing competitive concerns are part of a system built by business logic
o CPA Codes of Conduct one step towards keeping industry focused on business case for credit information sharing
30
At The Same Time…
One cannot let the perfect be the enemy of the good…
31
Introduction
Information Sharing in Theory
Institutional Framework: Legal Notice No. 97 & Credit Providers Assoc.
Findings: The State of Implementation
Conclusions: Lessons and Recommendations
Agenda
32
Considerations for Data Format Clarification
For clarification in reporting formats: Final data template of required fields should be specified
quickly, including harbors for missing data (historical)
o Simplified
o Specify that excel form v. data format
Final data exchange file format(s): issues for consideration
o Open standard v. proprietary: i.e., low cost, non-proprietary
o Adequate availability of skills, ease of training
o Extensibility and customizability
o Commonly accepted best practice standards for security and privacy, e.g., PGP
(pretty good privacy)
33
Considerations for Transmission Structure Clarifications
For clarification in transmission structure: (Report to central source v. Report to each bureau)Transmission to CBK or CPA site for retransmission to bureau
o Pros: Simplified Less worry about entry and exit of new CRBs
o Cons: Inserts regulators or industry association into a business process Single site = Single critical point of failure
Issue of leased lines v. Interneto Unless existing CBK lines used, leased lines expensiveo Routing to CBK introduces regulator into market/business process
34
CRB Licensing & Re-licensing
Need clarification on guidelines for CRB (re-)licensing Frequency of security audit
Transparency of data security standards
Potential solution: use internationally recognized standards,
ISO/IEC, BS, etc.
35
Technical Operational Challenges for Bank Compliance
IT and Skills: Banks need to address this
Must allocate necessary resources for data extraction/transmission
Some banks lack wherewithal to develop script
Customer communications
Provide some model notifications
36
Certification for CRBs by Int’l Standards
Consider international data security certification standards
Transparent to CRBs and to banks
Clear certification procedures
Change periodically with changes in tech, so are current
Solves problems of need for modifying standards and
compliance re-certification
37
CBK Must Avoid Over-Clarification
Some issues must be quickly settled by CBK:
Final specification of required fields
Data exchange format (singular or accepted list)
Transmission structure
But too much clarification by CBK does not effectively
balance regulatory and business systems.
38
On Chief Finding
Current implementation process has banks focusing on compliance and not on business processes/opportunities:
Project manager must guide industry through this division and lead
stakeholders to:
o Better understand and act upon system’s business logic
o Foster the creation of industry norms and relationships that make the system
one for growth and efficiency
39
Reality Check…
Lenders better off embracing process than just doing minimum necessary to comply.• Focus on efficiency enhancements• Focus on new product developments• Fuller participation (positive information sharing) yields greater benefits
• Sustainable growth in new markets• Improved loan portfolio performance• More efficient provisioning• Fairer lending
To realize these benefits, you--the banking industry--must engage the process and create a system for business and compliance, not just for compliance.
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