A financial system (within the scope of finance) is an arrangement that permits the exchange of funds between lenders, borrowers and investors. Financial systems operate at firm-specific, national and global levels. They comprise adaptable, closely related services, markets, and institutions designed to provide well-organized and regular linkage between investors and depositors.
Banks are the part of financial system and their primary function is to lend money to generate revenue. While lending money it is essential to be acquainted with borrowers, their track record, reputation, repayment capacity and much more about usage of funds to make sure that bank will suffer no loss. Fundamentally, borrowers undertake to repay principal plus interest/markup within stipulated span of time but lapses in managing affaires or unfavorable incidents lead them to default. The intrinsic uncertainty surrounding any individual or business project puts the ability in question to repay. As noteworthy as it may appear, this complication can be sensibly overcome by guessing the probability of full reimbursement and accordingly anticipating the interest rate. The second obstacle, the non-fulfillment of promise by borrower print unfaithful traces to obey the contract, may be hard to survive. The borrower can make efforts to streamline the true nature of a project or, once in possession of borrowed funds, switch them to other use or conceal the true outcome of this investment. Such issues are recognized as asymmetric information. It refers to situations, in which some mediator in trade hold information while others involved in the same trade do not. Information asymmetries refer to the fact that information does not flow smoothly in the real world. Some people have right of entry or approach to information while others do not.
Similarly in the matter of financial services, those providing the financial services do not always know as much as they would like to know about the customer to whom they are providing the service. This is why they do not provide financial services to everyone desirous of the same despite having enough funds at their disposal; they avoid disbursing to potential borrowers whom they don’t know enough about. As a matter of fact they feel it difficult and expensive to gather information about such borrowers. Thus we have credit restrains, even without any government intervention (Stiglitz and Weiss 1981).
Asymmetric information gives rise to mischievous attitude while effecting credit transactions, and these problems are particularly severe in poverty-focused credit markets where borrowers lack collateral and credit portfolios.
Aboody & Lev (2000) highlights insider trading as one of the effects of information asymmetry. Jappelli & Pagano (1999) also mention that information asymmetry can cause excessive lending and inefficiency in credit allocation. Bengt Holmstrom classifies all these problems into either moral hazard or adverse selection problems depending on the type of information asymmetry (Nayyar, 1990).
On the other hand, an independent market maker would achieve a dual goal if he acquired information himself. He could limit or eliminate the losses made against the better informed traders with regards to adverse choice and could also weaken his competitors and increase his trading opportunities in terms of competitive advantage (Rudiger & Vigier, 2014). Additionally, better information is the solution to the golden world of money making in the world (Sciubba, 2005). Resultantly credit bureaus are a pompous approach to information sharing among lenders. In the absence of such an institution, lenders of non-collateralized loans must resort to an array of informal mechanisms ranging from joint liability (Besley & Coate, 1995; Ghatak & Guinnane, 1999; Gine & Karlan 2006), to relationship banking, and to information sharing in the ‘credit officer lunch’ (McIntosh et al, 2006).
“An essential element in the prevention of multiple-lending and over-borrowing is the availability of information to the MFI of the existing outstanding loan of a potential borrower. This is not possible unless a Credit Information Bureau is established expeditiously.”
—Malegam Committee Report, Reserve Bank of India, January 2011
“Don’t wait until the problems are there before putting a credit bureau in place.”
—An MFI leader in Nicaragua, autumn 2009
Roll-over of CIB in Pakistan towards MFBS
Pakistan is one of the few countries in the world that has a separate and comprehensive legal and regulatory framework for microfinance banks (MFBs) and is generally considered to have one of the most enabling arrangements for microfinance observing the requirements of region and vital rules adapted globally. The Intelligence Unit of “The Economist” while evaluating Microfinance business environment standing 2013 has declared Pakistan as ranked 3rd. Pakistan has sustained rather improved scores on all indicators.
Keeping in view remarkable development of microfinance business in Pakistan, the Credit Information Bureau was upturned as MF-CIB in June 2012 by inclusion of MFBs as members of bureau. All credit data on borrowers is collected by CIB from its member financial institutions for aggregation in system and provided in return upon request in the form of credit reports. The relevant information enables the financial institutions to assess credit scoring and credit risk management by ascertaining credit history of prospective customers for more careful decisions.
The following MFBs are members of MF-CIB, State Bank of Pakistan.
– Advans Micro Finance Bank Limited
– APNA Micro Finance Bank Limited
– FINCA Micro Finance Bank Limited
– Khushhali Bank Limited
– Mobilink Microfinance Bank Limited
– NRSP Micro Finance Bank Limited
– Pak Oman Micro Finance Bank Limited.
– Tameer Micro Finance Bank Limited
– The First Micro Finance Bank Limited
– U Micro Finance Bank Limited
With the rising complications and emerging challenges on the financial circumstances, the role of CIB has become even more serious. The CIB at SBP has looked up more effectively to meet with new challenges with the passage of time as from the former simple, manually operated data system, a very sophisticated and hi-tech state-of the-art technology has been adapted to perform its crucial tasks more proficiently. The strengthened competence and valuable operational efficiency has encouraged the CIB to widen significantly the scope of reporting by doing away with the minimum limits. The aim is to detain the different categories of borrowers in view of growing exposure of banks to consumers, proprietors and SMEs. Existing eCIB system has been designed in line with best international credit sharing practices worldwide. The eCIB database has now been capturing more than 4 million borrowers’ records of about 100 member financial institutions including MFBs.
The key improvements of the new system also include to:
– Partition of Consumer and Corporate reports as well as data input formats.
– Availability for consumer credit and default history.
– Better performance in terms of speed, reliability and security of CIB data in order to curtail the processing cost/time of FIs.
– The new CIB system has been erected on latest state of the art skills which includes high capacity latest IT system having ability to capture the data from gross route level etc.
– Provisions for online amendments and updating for the FIs.
– Incorporation of large number of validation rules on data capturing application to ensure integrity and accuracy of the submitted data.
– Automated support and help to the FI users.
Benefits and impacts of CIB
Credit information system performs as intelligence adviser that adds to the transparency of credit markets. The importance of information in credit markets is well established in such seminal papers as Akerlof (1970), Stiglitz and Weiss (1981), and Hoff and Stiglitz (1998). However, in many developing countries, credit information systems are still in their early life and information sharing among lenders remains inadequate and weak. It is admitted reality that exchange of information play vital role in modernizing and strengthening the industry infrastructure by multiple means.
The credit report helps lenders to reduce or even eliminate the “fog of uncertainty” surrounding each new loan applicant from the lender’s point of view. No doubt, more information about a borrower’s previous credit history and the handling of existing accounts makes the lender’s risk assessment process visible and clear. With information sharing ― securities or collateral, about customer’s history of obligations and payments, substitutes for physical assets. As such, clients having few assets or no collateral may enter the credit system with spotless existence.
McIntosh and Wydick (2004, 2005) believe that the existence of a credit bureau may improve credit access for the poorest borrowers because the CIB opens access to credit for millions of such borrowers. This results into a better match of borrowers to loans. At present, the successful borrowers of microfinance institutions also face difficulty in accessing larger loans from commercial banks due to non-availability of their long proven credit history and timely repayments with a microfinance institution. The MF-CIB will facilitate the up gradation of such livelihood-based customers into small entrepreneurs.
Turan & Koskija (2014) outlined the positives of CIS as: increasing transparency among financial institutions, helping banks to lend prudently, reducing the risk level of default. Ahmad (2013) also highlighted that one of the factors leading to the growth or decline of NPLs is information sharing. Jappelli & Pagano (1999) also declared that information sharing is associated with broader credit markets and lower credit risk. Credit information sharing thus undoubtedly plays a pivotal role in reducing information asymmetry that exists between banks and borrowers (Gaitho, 2013).
Karapetyan & Stacescu (2009) argued that information makes available viable lead and is an important source of bank`s growth and profits. Karapetyan & Stacescu (2009) go on to argue that availability of such information has enabled the banks to make more accurate credit decisions, earn higher returns and increase welfare. Keeping in view the outcome of relevant researches about CIS and its adaptation by SBP in true perspectives especially by inclusion of MFIs have contributed towards transparency of credits to millions of poor households. Though repeated facilities are being allowed to avoid defaults but multiple borrowings by ignoring CIB reports appear non-feasible and unacceptable. The repayments against loans and profitability of institutions have also shown improvement due to information sharing through eCIB.