(Gene Leon)

1. Presented by
Dr. Gene Leon
IMF Resident Representative, Jamaica
2012
At CreditInfo Seminar on
Establishing A Credit Bureau in Jamaica
Knutsford Court Hotel, Kingston, on June 6, 2012

2. On The Role of Credit Bureaus
Dr Gene Leon, IMF
2
Greetings
Chair, CEO Credit Info, Participants, good afternoon. It is a great honor
to address you today – I will discuss the role of credit bureaus.
Introduction
I would like to make one central point: Credit bureaus perform a central
role in the provision of information, a key input to the financial decision-
making process. As such, that role implies a fundamental responsibility
that should not be treated lightly.
Role of financial sector
Financial institutions are like the central nervous system of modern
economies. Why? Because the majority of transactions in goods and
services that take place involves some form of financial instrument (or
asset).
The global financial crisis has triggered a closer focus on domestic real-
financial sector linkages, as well as international spillovers arising from
trade and financial integration. The crisis highlighted that a crisis can
originate (or be exacerbated) in any sector (including the household

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Dr Gene Leon, IMF
3
sector) and underscored the relevance of balance sheet analysis, the
need to monitor evolving channels of intermediation, and the importance
of information disclosure and oversight (corporate governance;
regulatory and prudential).
Thus the well-being of economies, including the effectiveness of
economic policy, is dependent in part on accumulating a comprehensive
set of data on institutional units, analyzing these data and making
effective decisions. In other words, the system is powered by data and
information.
We can establish the importance of information by noting three key
propositions:
Proposition 1: Institutional units seek to increase their net worth over
time, subject to uncertainty
Proposition 2: Markets facilitate transactions between institutional units
in goods and services and financial instruments.

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Dr Gene Leon, IMF
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Proposition 3: Transactions between institutional units lead to changes
in an institutional unit’s assets and liabilities, which are reflected in
changes in balance sheet positions. And fluctuations in the value of
asset and liabilities change the net worth of institutional units, influencing
consumption and investment decisions, as well the ability of financial
intermediaries to lend. So the efficient functioning of markets is
influenced by knowledge of information about institutional units.
So we may ask, how exactly does information impact the efficiency of
operation of financial markets? In general, the efficiency of a financial
system can be assessed in terms of how well it performs its core
functions. Broadly speaking, these include:
 mobilization and efficient allocation of savings (liquidity and
maturity transformation);
 risk management and allocation (diversification, hedging
insurance, and leveraging);
 resource pooling and diversification of ownership;
 information production and price discovery; and
 and efficient payments and settlements.

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Dr Gene Leon, IMF
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An efficient financial system also:
 facilitates better governance and control (discipline of external
pressure);
 deals with incentive and agency problems; and
 manages capital flows.
As such, an efficient financial system is better able to facilitate a
stronger monetary transmission mechanism.
Role of credit bureaus
Credit bureaus facilitate the provision of some of these functions.
Specifically, they:
 decrease information asymmetries between borrowers and
lenders
 minimize adverse selection problems, reducing the cost of
borrowing for debtors with good credit
 allow more accurate evaluation of credit risks, helping to increase
access to credit and thereby volume of credit
 contribute to lower operational costs for creditors (e.g., through
credit scoring and decreases in loan defaults. Creditors typically

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Dr Gene Leon, IMF
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analyze credit worthiness based on Character, Capacity, Capital,
Conditions, and Collateral)
In particular, credit bureaus assess the likely risk of extending you credit
or lending you a sum of money. This is good for businesses and good
for consumers. The system levels playing field so that everyone is
assessed on the same basis.
Importantly, by facilitating an increased and more efficient access to
finance, credit bureaus can play a significant development role in
emerging market and developing countries. Increased information
(especially positive information from credit reports) has been found to
improve approval rates for large and small firms and individuals, across
all types of lenders (retail and wholesale). Moreover, stronger credit
information is positively correlated with a reduction in default rates.
Growth of Credit Bureaus
The International Finance Corporation (IFC) estimates that the
widespread development of credit bureaus across countries could
potentially tap $2 trillion of financing and assist over 1 billion people, and

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Dr Gene Leon, IMF
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reduce transaction costs by one-third. Over the last two decades, private
credit bureaus have grown significantly and exist in Europe, Asia, Latin
America and the Caribbean, and sub-Saharan Africa. Ongoing initiatives
involve the development of international standards on credit reporting,
as well as widening of the set of institutions that report credit information
about consumers. A number of Caribbean countries, including
Barbados, The Bahamas, Belize, Guyana, and Trinidad and Tobago,
have or are setting up credit bureaus.
In Jamaica, current conditions suggest an environment for the
successful development of a credit bureau:
 a regulatory framework is in place
 creditors already use references to assess credit;
 data of banks are reliable;
 the population is sizable and economically-active; and
 the promoters are capable of creating a trusted, data-rich,
technologically advanced, low cost-high value bureau.
Further, the establishment of credit bureau services in Jamaica will
augment the payment systems and regulatory and supervisory

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Dr Gene Leon, IMF
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frameworks in improving access to retail and investment banking, as
well as to nonbank financial institutions.
Issues in implementation
I need not detain you on some prerequisites for a successful credit
bureau, namely the need to ensure the business model is commercially
viable, the legal and regulatory framework is adequate (the increased
scrutiny of the industry could well result in further enhancements to the
regulatory environment), and the appropriate technology has been
employed. The crux of the matter is that credit bureaus will more likely
succeed if there is acceptance by the public. In fact, the receipt of a
license to operate is a responsibility that should not be taken lightly. As
you embark on this venture I would like you to remember you are
custodians of TRUST (not the variety common to the Caribbean of old
which embraced, ―Buy today and trust tomorrow). So what do I mean by
TRUST? I believe the seminar this morning and your future engagement
in credit bureaus will reveal that:
 T is for transactions (the basis for the mathematical models on
which credit bureaus build credit scores; must reflect accurate
information);

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Dr Gene Leon, IMF
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 R is for rigor and reliability (the hallmarks of any well-functioning
system)
 U is for understanding (the easier it is for the population to
understand, the more buy-in increases)
 S is for security (doubts about the safety of information stored
and the process of transmission, especially in a world of rising
identity theft, is a sure prescription for low participation)
 T is for transparency (rock-solid governance procedures that
reflect integrity on individual, business, and bureau or institutional
levels)
Cultural paradigm shift
Another key point to consider is the need for a program of financial
education to support the cultural shift from ―closed‖ to ―openness.‖ Here,
the integrity of staff, use of fit and proper criteria, and transparency of
procedures will help mitigate initial unease. Further, expectations of
overnight success will need to be managed carefully. Not only will it take
some time to build an adequate credit database (time and provider
perimeter), the use of that information and the positive outcomes alluded
to above will take time. Transformation of this scale will not happen

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Dr Gene Leon, IMF
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overnight, as it requires integration of new actions and behaviors,
replacing old mindsets, systems, and structures.
Experiences
The experience from countries with credit bureaus is that it can take up
to five years from initial discussions to issuance of the first credit report.
So in addition to your own specialty knowledge, I suggest also strong
communication and a work ethic grounded in discipline and persistence.
Accuracy could be an issue. In the United States, it is estimated that up
to 90% of credit reports obtained from credit bureaus contain
inaccuracies, with the U.S. General Accounting Office (GAO) citing the
most common causes as inclusion of incorrect information and exclusion
of correct information. Of course, consumers provide inaccurate
information to compilers, but collectors of data also upload incorrect or
incomplete data. In that regard, incentive structures that place a
premium on accuracy over volume could be helpful.

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Dr Gene Leon, IMF
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Technological obsolescence must be avoided. Credit bureaus have
evolved, taking advantage of advances in technology and predictive
modeling (e.g., credit scoring) to reduce costs and increase efficiency.
Going forward, adaptation and innovation will be essential to the
industry’s survival. The US, for example, is expected to adapt to new
forms of delivery, including the Internet. As you know, the US has a two-
tier structure: a few credit bureaus with national coverage serving high-
volume customers and many smaller bureaus serving specific niches or
reselling data to low-volume customers. By extension, and to keep with
the mandate of security and data integrity, a proactive technological
updating program seems advisable.
And we need to cultivate a sense of urgency to act. It will necessary to
convince all stakeholders—government, private sector, and
households—that action delayed is an opportunity or benefit forgone.
Support from all stakeholders will be essential to minimize start up time
and maximize benefits. An obvious hurdle is the harmonization of data
that was not previously standardized or collected to be used for the
―new‖ purpose of credit reporting. That could translate to a number of
gaps in any standardized reporting format.