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.

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By  Imthishan Giado Published  August 14, 2008

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.

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