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Fri 15 Aug 2008 04:00 AM

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Money for nothing - credit bureaux turn to IT to manage risk

In a region concerned with privacy, the arrival of credit bureaux has met with mixed responses from the financial community. Imthishan Giado investigates the IT systems underlying the region's credit bureaux, and how they are working to make the risky business of lending safer.

In a region concerned with privacy, the arrival of credit bureaux has met with mixed responses from the financial community. Imthishan Giado investigates the IT systems underlying the region's credit bureaux, and how they are working to make the risky business of lending safer.

I think it's a fashion. People want to have credit bureaux because it looks good. Central Banks like to say: ‘Yes, our country has a credit bureau', but I don't think that they know the value of the credit bureau," says Robin Watson, assistant general manager of Bahrain's Benefit (Bahrain's Electronic Network for Financial Transactions) company, which in addition to operating the country's ATM (automated teller machine) network, also acts as its credit bureau.

Credit bureaux are a relevantly recent arrival to the GCC's financial sector, although such organisations have operated for more than a century globally. In recent years, the use of IT has dramatically overhauled the working operations of bureaux and explains why it is a relatively straightforward process to set one up in the modern era.

Banks are now starting to feel comfortable bringing in new customers that they’ve never met before.

Several countries in the region operate bureaux, including Saudi Arabia, Kuwait, Bahrain and most recently, Emcredit in the UAE, which opened its doors in late 2006. Watson explains how credit bureaux can help the expanding regional market.

"Lenders see credit bureaux as a major source of information. As the credit-making decision becomes more efficient, they can allocate more time to good customers or less time to high risk customers at the point of application.

Aggressive lenders can make decisions with medium to high risk applicants who are new to them, knowing that if they have effective collection management systems they can collect payments if necessary and risk base price to ensure profitable lending is maintained.

"More importantly, the general population appreciate being able to extend their borrowing power and know what is necessary to maintain a good standing. Even borrowers who have bad records know what they have to do; provided the bank has good credit analysts, facilities can be offered with certain conditions attached," he says.

There is another reason why credit bureaux are assuming a greater importance in the region - they are rapidly becoming part of the regulatory framework. Baqar Muzaffar, formerly CIO of UBL in Pakistan and now director of IT at Fireside Bank in the United States, recalls that obtaining a credit report in Pakistan became mandatory when applying for any loan facility for more than US $8000. He also believes that credit bureaux can eventually improve the efficiency of banks.

"The customer comes out a winner if, as a lending institution, I am able to do multiple things. One, weed out customers that I think have a higher chance of a default, reducing my cost and liabilities. Two, a lot of institutions are customising the consumer interest rate - if I have good credit and my bank can offer me a lower interest rate, that is to my advantage," he says.

When one considers how crucial IT is to banks in the modern era, it's natural to assume that integrating internal systems with the participating banks would be a fledging bureau's top priority.

But Watson, who designed Kuwait's credit bureau, in addition to Bahrain's, believes otherwise.

"There are other implications and dependencies such as financial, legal, administration and systems analysis to support the entire business which have to be considered before a bureau can be effectively launched. In effect, out of ten milestones the IT function does not start until number nine," he says.

The other major issue during the planning stages is deciding which systems to use as a basis for the bureau. Watson says he learned many hard lessons when setting up the Kuwait bureau, and is a now a strong proponent of using local talent and experience wherever available.

"If you take an off-the-shelf system from a global provider, the chances are that the data will not match the system. What we did was that we got the data, analysed it, formatted it, put it into a database that we bought and then designed a system to match that database," explains Watson.

Zaid Kamhawi, Emcredit's business development officer, describes the approach taken by the UAE's first credit bureau.

"Through an RFP process, Emcredit had benchmarked the leading global providers of information solutions that have played a pivotal role in setting up a number of world-class credit information companies and also possess wide local expertise. Emcredit selected Dun & Bradstreet SAME (South Asia Middle East) as a technical consultant to provide the know-how and solutions to establish Emcredit," he says.

While global providers can also have patchy support in the region, Watson believes the chief flaw of these vendors lies in their approach to localisation.

"For instance, Experian has a fantastic credit bureau system but as soon as you try and load it with Arabic names you've got major problems because its system will not accept them.

"You can actually be in the middle of an inquiry in English, ask your colleague who only speaks Arabic to have a search - you only toggle between Arabic and English. That is a must, particularly with Islamic institutions, for instance in Kuwait and Saudi Arabia. They will not look at anything in English," he states.

Muzaffar, however, disagrees, suggesting that larger institutions may be able to benefit from the experience of global providers.

"If the company was large enough, I would go with an established company like Experian or Transunion. The benefit is really not just the data - ultimately, this is heavy statistical modelling software. How you want to do the risk analysis, the pricing of a product - companies that have experience definitely have an edge," he says.

For Benefit, Watson eventually chose to go with International Turnkey Systems (ITS), as he had done previously in Kuwait.

"They are a company that didn't want to tell me how to set up a business; they said: ‘Robin, we don't understand the business, you tell us.' ITS made me sit down for four weeks and write the business requirements spec - 14 weeks later, we were at factory test level," he says.

One issue which Watson is particularly keen to emphasise is the importance of involving banks at a very early stage when designing the system. Since banks are naturally reluctant to disclose information relating to their assets, he says that it's important to establish relations with them as early as possible. "A bureau needs to show the Central Bank that it has the support of each of the banks - it cannot start successfully or function without at least 90% of the financial institutions participating.

Participating means understanding the terminology, correct data validation and migration and establishing a Code of Practice that requires the endorsement of the Central Bank. Without all of this in place a bureau will not have a successful implementation nor will it be easy to provide correct and logical information to the bureau's subscribers," says Watson.

Interestingly, Watson suggests that this was not the path followed by the UAE's Emcredit.

"I was involved with Emcredit at the beginning on a consultancy basis and I withdrew my service because they wouldn't get the banks involved from day one. Their project has actually been running for about three and a half years - that was when I said to them, get the banks involved and you'll have this business up and running in six months," he reveals.

Kamhawi responds: "Emcredit has been active since launch and has taken large strides to drive our business forward. Within the first year of operation we were working with nine members, seven of whom are among the top 12 financial institutions controlling 80% of the credit portfolio of the UAE.

"We have signed data sharing agreements with Dubai Police and Dubai e-Government, thereby strengthening our database with non-bank credit information.

We have also launched our first product, EmBounce, providing information on cheque defaults and, at an industry level, we have been actively supporting the legal infrastructure development by lending our technical expertise to the making of a federal Credit Information Law," he adds.

However, Muzaffar cautions that bureaux should not exert too much influence over the shape of the data his bank receives.

"What the credit bureau does is provide data. It's up to the financial institution to run their statistical models on that data. I'm not sure if the credit bureau should be in a position to dictate what the systems should be. To me, as a customer, that could possibly be a competitive advantage. If I can build a better scoring or financial statistical model when I do loan applications, that is my competitive advantage," he says.

Once the bureau is up and running, the next significant issue is deciding how the service will charge for access. With his experience in providing credit reporting services to countries with a small indigenous population, Watson is an advocate of the fixed fee approach.

"In such markets where costs have to be recovered and still leave a provision for research and development, a business model needs to be thorough and correct. Once this is established, it's better to have a set fixed fee for all services rather than being search-based," he says.

Muzaffar disagrees with this strategy: "I am personally in favour of paying per use. If you do 100 checks on 100 customers, you should pay accordingly. Why have monthly fees? That's a barrier to entry.

Now that bureaux are becoming a familiar sight in the Middle East, it's time to gauge the response from consumers and banks - and as Watson notes, it has followed an expected pattern.

"Borrowers felt discriminated against if they had a bad history, even if they were currently up to date with their payments, while lenders felt that the bureau would inhibit their lending capability. You get some responses like, ‘I can't do business with this guy because he was in default a year ago.' That indicates to me, having been in banking for 20 years, that ‘this is the only customer I've got'.

"Instead of just getting rid of that customer and finding another one who's going to give you more positive information, bring him in and sell him more products as you go along. The bureau can help in that regard - we can provide information on a company that provides a consumer loan to one customer, who had his credit card with another bank. Why isn't that bank, who's dealt with this guy for years, selling him a credit card?" he questions.

Muzaffar has observed similar responses in Pakistan: "To be honest, there has been resistance from the consumers as well as financial institutions and I think the reasons are understandable.

"If the customers can get away with not being held accountable, many of them would prefer that. From a company or corporate perspective, many larger companies think they are giving away their competitive advantage."

Kamhawi concurs: "We must remember that as is the case with any new product or service, there are a number of early adopters who typically understand our product and are willing to see us as part of their competitive advantage right from the start. Others need a little more time to come around; the world didn't switch to e-mail overnight."

The mood is not completely negative. Muzaffar's experience in the US suggests that done properly, credit bureaux will eventually become essential to the region's banking infrastructure.

"I think having a credit bureau is a sign of a maturing market but I don't know if it's a sign of a mature market. Right now, Dubai only has one credit bureau. There needs to be at least a couple of strong credit bureaux so that the financial institutions have access to competitive information," he says.

Watson suggests that credit bureaux are starting to change the ways in which banks market themselves to the public - and forcing them to actually go out and talk to people.

"Banks are now starting to feel comfortable bringing in new customers who they've never met before, because when they did a search on the bureau, they're surprised to find: ‘oh, this is a good guy and we really want to deal with him.'

"And it helps the customer who opens an account and performs well. A bank could approach him and say: ‘you're in good order; we'd like to sell you more products.' The credit bureau endorses that attitude, because you can use it to say: ‘we've got a guy here at the consumer level that has been with us for ten years who's eligible for credit cards, car and housing loans.' It actually opens up the market for the bank," he concludes.

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