EXECUTIVE SUMMARY OF EVALUATION FOR PUBLIC DISCLOSURE FROM: CMES- MENA Advisory Services BASELINE SURVEY OF THE INTEGRATION OF MICROFINANCE INSTITUTIONS IN PRIVATE CREDIT BUREAUS EGYPT AND PAKISTAN Redacted Version 1. The Executive Summary of the Evaluation entitled Baseline Survey of the Integration of Microfinance Institutions in Private Credit Bureaus Egypt and Pakistan has now been redacted for public disclosure in accordance with IFC’s 2012 Access to Information Policy, following the Procedure for Development, Management and Disclosure of IFC Evaluations effective on April 15, 2014. 2. The attached redacted version reflects the following adjustments:  Redaction of sensitive or confidential information related to clients and third parties such as donors and partners. (Redacted Executive Summary, pages 2 and 3);  Minor typographical corrections. 3. Questions on this document should be addressed to Andrea Salerno (ASalerno@ifc.org). Page 1 of 6 Executive Summary of Evaluation Baseline Survey of the Integration of Microfinance Institutions in Name of Evaluation Private Credit Bureaus Egypt and Pakistan Date of Final Report of Evaluation May 2014 Author of Final Report of Evaluation Mauricio Zambrana Cuellar; Andrea Salerno, IFC, ASalerno@ifc.org Date of this Executive Summary 06/20/2014 Author of this Executive Summary Mauricio Zambrana Cuellar; Andrea Salerno, IFC, ASalerno@ifc.org Number of pages of this Executive Summary 5 Modifications from original Executive Summary With Modification (Please refer to cover letter) Executive Summary Approved for public Anna Hidalgo, IFC- ECRIO, AHidalgo@worldbankgroup.org disclosure by (name) on (date) Background In its efforts to facilitate a more healthy and sustainable provision of financial services for micro entrepreneurs of Egypt and Pakistan, the International Finance Corporation (IFC) has undertaken two separate projects, looking for a full integration of microfinance practitioners into the credit reporting system of each country. As microfinance institutions1 (MFIs) in both countries are just at the beginning of the process of sharing credit information, an independent assessment was planned in order to measure the impact on micro lenders of such integration, using the methodology of “before and after ", which consists of comparing two separate "snapshots" taken at different times; one at the beginning (May, 2013), and another one, taken two or three years later. Objectives This paper comprises the results of the first “snapshot”, and it covers three main objectives: a) Understand current attitudes and practices of credit reporting and/or information sharing among MFIs. b) Set baseline status on all performance indicators for MFIs which are pertinent to the evaluation. c) Assess borrowers’ knowledge and awareness about credit reporting, their rights and responsibilities, and uses of credit score. 1 Along this document, any lender that provides microcredits is considered as a Microfinance Institution (MFI) or Microfinance Practitioner (MFP), making no distinction between regulated and non-regulated institutions. Page 2 of 6 Analysis Because of the large number of MFIs in both countries, a sample was selected based on the criteria of their involvement with the credit reporting system, which is comprised of two main groups: i) those already reporting credit data, and using credit reports to assess credit-worthiness of potential borrowers, and ii), those MFIs that are interested but have not yet begun sharing credit information. Greater emphasis was put in the first group. In order to meet each respective objectives, different methodologies were used to obtain the required information: interviews with CEOs, executives and branch office staff for the first objective; analysis of financial statements and statistical indicators for the second one; and focus group discussions for the third. Attitudes and practices In order to understand current attitudes and practices of MFIs in relation with credit reporting, it is important to consider that usefulness of credit reports dramatically increases when competition among MFIs is high, when multiple borrowing is a common practice, and when outstanding balances of clients have reached a certain amount. Interviewed members of MFIs in both countries definitely have the proper mindset, and do share a positive attitude towards credit reporting. They are more than aware of the importance of sharing credit information, and in fact have done (or are doing) so far, the necessary efforts to get integrated in the exchange of credit information. But the need, or the urgency, felt by MFIs to actively use this tool, is currently low –except in cases where MFIs have faced difficulties in certain, key geographical areas. For Egyptian MFIs, practices regarding the use of credit reports are not as sound and efficient as they could be: • Borrowers of group-lending programs are not being reported yet; • Credit reports are only being accessed at the end of the loan approval process, which is inefficient; • Branch offices have no direct access to the credit bureau; • Branch office staff is not being trained in using credit reports, and in some cases, loan officers have never had a credit report in their hands; • Customers are not being informed that their credit history is being shared and accessed to assess their credit-worthiness; • MFIs are accessing the standard credit report in pdf offered by an Egyptian credit bureau, which is too long or about 12 pages, instead of creating their own report from the data elements and/or having it linked directly in their systems by accessing the XML-format version of the report. However, another Egyptian company has developed a short-form credit report that some MFIs are able to access for ease of use, although it does not take full advantage of data stored in the database. • MFIs are willing to renew a loan for a very good customer who is in default with other lender(s) if he/she has a reasonable explanation for such anomaly, instead of rejecting the application and demanding the fulfillment or settlement of their previous obligations. Page 3 of 6 For Pakistani MFIs, it’s mostly the same, but there are some differences; everything else applies for both countries: • Borrowers of all lending channels are being reported. • Customers are being informed that their credit history is being shared and accessed to assess their credit-worthiness (with the exception of one MFI); • There is no XML-format report provided by the main credit information bureau; • MFIs are not willing to renew a loan for a very good customer, who is in default with other lender even though he/she has a reasonable explanation for such an anomaly; and are rejecting the application and demanding the fulfillment or settlement of previous obligations. Baseline status of performance indicators Empirical evidence on the impact of credit information sharing shows that there are very specific aspects in which both financial institutions and clients can benefit. However, not all indicators can be directly linked exclusively to participation in the credit bureau. Nevertheless, certain assumptions follow from usage of the following primary and secondary-level indicators and which give a good picture of a) current usage and integration of MFIs in the private credit bureau (CB), and b) baseline figures on secondary or possibly correlated portfolio and financial indicators which may be impacted by participation and use of the CB system. Indicators presented below represent the current situation in both countries. For a definition of each indicator, please refer to Boxes 8 and 9, on page 34 of the full evaluation report. Primary Data Egypt (MFIs/MFPs) Pakistan (MFIs/MFPs) Total number of MFIs/MFPs 17 27 Total number of MFIs participating in CB (either reporting and/or querying) out of total providers (Apr. 10 (58.8%) 24 (88.8%) 2013) Number of MFIs reporting all loan types, (Apr. 2013) 6 (35.2%) 24 (88.8%) Number of MFIs making inquiries, (Apr. 2013) 9 (52.9%) 13 (48.1%) Number of Inquiries (Total / Avg. per month) (June 2013) 5,500 20,000 Number of Disbursements ( Avg. per month) 56,000 (participating 240,000 MFIs only) Secondary Data (Weighted Average, as Dec. 2012) Portfolio at Risk (PAR >30 days) 3.3% 5.7% Potential loan losses 3.1% 2.2% (Loan-Loss Provisions / Gross Loan Portfolio) Write-off Rate 0.6% 1.6% Rejection Rate 2.25% 3% Client Dropout Rate 22% N/A Loan Processing Time (minimum and maximum) 4-15 days 5-10 days Operating Costs (Administrative costs / Gross Loan 12.8% 23.5% Portfolio) (Weighted Average) Staff Productivity (borrowers per staff) 161 397 (*) Page 4 of 6 Price of a credit report (as a percentage of average size of loans) 5 EGP ($.71) 17 PKR,($.16)** 0.2% 0.06% (*) For Pakistan, the indicator is defined as borrowers per loan officer ** Current subsidy in Pakistan is being phased out over three years. Coverage of the borrowing population represented on the credit bureau database is especially important. As for any type of network, the more data providers involved, the greater the benefits for all participants. In Egypt, there are 17 MFIs/MFPs which concentrate more than 80% of the microcredit borrowers’ portfolio, and only six of them are reporting all types of loans. In Pakistan, the scenario is more promising, with 24 out of 27 reporting all types of loans; although inquiries are far from reaching the threshold of a full involvement of participants (20,000 monthly inquiries vs. 240,000 monthly disbursements. At the time of the second assessment, some of these indicators should show a better performance, if there are no (further) disturbing external events. Borrowers’ knowledge and awareness about credit reporting Borrowers’ knowledge and awareness about credit reporting is generally low across Egypt. On average, 7 out of 10 participants in the discussions were not familiar with the existence of credit bureaus; and only when explained the role of credit bureaus, participants started to understand the implications of credit data being shared by lenders. In Pakistan, borrowers had a more general knowledge about credit reporting, and their level of awareness about the implications of credit reporting was high. On average, 7 out of 10 participants of focus group discussions recalled giving their consent to be inquired and reported, although it was not completely clear for them which were the mechanisms used by MFIs for sharing payment behavior of borrowers. In a similar order of magnitude (70%), they were fully aware about the consequences of defaulting if they apply for a new loan. In both countries borrowers know that there is some way in which MFIs are able to inquire applicants' credit histories, and they are aware that misbehavior in repayment of previous loans will affect their access to new credit facilities. Indeed, in both countries MFIs have reported that they are inquiring on consent (in applications for instance) before reporting and querying. This may need to be verified independently in the future. About their rights and responsibilities, the knowledge is almost non-existent; borrowers acknowledge that they can dispute the information held by the MFI if it’s erroneous, false, incomplete or outdated, but they don´t know about existing dispute mechanisms run by credit bureaus. In terms of credit scores, most borrowers do not know what it means. Just a few participants of the discussions (less than one per group; in many groups, none of them) had an idea about credit scores and Page 5 of 6 why it is important, which is a totally new concept for most of them. Language barriers play also a role that explains why borrowers are not familiar with some concepts. Conclusions and Recommendations Sharing credit information will produce a positive impact on credit operations of MFIs in those markets where several players are present. However, full integration of the MFIs of Egypt and Pakistan in their respective CBs will take more time under current conditions; specifically since there is a perception that the price per credit report may be greater than the (perceived) benefit of using it. MFIs may report data, but in the short term will not use credit reports for each and every credit application. Copyright and Legal Disclaimer The material in this publication is copyrighted. 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Instead, any issues arising in an IFC-financed project will be evaluated and addressed in the context of the particular circumstances of the project. Page 6 of 6