Why we need a credit information system, and why we need it now

Romeo Bernardo

Posted on August 04, 2014

A 2007 STUDY by the Asian Development Bank (ADB) on binding constraints in the Philippines identified the lack of financing as a key stumbling block to growth and development. This was at a time when local banks were holding a lot of excess cash, and chasing after a few large corporates which were thus in a position to demand lower-than-treasury-yield interest rates.

The constraint clearly applied to micro-enterprises and small and medium enterprises (SMEs). Micro-enterprises refer to those with assets under P3 million, small enterprises those with P3 million to P15 million, and medium enterprises up to P100 million. SMEs alone make up 98% of firms in the country. It is often harder to lend to such enterprises than big corporations -- they do not have audited financial statements, and owners do not put a bar between their business and their household wallets.

SMEs’ lack of access to financing is of course not new. Together with the agricultural sector, they have been the target of failed government-directed programs since the 1970s.

In fact, even as the Bangko Sentral has been barred from these developmental activities, laws mandating private banks to lend to agri-agra and SMEs continue to be in effect. In many cases, banks had found themselves better off accepting the penalties of non-compliance than to risk capital loss by lending to these sectors. Why?

At the core of the problem is a well-known market failure in economies, information asymmetry: banks and other financiers do not know as well as the borrower the latter’s track record in loan repayment, and would thus have a hard time telling apart good borrowers from bad ones.

In the absence of reliable information to help banks make the right credit decision, SMEs and most especially micro enterprises applying for loans would face a higher probability of getting denied. This is true as well for individuals.

The flip side is that the pool of borrowers is smaller, resulting in high opportunity costs not just for the banks and other credit providers, but most crucially for the nation and public at large.

Although the problem is a well-known one, it was only in 2008 that a law was passed creating the Credit Information Corporation (CIC). The CIC is supposed to aggregate individuals’ and firms’ credit information in a database to help would-be borrowers prove good credit record (thus improving their chances of getting a loan) and financiers make good credit judgements (thus reducing default risk).

Work on this has been gaining traction in the past year with the appointment of a dynamic and charismatic IT entrepreneur, Jaime Garchitorena, as President. He has the solid support of his entire board, led by its ex-officio chairman, Securities and Exchange Commission Chair Teresa Herbosa.

Under Garchitorena’s leadership, key milestones were achieved: First, a meeting of the minds between the CIC and the first batch of data providers, primarily the banks. In addition to the banks, the CIC is also aiming to fill its database with payment records of utility companies such as Meralco, the water concessionaires and the telecoms, as well as those of pension agencies, cooperatives and micro-finance institutions.

Second, the signing of contract between the CIC and the CRIF, a leading international credit bureau services technology provider, after a thorough and transparent competitive procurement process supported by the International Finance Corporation. The target is to be able to offer CIC’s services to the public toward the end of next year even as it continually expands data sources to enrich its database.

A necessary activity to ensure public acceptance and wide usage of the credit information system (CIS), which the CIC law also mandates, is a continuing awareness campaign that educates the public about the benefits of the CIS, the do’s and dont’s of keeping one’s credit history clean, conditions for accessing credit records, and increasing financial literacy in general.

The activities of the CIC are fully supported by the government in light of the benefits generated by a functional CIC to the economy and financial system. In addition to the Bangko Sentral and the SEC, Finance Secretary Cesar Purisima and Trade and Industry Secretary Gregory Domingo have been keen for the Philippines to join soonest the rest of the original ASEAN countries with a functioning credit information system. This is one of the factors in international competitive surveys -- including the IFC’s Ease of Doing Business.

My own small involvement is as a member of the USAID-funded COMPETE project that is assisting the CIC in bringing global best practice knowledge in the design and marketing of the CIS as well as garnering broad-based support from local financial institutions, industry organizations, and the other government and non-government organizations.

International experience with credit information systems (most recently in Japan, Malaysia, Taiwan) shows that the availability of reliable information helps reduce firms’ and individuals’ financial constraints, increases their access to credit, lowers banks’ loan default rates and fosters long-term responsible borrower behavior. The CIS is clearly a win-win solution to a critical binding constraint to our country’s inclusive growth aspirations. Simply put, the CIC will help improve our people’s lives.

Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.