Most of the world’s countries now have some type of credit reporting (only 35 of 189 countries measured do not). New credit bureaus have launched in the past several years in Tajikistan, Cambodia, Vietnam, Tonga, Tanzania, Guyana, and Jamaica. In April 2014, Afghanistan’s new, fully electronic Public Credit Registry introduced its first online credit report, replacing a manual system that used outdated paperwork. Even in a new market such as Myanmar, a credit bureau is expected to be operational by June 2016 and serve about 3 million credit reporting inquiries by June 2020. And other models are emerging, with West Africa and the Asia-Pacific region among those innovating with cooperative regional approaches (see “Regional Credit Reporting That Crosses Borders” in previous section).
While it is important to bring credit reporting to the 35 countries who don’t have it, it is at least as large a challenge to improve the quality of the credit reporting systems in the dozens of countries where such systems are new, struggling, or lacking coverage of lower income clients. And in recent history there has been a troubling trend toward building public credit registries – even, in some cases, replacing private credit bureaus – despite the evidence that private credit bureaus are more effective. Meeting this infrastructure challenge requires the combined efforts of credit reporting entities, regulators, financial service providers, and funders.
Regulators in many countries – including Morocco, Cambodia, and India – have jumpstarted the industry by requiring all providers to contribute data. In all but 11 of the countries reporting to the World Bank Doing Business report, regulators require the use of positive as well as negative data, which significantly improves predictive ability and access to credit. In some countries key stakeholders work together, as in the launch of the MFI Credit Bureau Initiative in India (See sidebar “Crisis Triggers Fast Growth of Credit Reporting for Microfinance in India”).
Yet even when credit bureaus have appeared, many financial service providers do not actively participate. Credit bureau business models depend on active lender participation to generate fees, and low participation makes credit reports spotty and unreliable. It also results in higher prices for credit inquiries, which in turn discourages use. Many lenders that serve lower-income customers are reluctant to participate. Some do not want to make the investment to connect their systems with those of the credit bureau. Others are satisfied with their own credit underwriting and see the credit bureau report simply as an added cost. Still others are unwilling to share information with competitors.
IFC has done important work to bring stakeholders together and to build the credit reporting ecosystem, and its work has been supported by a number of governments' development agencies, including those of Australia, Austria, Canada, Italy, Japan, Luxembourg, the Netherlands, Norway, New Zealand, Switzerland, and the United Kingdom. Some private organizations have also been supportive, such as the Omidyar Network and Visa International. Yet the costs of building and improving public credit registries and of launching private credit bureaus – supported by regulation that ensures providers will participate in the system and cover its costs – require deeper investment at the country level.
An equally imposing challenge for new systems is ensuring data quality. Credit reporting systems “should be safe and efficient, and fully supportive of data subject and consumer rights,” as stated in the General Principles for Credit Reporting, yet not all systems currently achieve those standards. Of the 55 countries covered by the Global Microscope 2014, 87 percent have functioning credit reporting systems, but only 18 percent have effective systems, meaning that they are comprehensive, regularly updated, and accessed by providers. Even countries with mature credit reporting industries struggle to ensure that consumer data are accurate and used appropriately. (For more on “Good Practices in Credit Information,” see the World Bank Doing Business report. For an overview of the structures and governance of credit reporting in emerging markets, see Credit Bureaus in Emerging Markets: Overview of Ownership & Regulatory Frameworks, published by PERC.)
We would like to see credit reporting move up on the financial inclusion to-do list. Of 147 Maya Declaration commitments tabulated by the Alliance for Financial Inclusion since 2011, only 16 are related to credit information systems. Credit reporting is a must-have for an inclusive financial system.