Peer Learning Event - October 2, 2008 Brussels, Belgium Trends and Challenges in Lending Technologies Gilles Galludec, Principal, Program Manager PBGI Global Financial Markets International Finance Corporation

In emerging markets, roughly two-thirds of the population remain unbanked and underserved

Decreases information asymmetries (borrower knows better the odds of repaying his debt). Allows lenders to more accurately evaluate risks and improve portfolio quality Eases adverse selection problem and lowers the costs of credit for a good borrower Increases credit volume/improves A2 credit Supports introduction of credit scoring and automated underwriting, lowers lender operational costs, improves profitability Credit Bureaus: Trends and Challenges - 1 Credit Bureau: institution that collects information from Creditors and public sources on a borrowers credit history. Private CB industry divided into 2 categories: Consumer CBs and Commercial CBs. Ownership Structure of CBs

Credit Bureaus: Trends and Challenges - 2 4

Credit Information Index (0-6) Data on both firms and individuals distributed Both positive and negative information distributed Information from retailers, utilities, trade creditors and financial institutions distributed More than 2 years of historical data distributed Data on loans below 1% of income per capita distributed Borrowers guaranteed access to their data in largest registry by law Source: Doing Business 2008 Credit Bureaus: Trends and Challenges - 3 Private Bureau Coverage (% of Adults) Private Bureau Coverage (% of Adult Population) South Asia Sub-Saharan Africa Middle East & North Africa East Asia & Pacific Eastern Europe & Central Asia Latin America & Caribbean OECD Credit Information Index OECDEastern Europe & Central Asia Latin America & Caribbean Middle East & North Africa East Asia & Pacific South Asia Sub- Saharan Africa 5

Credit Bureaus: Trends and Challenges - 4 Types of Information Sources of Information Full (information shared by banks, retailers, NBFIs) Fragmented (e.g. information shared among banks only or retail only) High Predictiveness (e.g. U.S., UK, South Africa, Ecuador) Lower Predictiveness (e.g. Australia, Brazil) Lower Predictiveness (e.g. Mexico, Singapore, Romania) Lowest Predictiveness (e.g. Nepal, Morocco, Haiti) Positive & Negative Information Negative Information 6

Credit Bureaus: Trends and Challenges Change perception of / building awareness in the community 2.Ensure commercial viability 3.Establish an appropriate legal and regulatory framework 4.Identify appropriate technology and software 5.Ensure adequate data availability 6.Specify staffing needs Practical considerations 1.Conduct a Market Assessment 2.Conduct a feasibility study (technical scoping study, stakeholders analysis, legal and regulatory assessment) 3.Establish a Business Model for CB operations

Credit Bureaus Ownership Structures

Credit Scoring: Trends and Challenges - 1 A method that uses links between past repayment performance and the clients and loans characteristics to predict a future repayment risk. The score is an estimate of the probability of default. Benefits of credit scoring Streamline the lending process and lower costs Reduces time and manual steps in processing each application Reduces number of applications needing manual review Reduces training time for new credit staff Improve loan officer efficiency (reduce time spent on collections, which in some markets claim up to 50% of loan officers time) Increase lending volume Approve 10-30% more applications keeping loss rate unchanged Enables risk-based pricing Better quantify expected losses for different risk classes of borrowers Source: Based on Global Credit Bureau Program experience, USAID, ACCION (ACCION, Credit Scoring for Microenterprise Brief,

Credit Scoring: Trends and Challenges - 2 Requirements: Centralized database Good track record of client information Management commitment Ready for cultural changes Integration of staff from IT and Credit to design and refine scoring applications

Sample credit reports History of Payments – Observation Periods NOSAJJMAMFJDNOSAJJMAMFJDNOSAJJ Most recent record of payments Read histories from right to left Oldest record available 1 Payment on time 2 Payment delayed between 1 to 29 days 3 and above indicate more delays in payment Sample History of Payments 11