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Microfinance Credit Bureau: Let's make the dream come true

Shaikhul Islam
CREDIT Bureau is an automated system based entity that specialises in collecting, collating, processing and disseminating client credit information. A Credit Bureau preserves and manages consumer credit data files, keeps them up-to-date and provides credit report to authorised users such as lenders for their lending decision making purpose.
There are two parts of a Credit Bureau: (a) a core automated information system that collects, collates, processes and disseminates credit information and (b) regulatory; ownership and operational structure, which manages business processes and functions related to all aspects of business, including governance, accounts/finance, marketing, inventory, legal matters, etc.
The main purpose of a Credit Bureau is to reduce credit risk in the market and promote good credit culture. This applies to the microfinance sector in Bangladesh as well, as the sector is gradually merging with the formal financial sector. Therefore, a Microfinance Credit Bureau is now a critical need.
Efforts have been made to establish a Microfinance Credit Bureau in Bangladesh over the last few years. Yet, it is still a dream. Why is that? There are three reasons for this. First, there is no consensus among the interest groups on regulator); ownership and operational structure of the Credit Bureau. Second, business problems have not been identified clearly, which leads to the concern that if we don't know what problems need to be solved then how can we solve them? Without identifying and acknowledging the specific business problems, considering Credit Bureau as a solution may be risky. Third, technical operational environment of the Credit Bureau has not been assessed yet. Therefore, it is reasonable to say that the establishment of a Credit Bureau is facing a daunting challenge, if not difficulty.
Regulatory issue should not be a big deal as MRA and PKSF are already in the market as regulator and quasi-regulator, and they can pull the strings if needed. Ownership may be the contentious issue and may promote difference of opinions among various interest groups, however that can be resolved if all parties are committed and are ready for investment. Real commitment can be demonstrated if the interest groups agree to contribute financially and technically for the establishment of Credit Bureau. Therefore, it is important to identify the interest groups based on their tangible contribution and not by any other means. Once the ownership structure is settled, an appropriate business model can be devised as part of the responsibility of the Credit Bureau owners.
Many studies suggest that business problems of the microfinance industry have been well identified and therefore need not be discussed, though we know there are overlapping over-indebtedness and portfolio quality management issues. Let's assume that a Credit Bureau will address these issues.
This leads us to focus on the third reason, that is the technical environment under which a Credit Bureau will be operational. This should be considered as the top priority for assessment. Interest groups need to ask whether it is possible to operate a Credit Bureau within a technical environment under which the main institutional customers, Microfinance Institutions (MFI), are currently operating. This requires a thorough assessment of the existing automation situation in the microfinance industry. If the technical environment cannot help solve the business problems then there is no need for a Credit Bureau, however good the regulatory or ownership structure are. The following example can be taken into consideration to understand the technical operational environment.
Typically, MFIs are mostly structured within a head office-branch office relationship (one-office based MFIs and medium to very large MFIs have zonal or area offices, or both, and they are linked to branch offices and head office). The roles of head office, zonal office and area offices are merely supervisory in nature, such as setting up business rules to manage operations and analysing Management Information System (MIS) reports, including head office accounts and finance department, which are involved in day-to-day transactions such as receiving funds from donors/lenders, making payments, disbursing salary etc.
Microfinance-related financial transactional activities take place at the branches, which are dispersed over different locations, and many are in remote areas. From Credit Bureau functional point of view the Source of Truth (SST) or transactions originate from branch level. What a branch would need to do on a daily basis is to process loan applications and take credit decisions based on the responses from the Credit Bureau about clients' borrowing histories. There is the need for an automated relationship between the branch and the Credit Bureau for taking appropriate lending decision when a client applies for credit. So the overriding question is, how should the Credit Bureau receive bulk client information request from a branch, and how should a branch receive responses from the Credit Bureau against each request? This
request and response mechanism should be based on a robust and scalable backend system capability which forms the basis of technical operational environment of the Credit Bureau. Without this mechanism in place, nothing can be achieved.
Another operational aspect of a Credit Bureau is the lag time between the request response mechanisms. This means that the branch offices must be able to process bulk credit information request and the Credit Bureau should be able to respond within the shortest possible time, and the lag time should not be more than couple of hours. Any response that takes more than two hours increases clients' sufferings.
So, the fundamental questions here is, how can branches send data to the Credit Bureau? Should they send data automatically, that is system to system, or manually, or by any other means? Should the branches be connected to the Credit Bureau and be capable of synchronising (both upload and download) client status update data so that the Credit Bureau can get up-to-date data on a regular basis from the branch systems?
Do we have this capability in the microfinance sector? The answer is no. Unfortunately, microfinance automation is still in its infancy, and so is the technological infrastructure such as internet connectivity in rural areas (we know 3G is there but still it is not good enough and has not been out-reached to rural areas) and lack of highly scalable data centre to handle millions of client records. Also, MH branches are not fully automated yet due to lack of appropriate automation strategies and commitment from relevant stakeholders.
Is it possible to establish a Credit Bureau in this adverse technical situation? The answer is yes. The main point is that establishing a Microfinance Credit Bureau in Bangladesh, with design, development and operationalisation of a world class automated system for managing millions of consumer credit files, is neither difficult nor impossible, and it should not take more than a year to start operations.
This requires careful planning, meticulous design and world class technical expertise to solve the technical operational challenges. Credit Bureau technical operations can be managed only if it is fully automated and uses the most appropriate technological solutions, which will be capable of handling a robust and scalable request response mechanism.
The writer is NRB Technology Entrepreneur, Australia, and CEO of GrassRoot Systems.
E-mail: shaikhul@grassrootsystems.com