Huddled in the crowded lobby of the Sheraton Arlington hotel at the annual SEEP Network Conference, we listened intently to Syed Mohsin Ahmed as he elaborated on Pakistan’s new Microfinance Credit Information Bureau (MF-CIB). We scribbled in our notebooks, taking down points for the Financial Inclusion 2020 Credit Reporting and Client Information Analytics Experts’ Working Group, of which he is a member.
Then he said something that really made an impression: “Establishing a microfinance specific credit information bureau has been the single most important thing we have done for the industry in Pakistan since the 2008 crisis.” Now, that is a very big statement coming from the CEO of the Pakistan Microfinance Network (PMN), which represents 96 percent of all industry participants in the country.
Almost all participants in the microfinance space are asking for credit reporting. In our Opportunities and Obstacles to Financial Inclusion survey of experts and participants in the microfinance and financial inclusion sectors, credit bureaus ranked as the number three opportunity and lack of credit bureaus as the number six obstacle. From Africa, to Asia to the Caribbean, the story wasn’t much different; it was ranked on almost everyone’s top ten list. The general consensus was that weak or absent credit bureaus had contributed to the over-indebtedness crises that had plagued the microfinance sector a few years back.
Despite the calls for better credit reporting, progress is wanted. Many developing countries have credit bureaus that provide services to the middle income clients found in the formal banking sector. Microfinance institutions and low income clients tend to be excluded. The reasons for this lack range from reluctance on the part of providers to share data to an unsupportive legal environment, to uncertainty over who should take action. It’s not all bleak and blurry though. Some countries have seized upon identified challenges and turned them into success stories.
As Syed Mohsin Ahmed asserts, Pakistan is a success story we can learn from.
Pakistan was an early adopter in the development of credit reporting systems, with the State Bank of Pakistan (SBP, the country’s central bank) establishing the Credit Information Bureau (CIB) in 1992. In 2003, this system was made electronic with the setting up of the eCIB. However, only loans beyond 500,000 rupees (the equivalent of a little over $9,000) were due to be reported into the system. This obviously excluded microcredit, necessitating either a change in the current regulation or the setting up of a specific system for microfinance. The latter option was chosen, and in June 2012, MF-CIB was launched by the State Bank of Pakistan, the Pakistan Microfinance Network, and the Pakistan Poverty Alleviation Fund, in partnership with DataCheck, a private credit bureau. Funding came from the UK Department of International Development (DFID) and from the International Finance Corporation.
The Pakistani MF-CIB exemplifies the results of a concerted effort by industry participants to speak to each other, and then move from talking to action (which by the way is what FI2020’s Building the Road Map to Financial Inclusion seeks to do).
Here are some lessons from Pakistan in a nutshell:
- Everybody needs to work together. In the Pakistani example, the idea that the initiative should rest with one party was done away with. Instead, an ecosystem was established in which regulators collaborated with donors, microfinance providers, an apex body, a network, an identification system established by the central government, a commercial credit bureau, and support organizations.
- Microfinance providers must be in agreement. Having an umbrella support organization (PMN) leading the conversation and getting microfinance providers to communicate eliminated problems such as unwillingness to share data. The PMN also facilitated capacity building amongst MFPs, helping to make them “credit bureau ready.” As important, it assured DataCheck (a private credit bureau) that there was enough volume to make a microfinance-oriented business viable, thus overcoming one of the biggest challenges to getting credit reporting agencies to serve the microfinance space. Another challenge in Pakistan has been promoting culture/operational change in microfinance providers, which PMN is trying to address.
- Leverage existing infrastructure and make sure clients are protected. MF-CIB’s strong linkages to the SBP not only aided data sharing, but also guaranteed that the process of profiling client information would fall within regulations and follow client protection principles, particularly those concerning protection and proper use of private data. Additionally, the connection to the SBP ensured that the MF-CIB could tag onto the Computerized National Identity Card system issued by the National Database and Registration Authority. An absence of national identification systems has been identified as one of the barriers to credit reporting in many developing states.
- Financial literacy is important. The SBP, in partnership with DFID, has a Financial Inclusion Program and a Nationwide Financial Literacy Program to educate consumers on their obligations to furnish the requisite information and preserve their credit histories.
As Syed Mohsin indicated, it isn’t a jolly ride to create a microfinance specific credit bureau, but it is very doable with a combined effort.
Credit bureaus are only a slice of the larger Credit Reporting Services Providers pie though. Coming from a developing country myself, where it could take some years for the right infrastructure to be put in place, I begin to think about other avenues we need to explore and build upon, including utilizing alternative sources of data…
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