Study of Small and Medium Enterprises in Azerbaijan - IFC

Box 8.2 Examples of a successful credit bureau (continue)
In Japan and in the majority of European countries, as a rule, credit bureaus are created as private companies, owned by a creditors’ consortium.
In the United Kingdom there are two independent credit bureaus, fully independent from the lenders. In Finland and Belgium, credit
bureaus are controlled or licensed by the governmental agencies.
Credit bureaus operating in Germany have formed a union of eight regional partnerships, which are independent in legal and economic
relationships – the Common Credit Provision Protection Partnership (SCHUFA). Their owners and simultaneously partners are: commercial
banks, savings banks, cooperative banks, as well as the firms offering credit cards, construction savings and mortgage banks, leasing
partnerships, as well as consumer goods enterprises and equity investment funds, offering monetary or commodity credits for consumer
goods to individuals.
In most countries, credit bureau databases are formed through years of hard work; in the U.S., Canada, Finland, and South Africa, credit
bureaus began to function at the end of 19th and early 20th century. In other countries, such as Italy, credit bureaus were established only
recently and are growing rapidly and in demand as a service. In some Latin American and Asian countries, credit bureaus are in the establishment
stage, accumulating small volumes, primarily negative (defaulting) records; but these are the first steps on the way to integrating
larger databases.
The volume of the information exchanged using the credit bureaus’ service is large. In the U.S., Belgium, Brazil, United Kingdom, Japan and
Germany, the number of reports provided exceeds the population.
The protection of creditors rights is the basis for a functioning credit bureau. In countries with weak legislative and legal protection, borrowers
can be dishonest and stop making loan payments, even while solvent. Therefore, legislative protection of creditors’ rights not only through
the monitoring system using credit bureaus’ databases, but also through the judicial and arbitration system is essential in all countries. Some
arbitration courts have been known to refuse a complaint from a creditor, if no attempt was made to obtain the borrower’s records from the
credit bureau before the loan approval.
For the growth of SMEs, credit bureaus can play a crucial role. By increasing the volume of transactions, the database expands to include
a multitude of different datasets received from creditors, as well as from the companies themselves, not only relating to the activity of the
borrower, but on their financial standing, as well as about their other creditors, stockholders, and managers. Besides providing the standard
reports on credit operations as a statistic risk-management, credit bureaus perform functions as rating agencies. The largest and oldest global
agency is Dun & Bradstreet, which currently holds data on more than 48 million companies, 10 million of which are located in the U.S.
In addition to private credit bureaus, many countries have a state credit registration institution – Public Credit Registers (PCR). This institution
was historically formed for registration of mortgages on real estate, later to be expanded to other types of leases. This too may be a valuable
source of relevant data.
The main difference between a PCR and a credit bureau is that for the former, participation is mandatory, established by corresponding rules
(except in Finland and Sri Lanka, where participation is voluntary). As this takes place, all information is standardized (for example, credits
above an established level, issued for a defined time period) and is credit-focused rather than borrower focused.
In the majority of countries, PCRs are controlled by central banks. Exceptions are: Chile, Costa Rica, and Peru, where they operate under the
banking supervision agency, as well as Finland, where management has been transferred to a private entity. Access to information is granted
only to authorized employees of the central bank (primarily to support the database and to adhere to strict observance of confidentiality)
and reports are provided to financial institutions.
Credit bureaus provide different types of reports on credit operations depending on the availability of the information on the potential borrower,
credit types, and most important, the degree of details required by the creditor. The simplest report contains information on previous
defaulted payments and bad loans – so called “black” or “negative” data. The most detailed reports - “white” or “positive” – contain complex
information on assets and liabilities of the borrower, guarantees and debt structure according to the lending terms, his business, and, sometimes,
family history. The report’s price depends on the degree of details provided. The basic report’s price is relatively low and fluctuates
from $1 in the U.K. and U.S., to $2 in Italy, and $3 in Argentina. The most developed credit bureaus compile the borrowers’ credit ratings,
based on their characteristics and credit history, as well as data for compiling statistical models, promote the use of financial instruments,
help evaluate credit costs, and establish and regulate credit limits.
Experience shows that the exchange of information, which credit bureaus facilitate stimulates the expansion of the bank credit portfolio in
relation to GDP by approximately 20 percent. In addition, credit risks are lowered significantly, and, correspondingly, provisions for bad loans
decrease. Thus, increased access to financial information positively affects credit efficiency and as a result positively affects GDP growth and
labor productivity.
Aze r b a i j a n Bu s i n e s s En a b l i n g En v i r o n m e n t Pr o j e c t 137