Credit Bureau Development
In developed countries such as the United States, credit reporting systems are usually installed by private enterprises where merchants and other credit extenders are joined together through intermediary organizations (sometimes called credit bureaus). Credit bureaus provide credit grantors with a host of services at the local level such as account collection activity, electronic check verification, pre-employment screening, commercial and retail debt recovery services, skip tracing, and of course credit reporting services.
Credit bureaus are usually tied to large depositories of information that track the information provided by many credit bureaus into one universal picture of the credit history of an individual or business. The combination of the credit bureaus and the depository allows for local gathering of information as well as a tracking system that follows the credit histories of individuals or businesses as they move from locality to locality.
As the information depository size increases better credit data is available to the merchants and credit companies that have joined together. An example of information provided to credit bureaus is when credit grantors report on the progress of an individual’s payment histories from time to time (usually quarterly). The credit companies pay a small fee for each credit record that they request from the credit bureau and pay for any support services being provided by the bureau.
A credit bureau helps to develop a solid middle class and produces both short- and long-term benefits to an economy by empowering the citizens in any country with greater mobility, greater opportunity, and, in the long run, greater resilience against economic shocks. A credit bureau provides products, services, convenience, security, acknowledgment, accessibility, and low costs to all individuals in society. The result is increased access to credit across the income spectrum, greater purchasing power for
individuals, and improved transparency of small businesses.
In Kazakhstan, the Pragma Corporation helped to create the first credit bureau in the former Soviet Union while implementing USAID Financial Sector Initiative. In Kazakhstan the credit bureau was an impartial entity that stores all past and present credit transactions entered into by a particular legal or physical person and that will indicate the manner in which the subject of the credit profile repaid the obligation to the respective creditors. The credit bureau also contains demographic information on the subject to ensure proper identification, information that is pertinent to the subject’s creditworthiness, and an indication of the overall risk relating to an applicant as regards the repayment of newly established credit, such as inquiries by other parties with a permissible purpose. The credit bureau provides an avenue for the verification or validation of any information that may be questioned or disputed by the subject of the credit profile. A credit bureau serves both parties in a credit transaction and is an excellent tool to reduce risk and facilitate and accelerate the approval process.
In 2002, Pragma undertook activities to understand data source quality and locations, design a marketing and public awareness campaign, and develop a legislative and regulatory package. As a result of this analysis, it was determined that new legislation was required to address limitations in the law concerning the disclosure of information, and to facilitate private sector funding for the project. USAID/Pragma drafted the necessary changes to the legal framework. However the process would most likely be lengthy and would present serious challenges. The USAID/Pragma drafts were the basis for a new Credit Bureau Law that was drafted and sent for review. This was a major accomplishment because the law serves as the foundation for a credit bureau in Kazakhstan. Finalization of the law ran into complications because it needed to reflect the right to access information, and the principle of immunity. The new law reflected consumer rights and obligations. The new law affected at least eight other laws: Law on Banking, Law on the National Bank, Joint Stock Company Law, Administrative Procedural Law, Criminal Code, State Procedural Code, Law on Motor Vehicles, and Law on Real Estate.
While shepherding the necessary legal changes, USAID/Pragma and the NBK also prepared and signed a formal Credit Bureau Meeting Protocol (dated February 12, 2002) that covers the major issues fundamental to achieving the strategic objectives. The Protocol clarified outstanding legal, business, and data access issues that slowed progress in developing the Business Plan.
On April 17, 2004, the Mazhilis approved the Credit Bureau Law. The Mazhilis’s version of the law was substantially consistent with European data processing legislation and with the U.S. Fair Credit Reporting Act. On July 6th, 2004 President Nursultan Nazarbaev signed Kazakhstan’s Credit Bureau Law. Only twenty-three days later, on July 29, 2004, in Almaty, the seven largest private banks in Kazakhstan formally agreed to establish the first credit bureau in the Commonwealth of Independent States, the First Kazakhstan Credit Bureau.
The law established the following conditions under which the credit bureau was expected to operate: (a) consumer consent is required before information can be shared; (b) funding of the credit bureau is to be entirely private; (c) data sharing of positive and negative data is permissible; (d) there is to be no data fragmentation; and (e) non-financial institutions can participate in the credit bureau system. Accordingly, the First Kazakhstan Credit Bureau was expected to operate in an environment that is substantially consistent with conditions in the European Union and in the United States and superior to those in Australia/New Zealand, Hong Kong, and in many other countries.
Following extensive discussions with the major stakeholders, the seven banks agreed to invest US$210,000 in equity capital, with each contributing US$30,000. Later, five of the seven banks agreed to provide the additional US$1,500,000 that was required to reach break even under a pessimistic scenario.
The First Credit Bureau of Kazakhstan officially received its operating license from Kazakhstan’s Financial Supervisory Agency (FSA) in November, 2005. The Credit Bureau has been loading data and testing it now remains for the Credit Bureau’s clients to sign a General Agreement (GA) in order to start issuing actual credit reports. The First Credit Bureau has been conducting commercial activity since January 2006. It is the first fully operational credit bureau in the CIS that is both consistent with international best practices and contains over 98% of consumer information from the banking sector in a single database at a single location. Unlike in many other countries, the Kazakhstan Credit Bureau is 100% owned by the private sector. As of September 15, 2006, the Credit Bureau had 681,019 credit histories in its database, out of which 7,381 were legal entities and 673,477 were physical persons. For more information, please visit www.1cb.kz.
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