Microfinance for Bankers and Investors_8

232 • Microfinance for Bankers and Investors Kazakhstan’s Steep but Fragile Economic Ascent In terms of landmass, Kazakhstan is the largest former Soviet republic. Its econ-omy runs on oil and mineral extraction, followed by agriculture. After the demise of the Soviet Union, the government embarked on economic reform, liberalized the financial sector, and transferred assets to private hands. Between 2000 and 2008 the country’s economy grew at 10 percent per year. This strong economic growth, combined with government investment in pensions and other social benefits, caused the poverty rate to drop from 39 percent in 1998 to about 20 percent in 2004.2 During this time the banking industry first blossomed, with commercial banks proliferating, and then consolidated. By 2003, three banks had a market share of 60 percent.3 Commercial bank lending was steadily increasing, but loans to households were restricted due to lack of quality collateral, and loans to small and medium enterprises had actually decreased over the previous three years. Macroeconomists such as those at the International Monetary Fund and USAID were concerned that the financial sector was not operating efficiently and that risks were increasing.4 The Credit Bureau Project Until this time, Kazakhstan’s only credit history database was a rudimentary system managed by the National Bank, the country’s central bank. Here, loan and borrower information from banks was collected on a monthly basis. Unfor-tunately, this information was collected without the permission of its subjects, against best practice standards in the developed world.5 In 2001, USAID engaged the U.S. consulting firm Pragma Corporation to provide technical assistance to the Kazakh government for the formation of a credit bureau and rating agency. Pragma’s initial feasibility study indicated that the market was large enough for a credit bureau to be financially sustainable. Mistrust and Competition One of Pragma’s first tasks was building consensus among the banking com-munity about the characteristics of the new credit bureau. Banks had to agree to consolidate their data, but they were reluctant to hand over their client data-bases to their prime competitors.6 Pragma’s experts argued that data-sharing Creditinfo: First Credit Bureau in Kazakhstan • 233 would help banks increase market size, decrease delinquency, and build on-time payment habits among borrowers.7 Lacking a clear commitment from stakeholders to share data, Pragma sought to expose bankers and government officials to credit bureau best practices. Nowhere in the former Soviet Union was there a fully functioning, privately owned credit bureau, so Pragma searched farther afield. Representatives of the Kazakh Parliament visited Experian headquarters in London in May 2004. Key players attended the First Central Asian Credit Bureau Conference in January 2003.8 The general manager of First Credit Bureau, Anvar Akhmedov, part of the credit bureau project from the beginning, recognizes that “studying international experiences allowed [the founders] to avoid many aspects and ‘reefs’ that could prevent the fast creation of the necessary legislative and tech-nical base.”9 Building a Legal Framework At the time, there was no functioning credit bureau law in Kazakhstan. Pragma began working on a draft law together with the Financial Institutions Associa-tion of Kazakhstan, the National Bank, and the Agency for Regulation and Supervision of Financial Markets and Financial Organizations.10 The group decided to follow the format of best practice credit bureau laws: defining what a credit bureau is, its functions, obligations, and rights; establishing the basis for independent private bureaus; and protecting the privacy and confidentiality of personal and corporate financial information.11 The law also needed to be flexible enough to adapt to evolution of the financial system. First drafts of the law reflected mistrust of the private sector. They were over-regulating, threatening the financial viability of a future credit bureau, or had insufficient consumer protection. Nevertheless, it took only three years to develop and pass a law based on international standards—a speed record com-pared to many other countries. Another sticking point was private versus public ownership. Private credit bureaus, the stakeholders understood, would cover more clients. Government officials gradually began to accept the idea that part of the credit bureau could be privately owned and another part owned by the government. But a branched credit bureau—with one branch responsible for legal and corpo-rate entities, and the other for individuals—would not perform well. It also had the potential to create situations in which competing banks withheld information from one another.12 234 • Microfinance for Bankers and Investors The National Bank proposed to become a major shareholder temporarily in order to make it easier for all the banks to come together. It suggested pri-vatizing the bureau after three years with the sale of its shares.13 But USAID and Pragma proposed a private credit bureau, with stable ownership, following the predominant model in developed countries. Eventually the National Bank agreed. The new Credit Bureau Law mandated 100 per-cent private ownership. This structure, Akhmedov notes, gives the credit bureau greater ability to resolve problems quickly and efficiently.14 A public credit bureau could have been established faster but would not have met Kazakhstan’s needs as well. The Credit Bureau Law also addresses data sharing and consumer rights. It permits the sharing of both positive (good repayment) and negative (poor repayment) histories. It also mandates that all financial institutions share their data and allows other institutions such as government agencies, utilities, and telecommunications companies to contribute data on a voluntary basis. At the same time, the law allows customers to opt out of information sharing. Investment Capital Once the law was passed in 2004, it took only 23 more days for the credit bureau’s founding banks to sign a formal agreement to establish First Credit Bureau. The original founders were the seven biggest Kazakh banks, cover-ing the vast majority of the market. Early in the process, the banks agreed to invest equal amounts of start-up capital, $210,000 each. When this proved insufficient for a worst-case scenario, five of the seven banks raised their con-tributions. Just before First Credit Bureau opened, a nonbank financial institution and Creditinfo—the international credit reporting company that would run the bureau—bought in. The total amount raised was just under $2 million, projected to last until 2009, when First Credit Bureau should break even. The credit bureau was established as a limited liability corporation—not a joint venture between banks. Consequently, there is no board of directors, only management and a shareholder committee. The idea behind this structure was to keep shareholders from interfering with operations, and to maintain control of the data, in order to give more credibility to the bureau. The internal investors—Kazakh banks—worried about the security of the database and the confidentiality of information. They decided not to search for outside investors.15 Creditinfo: First Credit Bureau in Kazakhstan • 235 Enter Creditinfo Credit bureaus need sophisticated software to share and analyze information. Shareholders decided not to develop their own software, fearing there would be too many problems. Equally important, they wanted fast implementation, since the banks were expanding rapidly.16 They decided to hold an international ten-der for a technological partner. They were less concerned about the price than the quality and usefulness of the software and the technical support accompa-nying it. The tender attracted internationally respected credit reporting firms Dun & Bradstreet, Creditinfo, Experian, and Austria’s KSV/SHUFA. First Credit Bureau’s shareholders visited other countries to review systems in operation. Creditinfo is a small Icelandic credit reporting firm specializing in emerg-ing markets. While a newcomer to the field, it has pursued its core strategy of mergers and acquisitions aggressively in Eastern Europe, and it currently oper-ates in Bulgaria, Czech Republic, Cyprus, Greece, Lithuania, Malta, Slovakia, Romania, Iceland, and Norway.17 In 2005, Creditinfo was awarded the Kazakh contract and signed an agreement to supply the credit bureau with software, training, and advice. Creditinfo realized the profit potential of First Credit Bureau and thus was not content to be only a technical assistance provider. For a full year, the company asked repeatedly to become a shareholder, offering to purchase half of the credit bureau. The request was eventually approved. In November 2005, First Credit Bureau received its license. Data loading from member banks’ databases had begun several months earlier, requiring hundreds of people from dozens of organizations to enter credit information from existing data.18 By September 2006, First Credit Bureau covered 5.5 per-cent of Kazakh adults, using information from 29 commercial banks.19 According to the World Bank’s 2009 Doing Business Report, Kazakhstan’s credit sharing environment rivals its neighbors and shows great improvement since 2004, as noted in Table 1. More than 6 million credit contracts are in the database. Public registry coverage (percent of adult population) Private bureau coverage (percent of adult population) Kazakhstan 2004 0 0 Kazakhstan 2008 0.0 25.6 Regional OECD 2008 2008 4.6 8.4 17.6 58.4 Table 1 Coverage of Adults by Credit Bureaus Source: World Bank’s Doing Business Reports, 2004 and 2009. 236 • Microfinance for Bankers and Investors In an effort to spur internal development, the credit bureau dedicated the year 2005 to infrastructure development and 2006 to growth. By 2008, First Credit Bureau had been profitable for over a year.20 There were nearly 800,000 processed inquiries in 2007, up from 30,000 in 2006. This amounts to several inquiries every minute of the business day. By the end of 2007, 3 million credit histories had been generated, among them over 19,000 histories on legal enti-ties (companies) and 2.8 million individual histories. The hit rate, a measure of the degree that a database covers the total market, has reached 70 percent, a level that corresponds to that of a developed country.21 In 2008, First Credit Bureau had 100 clients using its reports, with two to three new clients joining every week and no competitors. Banks are required to participate, while organizations such as leasing companies and microfinance institutions are permitted to access the credit bureau voluntarily. Some such institutions are clients of First Credit Bureau, but for smaller businesses, includ-ing some MFIs, the expense and infrastructure requirements are too high. The cost for a small MFI is approximately $4,000 annually.22 In addition, MFIs need special software for information exchange and a dedicated staff person for transmitting and accessing information. Zhumagul Kharlibaeva, general manager of Bereke, a small MFI, sees the advantages of becoming a client, but for the moment says that the costs are out of reach.23 First Credit Bureau’s Akhmedov believes that the credit bureau has helped low-income people. He argues that it helps prevent fraud and identity theft, especially among the poor, who are often victims of this crime. He also argues that the credit bureau’s activities have helped tighten credit availability to bor-rowers with poor payment histories, preventing overindebtedness. On the flip side, credit has become cheaper for people with good repayment histories. When talking to MFIs, he suggests that those institutions that don’t parti-cipate in the credit bureau will end up with the bad borrowers.24 The MFI community is taking this argument under serious consideration.25 The establishment of First Credit Bureau and the demand for its services presented an opportunity for a small but aggressive private-sector actor, Creditinfo, to continue its expansion into Eastern Europe. The involvement of Creditinfo provided technical expertise and capital to the growing Kazakh credit bureau, making it easier to obtain credit in Kazakhstan. ... - tailieumienphi.vn