Rationale for credit informa- tion sharing
One of the main concerns in the develop- ment of microfinance industry in Myan- mar is the risks related to the lending to the base of the pyramid. The country has encountered banking problems in the past that made people wary of investments in the financial sector. With this fear factor, for- mal financial institutions shy away from any lending activity that is not secured. This re- sulted in a wide gap, with a large number of people without access to financial services.
Among the poor, the gap is being filled-up by informal money lenders taking advan- tage of the situation by charging very high premiums on loans. The short-term loans usually address emergency needs of the bor- rowers, but are not relevant for productive and income-generating activities needed to improve the economic condition of the poor.
With the passage of the Microfinance law in 2011, there are expectations that resources will immediately flow to where it is needed most – the poor, especially those in the rural areas. As the number of microfinance insti- tutions (MFIs) increase, it is expected that more rural areas will be covered. But as it is, most of the operations in the country are still in the areas that can be considered with high population density, meaning the key cities and townships. This can be attributed to the prudential practices of the MFIs, ensuring theprofitabilityandsustainabilityofthein- stitution and addressing the risks involved in providing financial services.
One of the main risks in microfinance is cred- it risk, or the possibility of the borrower de- faulting on its payment. Two scenarios may happen: the first is over-indebtedness where the borrower access loans from various MFIs beyond her capacity to pay, to support exist- ing activities and to cover payments to pre- vious loans. The second is fraudulent loans where a borrower taking advantage of many MFIs operating, borrows from a number of institutions without intention of paying but to defraud instead.
Role of the Credit Bureau
It is in the context of over-indebtedness on the part of the client and high credit risk on the part of the MFI, that the relevance of the credit information sharing comes to fore. The concept of credit bureau is basically to build-up credit information of clients. It is a facility where all information about the clients and their credit transactions are cen- trally stored. The information is retrieved to help financial institutions to decide on ap- proving or declining a loan application.
The facility will develop a credit history of its clients, helping them to enhance their chance of accessing bigger loans as they ex- hibit creditworthiness. This will also address the issue of over-indebtedness as the capaci- ty of the clients to manage loans will be con- sidered and not just approving and releasing loans without considering their capacity to pay. This is the essence of client protection and prevention of over-indebtedness.
The financial institutions will also have a more objective view on the capacity of the client to manage loans and be able to pay back. The centralization of credit informa- tion and the sharing of this information to institutions will effectively contribute to lessening credit risk. With a functional credit bureau, investors interested in pro- viding more funds to the industry will be more comfortable with their investments.
Client information sharing initiative in Myanmar
One of the main issues now is the nature of the credit bureau that will be installed in Myanmar. Will it cover all financial institu- tions, or will a credit bureau that will address specific dynamics and nuances of the micro- finance industry be set up separately? CRIF, a global solutions provider has proposed an industry-level credit information sharing system that can be immediately installed to cope with the fast growing microfinance in- dustry. Its proposal has been drawn from its experience in managing credit bureaus in Asia specifically Bangladesh, India, Indone- sia, Philippines and Vietnam. The proposal is being studied by Myanmar regulatory agencies, but suffice it to say that installing a credit bureau will definitely contribute to a better financial system.
