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Development of the Philippine Credit Information Database and Credit Guarantee System: Information

Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

Chapter 4

Credit Bureau Creation and Development in the Philippines

4.1. Credit Bureau and the Credit Information Database

Credit bureaus are essential to the development of the financial system. Credit bureaus are
defined as an institution that collects information from creditors and available public sources on a
borrower’s credit history (IFC, 2006). Although private credit bureaus have been in existence in the
Philippines, there is still the absence of a centralized credit information system that deters the further
development of the country’s financial system. This lack of a comprehensive and specific database
makes individual and corporate credit inaccessible and costly. It also puts financial institutions to
excessive and unnecessary credit risks with this deficiency of credit information.

On the 31st of October 2008, the Credit Information System Act (CISA) of 2008 was signed into
law. Also known as Republic Act (RA) No. 9510, CISA is part of the Bangko Sentral ng Pilipinas’ (BSP)
aim of promoting greater adherence to the enhanced standards on transparency, accountability and
fairness (BSP, 2008). Under the CISA, the credit information system that will be established will directly
focus on the need for reliable credit information concerning the credit status and reputation of
borrowers.

However, it is very important to note that there is an existing credit information system in the
Philippines, though fragmented, unorganized, and seemingly underdeveloped. This crucial irony of
sorts brings forth the systemic reality of the Philippine financial system and its pitch to become mature
and developed.

The structure of this chapter initially flows from the analysis of the legal and regulatory
framework of existing credit bureaus and other credit-related agencies and how these credit entities
would hypothetically fare under the CISA. This will be undertaken through the flow of credit information
framework, both without CISA and under CISA. Some relevant implications will be discussed on the
creation of the Central Credit Information Corporation (CCIC) under CISA and its eventualities on
existing credit bureaus and other credit-related agencies. The legal and regulatory framework of CISA
itself will be discussed and analyzed, and the evaluation of the CISA, as a good enabling legislation for
credit bureau and credit information database creation and development, will be presented.

The infrastructure needed for a successful implementation of the CISA will be tackled next and
how current technology is implemented for building an efficient credit information database including
model credit bureaus and international best practices to boost future steps. Finally, the results of a
mini-survey will be presented on the current perception and views on credit bureaus and credit
information database by banks and other credit-related institutions in the Philippine financial system.
Conclusion and some recommendations will be presented regarding credit bureau creation and
development in the Philippines at the end.

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Development of the Philippine Credit Information Database and Credit Guarantee System: Information
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4.1.1. Legal and Regulatory Framework of Existing Credit Bureaus and Other Credit- Related
Agencies in the Philippines

Although legal framework and regulations vary around the world for credit reporting, Miller and
Mylenko (n.d.) mentions that there are several laws in a country which would be important to credit
bureaus and their existence. Among them are the following: 1) regulations concerning bank secrecy; 2)
data protection law; 3) consumer protection; 4) fair credit granting and consumer credit regulations;
and, 5) provisions regarding privacy and personal or corporate secret in existing laws. Moreover, it is
important to look at the scope of the existing laws because it spells the success of particular laws
pertaining to the creation of credit bureaus and the encouragement of proper credit reporting.

To see the current set of regulations and laws that govern the credit bureaus in the Philippines,
Table 1 outlines each area cited by Miller and Mylenko (n.d.) for assessment of the legal and regulatory
frameworks. Each area will set out each existing Philippine law that has been enacted and
implemented so far.

Table 4.1: Legal Framework Afforded to Existing Credit Bureaus and Other Credit-Related
Agencies in the Philippines
Legal Framework for Credit Reporting Existing Philippine Laws
1) Regulations Concerning Bank Secrecy There are existing Philippine laws that govern
bank secrecy which literature says has greatly
impeded the effectiveness of credit bureaus and
other credit-related entities all over the world. In
the Philippines, these are the most important ones
that need to be cited:

a. Presidential Decree (P.D.) No. 1941 or the


P.D. “Recognizing and Supporting the Credit
Information Bureau, Inc.” – This particular P.D.
was created under the regime of the former
President Ferdinand E. Marcos back in 1984. This
decree has been put out to support the Credit
Information Exchange System initiated under the
Letter of Instructions No. 1107 ordering the then
Central Bank to put up the said system. However,
President Marcos had to initiate P.D. No. 1941 in
order to fortify the mandate of the Credit
Information Bureau, Inc. (CIBI).
P.D. No. 1941 states that “all banking and other
financial institutions may, at its discretion, make
available to the CIBI information relative to the
funds or properties in the custody of said
institutions,…and any other data or information”
for CIBI to carry out its function as “a competent
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Development of the Philippine Credit Information Database and Credit Guarantee System: Information
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and suitable credit bureau” to implement the


national policy of the promotion of the
development and maintenance of rational and
efficient credit processes in the Philippine financial
system.
Almost twenty-five (25) years later, CIBI only
caters to less than ten thousand (10,000) clients
and customers. The discretionary nature of its
ability to get necessary and relevant credit
information to be a competent and suitable credit
bureau has played a huge role in its stunted
growth. Thus, the scope of the P.D. was limited,
and spelled its failure to include numerous
institutions participating in credit reporting.
Furthermore, the enactment of the succeeding
laws on secrecy impeded its potential and
necessity.

b. The General Banking Law of 2000 or


Republic Act (R.A.) No. 8791 – This law covers
other forms of investments in the financial system.
Section 55, prohibits, “unless there is an order of
a court of competent jurisdiction, the disclosure by
any director, official, employee or agent of any
bank any information relative to the funds or
properties in the custody of the bank belonging to
private individuals, corporations or any other
entity” (Primer on the Bank Secrecy Law, n.d.).
This particular portion of the law, thus, cautions
banks to disclose any information relative to funds
or assets under its care that belongs to private
entities. In turn, this has limited the activities of
credit bureaus and other credit-related firms in the
Philippines. But, it would be important to point out
that an existing credit bureau, the BAP-Credit
Bureau, Inc., with its major source of credit
information are its member banks. It has undue
advantage with its main clients as its own
members in the association. This allows the said
credit bureau assure the secrecy of credit
information with its affiliation with almost all the
banks in the Philippine financial system.
However, the said credit bureau is not biased
toward SMEs because its database does not have
a separate classification for such firms. This
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actually accentuates the bias against SMEs of


major banks in the Philippines.

c. The Law on Secrecy of Bank Deposits or


R.A. No. 1405 – This particular law “declares that
all types of deposits in banking institutions
including investments in bonds issued by the
Philippine government and its political
subdivisions and instrumentalities are considered
of absolutely confidential nature” (Philippine
Deposit Insurance Corporation, n.d.). Deposits
may not be examined by any person, government
official, bureau or office. Any violation will be
meted with certain penalties accorded under the
said Law.
This law augments the difficulty of existing credit
bureaus and other credit-related agencies in
accessing important and essential credit
information for the success of their operations as
the conduit of reliable and competent credit
information.

d. The Credit Information System Act (CISA) of


2008 – This law has been recently signed and is
waiting for the set of implementing rules and
guidelines. An important part of this law is that it
amends the secrecy laws outlined above in order
to compel banks, financial institutions, and other
credit-related agencies to centralize credit
information. This law will be detailed in the
succeeding discussions.

2) Data Protection Laws Data protection laws allow information exchange


among all types of creditors (Miller and Mylenko,
n.d.). At the moment, there are no Philippine data
protection laws enacted and signed into law.
Under the CISA, banks have been assured that
there would be little risk that credit information
sharing would give undue advantage to their
competitors.
However, there is no particular law currently that
addresses the need to protect data in the
Philippines. There is a pending bill in the Senate
of the Philippines (Senate Bill No. 1371) entitled
“Personal Data Protection Act of 2007” which
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Development of the Philippine Credit Information Database and Credit Guarantee System: Information
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aims to prohibit the “misappropriation of personal


information in database and collections of
information, providing a mechanism for protection
against theft, and for other purposes”. Thus,
personal data protection in the Philippines, as of
today, is left to consumers themselves and to the
ones managing and controlling personal data
bases.

3) Consumer Protection Laws There is R.A. No. 7394 or “The Consumer Act of
the Philippines of 1991” that governs the
consumer rights of persons in the Philippines.
Specifically, the law delves into “Consumer Credit
Transaction” which deals with the development of
“fair and economically sound consumer credit
practices”. The goal of this chapter in the said law
is “to protect the consumer from lack of
awareness of the true cost of credit to the user”.
The State, according to the law, will assure the full
disclosure of the cost of credit.
There is no other law, except CISA so far,
specifically protects the customers/consumers in
data base collection and management especially
dealing with credit bureaus and other credit-
related agencies in the Philippines.

4) Fair Credit Granting and Consumer Credit There are is no specific law governing fair credit
Regulations granting in the Philippines, except for what
already has been discussed. Consumer credit
regulations are explicit in the Consumer Act of the
Philippines. But, as mentioned earlier, there are
no particular references to credit bureau
regulation and development.

5) Provisions on Privacy and Personal or Privacy and personal or corporate secrecy would
Corporate Secrets again return to existing bank secrecy laws which
have impeded the development of credit bureaus
and other credit-related agencies in the
Philippines. CISA, however, amends secrecy laws
to compel banks to centralize credit information
collection.

It seems that credit bureaus and other existing credit-related agencies are indeed impeded by
secrecy laws and the lack of other regulations that will manage and grow the operations of the said
institutions. P.D. No. 1941 did not deliver what it was supposed to because of political and economic
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Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

upheavals during its inception in early 1980s. Furthermore, its supported institution, the CIBI did not
become the “competent and suitable credit bureau” it was intended to be with its weak appeal to the
credit and financial system as a whole. On the other hand, the set-up of the BAP-Credit Bureau Inc.
showed the strength of an association of financial institutions servicing and protecting itself from credit
risks in the financial system. With existing banking secrecy laws, it has managed to create a better
database than other existing credit-related agencies that have long existed before. Finally, Dun &
Bradstreet Philippines, Inc. seems to be a fairly good model for a small private credit-related agency.

In terms of regulation, there is no specific government agency that is in charge of credit


bureaus and the credit information system in the Philippines. The Securities and Exchange
Commission (SEC), as the regulator of all businesses, is the default government agency in control.
However, it must be pointed out that with CIBI, prior to 1997, was under the helm of BSP. BAP-Credit
Bureau, Inc., on the other hand, is indirectly under the BSP since it is an association of the banks
regulated by the BSP. In general, there is no specific public entity that regulates the existing credit
bureaus and other credit-related agencies in the Philippines.

On the topic of credit risk management, Basel 2, in the Philippines, under its new capital
adequacy standards will allow banks to “appropriately disclose pertinent information” among others that
will hopefully contribute to the greater resiliency of the Philippine banking system increasing its credit
and lending activities in the long-run (Tetangco, 2007). This particular assumption is with or without the
CISA. Therefore, this further strengthens the resolve of the financial system altogether as concerned
and relevant government agencies, with the Securities and Exchange Commission (SEC) as the lead,
come up with the implementing rules and regulations of the CISA in the next coming months.
Nevertheless, this does not assure the further creation and development of existing credit bureaus and
other credit-related agencies.

4.1.2. The Credit Information Systems Act (CISA) of 2008

The CISA of 2008 is part of the BSP’s objective of the promotion of greater adherence to
enhanced standards of transparency, accountability and fairness. It was signed into law by President
Gloria Macapagal-Arroyo last October 2008 after four years that the country has been greatly involved
in the creation and passage of this said law.

To facilitate the understanding of the current credit information system in the Philippines, the
flow of credit information will be the main framework of analysis. This means that the existing system
and its regulation and legal framework will be described through a diagram before CISA and another
diagram under the CISA.

Figure 4.1 shows the flow of credit information under the existing credit information system in
the Philippines. Following the flow of credit data, it all starts with the main sources of credit information
from both borrowers (individuals and firms) and other borrowers (transactors/customers). It should be
noted that SMEs are not clearly classified in the sources of credit data.

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Figure 4.1: The Flow of Credit Information Before CISA

Banks and Other Government


Lending Institutions

Other Entities that Provide Credit Private credit bureaus and other
Sources of Credit Information
(such as cooperatives, micro- credit-related agencies (BAP-CBI,
1) Borrowers
finance institutions, etc.) CIBI, Dun & Bradstreet Philippines,
2) Other Borrowers
etc.)
(Transactors/Customers)

Other Sources of Useful Credit


Information (such as utility
companies)

Credit information, both positive and negative, then goes to banks and/or other government
lending institutions, other entities that provide credit like cooperatives, micro-finance institutions
(although this is not clearly pointed out by the other private credit-related agencies), and other sources
of useful credit information. Credit data then proceeds to the existing private credit bureaus and other
credit-related firms that revert back the necessary credit information to banks and other credit-providing
institutions in the financial system.

Figure 4.2: The Flow of Credit Information Under CISA

Borrower Identification System

Banks and Other Government


Lending Institutions

Sources of Credit Information


1) Borrowers Other Entities that Provide Credit
2) Other Borrowers (such as cooperatives, micro- Central Credit Information Corporation
(Transactors/Customers) finance institutions, etc.)

Other Sources of Useful Credit


Information (such as utility
companies)
Accessing Entities (such as banks,
government lending institutions,
etc. to include private credit
bureaus and private credit-rating
agencies)

The CISA was signed into law because the State believes that the absence of a centralized
information system is a huge restriction to the development of the country’s young yet small financial
system. The main argument for the CISA is that the “lack of a comprehensive and detailed database
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makes borrowing costly and inaccessible to small borrowers, and exposes the financial institutions to
excessive and unnecessary risks.

Figure 4.2 illustrates the flow of credit information under the CISA. Two (2) main sources of
credit information will be the: 1) borrowers; and, 2) other transactors and customers of credit services.
Credit information, both positive and negative, will then be coursed through three (3) entities namely: 1)
banks and government lending institutions; 2) other entities that provide credit such as cooperatives,
micro-finance institutions and other similar institutions; and, 3) other sources of useful credit information
such as utility firms. All of the credit information will be required to be submitted to the CCIC which will
employ a borrower identification system that will facilitate the consolidation of credit information on a
certain borrower. The CCIC will gather both positive and negative information on a borrower’s
creditworthiness. The borrowers will therefore have the opportunity and venue to dispute what they
may deem as inaccurate credit information about them (as shown by line from the “sources of credit
information” to the “Central Credit Information Corporation). Therefore, the flow of credit information, in
terms of quality and accuracy, will be

Once credit information is collected and processed through the CCIC, it will distribute through
accessing entities, who can be likewise the primary providers of credit information such as banks,
government lending institutions, etc. The processed information may likewise be provided to special
accessing entities, which include the existing private credit bureaus and private credit-rating agencies.

Under this ideal set-up where the flow of credit information starts from all types of borrowers,
which may include SMEs, these SMEs would therefore not be alienated from the main financial system
in terms of the ease of access to necessary credit for expansion and, therefore, growth of these
particular firms. If institutions participating in credit reporting would be encouraged to be all-
encompassing, the success of credit management and ease of credit will be easily attained. The scope
of the law should include all institutions (as many as possible) involved in beefing up the credit
information system under the CISA.

4.1.3. Legal and Regulatory Framework Implications of the CISA

Bank secrecy provisions in existing laws are said to be often the major impediments to the
development of a credit bureau. The CISA, in effect, amends Philippine secrecy laws, such as RA No.
1405 (Law on the Secrecy of Bank Deposits), RA No. 6426 (The Foreign Currency Deposit Act), and
RA No. 8791 (The General Banking Law of 2000).

Section 4 of the CISA seeks to establish the “Credit Information System” (CIS). The CIS will be
established under the Central Credit Information Corporation (CCIC), sixty percent (60%) owned by the
National Government (with the Securities and Exchange Commission as the lead government
institution) with the remaining forty percent (40%) to be owned and held by qualified investors including
industry association of banks, quasi-banks, and other credit-related associations.
The main objective of this theme in the legislation is to enable credit reporting balance the
ability of institutions to exchange credit information in the normal course of business while at the same
time protecting the rights to privacy. IFC (2006) cited two general approaches to credit reporting: 1) use
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of broad data protection laws; and, 2) use of specific credit bureau or credit reporting laws. European
countries have adopted the former, while a lot of emerging markets have applied the latter.

The succeeding discussions delves into the CISA, by citing its specific provisions, and
evaluating how this new law will generally affect existing credit bureaus and credit-related agencies.
Under the flow of credit information, it can be observed that existing credit bureaus and other credit-
related agencies can still thrive by accessing their own information from the CCIC. However, this set-up
will only work on a proper environment where all of the stakeholders’ interests will be satisfied. Thus, a
middle-ground should be settled to see the efficiency and eventual effectiveness of the CISA.

4.1.3.1. The Need to Establish a “Comprehensive and Centralized Credit Information


System

The creation of the CCIC under the CISA is the recognition of the need for a comprehensive
and centralized credit information system. The enactment of CISA into a law, in effect, repeals
completely Presidential Decree No. 1941 entitled “Recognizing and Supporting the Credit Information
Bureau” penned in 1984 by former President Ferdinand Marcos (cited in Table 4.1).

The eventual establishment of the CCIC mandates that “banks, quasi-banks, their subsidiaries
and affiliates, life insurance companies, credit card companies and other entities that provide credit
facilities” will be required to submit basic credit data and update such information on a regular basis
(Section 4.a). Thus, existing credit bureaus and credit-rating agencies currently collecting data and
receiving data from credit facilities in the financial system will be directly competing with the CCIC.

Moreover, CISA will bolster further the State’s resolve to, through the BSP, develop the
financial market of the Philippines, and its enactment into a law would not have come at a better time
and would be critical in boosting the credit system in this time of global financial and confidence crisis
in financial markets.

4.1.3.2. Institutions Participating in Credit Reporting (Open System)

Section 4.a clearly mentions the CCIC will “require” all credit and credit-related entities in the
financial system. The CCIC, in Section 4.b, further may include “other” credit services providers in the
“compulsory” participation in the credit information system.

Once again, the institutions to be tapped through CCIC are the same institutions that existing
credit bureaus and, at the same time, credit-rating agencies have been getting basic credit data from.
The IFC (2006) points out that a benchmark for good-enabling laws for the creation of credit bureaus
and the like is having an “open system” allowing credit reporting of all banks and non-bank institutions.
This now makes the credit system all-encompassing with regard to the scope of the law. Economic
research has shown that the international best practice of the inclusion of all possible entities in the
system greatly contributes to the credit system’s success where all information flows from all possible
stakeholders (Miller and Mylenko, n.d.).
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There are two (2) primary sources of credit information will be the 1) borrowers and 2) other
transactors/customers (refer to Figure 4.2). Credit information shall be coursed through three (3)
entities: 1) the banks and government lending institutions; 2) other entities that provide credit such as
cooperatives, micro-finance institutions and other similar institutions; and 3) other sources of useful
credit information such as utility companies.

The information is collected through the CCIC, and they will process this information and
distribute it through the “accessing entities,” who are likewise the primary providers of credit information
(i.e., the banks and other entities earlier mentioned). Credit information may likewise be provided to
special accessing entities, which include the private credit bureaus and private credit rating agencies.
These entities can source information from the CCIC and may use the information for creating credit
reports and ratings and may add whatever value to the report as required by their customers (BSP,
2008).

4.1.3.3. Limitations on the Time Period Information is Kept and Distributed

Section 4.h (of the CISA) mandates that “negative information on a borrower as contained in
the credit history files of borrowers” should stay in the CICC database not more than three (3) years
from and after the said negative information was rectified.

This particular section of the said law creates additional incentives for the borrower to greatly
improve credit repayment behavior and allows a borrower to “clean up” the record. Furthermore,
economic research shows that recent nature of credit repayment record is relevant in predicting credit
default. It therefore gives lenders that forward advantage in anticipation of future credit defaults by
borrowers (Miller and Mylenko, n.d.).

4.1.3.4. Data Processing Systems and Data Safety

Section 5.i states that the CCIC “shall acquire and use state-of-the-art technology and facilities
in its operations to ensure its continuing competence and capability to provide up to date negative and
positive credit information”. This will also allow the CCIC “to relay credit information electronically”
including to ensure the “accuracy of collected, stored and disseminated credit information”.

Developments in technology and healthy competition in the industry are two of the main drivers
of the development of data processing according to Miller and Mylenko (n.d.). Under the
abovementioned section of the CISA, there will be a “borrower’s identification system for the purpose of
consolidating credit information”. Thus, this further ensures that data are safe and continuously rectified
to be accurate (a discussion on the type of technology to be used for eventual success follow in the
succeeding pages).
Section 6 clearly mentions the CCIC and authorized entities shall hold the credit information in
strict confidentiality and shall use the said information “only for the declared purpose of establishing the
creditworthiness of the borrower”. Thus, data safety can be assumed. This, however, should be taken
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with caution on the basis of transparency and full accountability of the State especially at this early
stage of the creation of the CCIC.

4.1.3.5. Consumer Protection

According to Miller and Mylenko (n.d.), credit reporting and data protection laws internationally
are in large part self-enforcing. Section 6.n of CISA states that “the borrower has the right to know the
causes of refusal of the application for credit facilities or services from a financial institution that uses
basic credit data as basis or ground for such refusal”. This particular notice of refusal of credit is one of
the most effective methods for maintaining the quality and accuracy of information in the database.
Furthermore, Section 6.o indicates that the borrower has a right of ready and immediate access to the
credit information pertinent to the borrower. This specific feature of the CISA further enhances the
quality of information provided through rectification and verification processes.

Guarding against the misuse of data is one of the most important hallmarks of a successful
credit bureau development. CISA, in Section 6, again, discusses the “confidentiality of credit
information”. All the submitting entities, the accessing entities, the outsource entities, the special
accessing entities and the duly authorized non-accessing entities are mandated to hold credit
information under strict confidentiality. There will be an accreditation process for the specific accessing
entities to have the privilege of accessing data. However, violation of the confidentiality clause will
render the suspension or revocation the accreditation privilege.

At the end of the day, data provided to the credit database of the CCIC should be well
protected compared to existing credit bureaus and credit-rating agencies. A “borrower identification
system”, in Section 4.o, will be established to facilitate the consolidation of credit information on a
borrower (see Figure 4.2 for reference). This body will gather both positive and negative information on
the borrower’s creditworthiness. The borrowers will thus have a right to know the credit information
about them and shall be given the venue and opportunity to dispute what they may deem as inaccurate
information (BSP, 2008).

With all of the different aspects on the CISA or RA No. 9510 discussed, the CISA seems to be
a good enabling legislation for the establishment of a centralized and comprehensive credit bureau in
the Philippines. It has been four years in the making according to the BSP. However, as mentioned
earlier, the corresponding implementing rules and guidelines of the CISA are yet to be drafted and
framed by the various stakeholders of credit expansion and financial market development in the
Philippines.

Based on IFC (2006) standards for evaluating pertinent laws regarding credit reporting, the
CISA meets the minimum requirements of a sufficient law to govern credit bureau creation and
development in the Philippines. However, it must be clearly noted again that as of today, no
implementing rules and guidelines have been put out yet by the drafters of the CISA. Much remains to
be seen whether the CISA will be successful at addressing the “lack of comprehensiveness and
credibility of credit-related information” as according to the Bangko Sentral ng Pilipinas Governor
Amando Tetangco, Jr. when asked about the prospects of CISA.
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4.2. Infrastructure Needed for the Creation of an Effective Credit Information System

The CCIC, through the CISA, “shall acquire and use state-of-the-art technology and facilities in
its operations” as provided for in Section 5.i. The purpose of the needed infrastructure is to largely
ensure the continuing competence and capability of the CCIC to provide timely positive and negative
credit information. Furthermore, it is also enable CCIC to transmit reliable credit information and insure
the quality of collected, stored and disseminated credit information.

Since the credit bureau industry is so called data-driven, the importance of the right
infrastructure and the selection of the technology-provider are very much highlighted. IFC (2006) points
out the maintenance of absolute security over sensitive personal information coupled with its
appropriate treatment are very crucial. Thus, the identification of the suitable technology and software
that will help govern the credit information system is brought to fore.

IFC (2006) identified three (3) important functions to be performed by credit bureaus related to
the functional requirements of credit bureau appropriate-technology:

4.2.1. Collect, Validate and Merge Data

The CCIC will be collecting data from various sources. Thus, basic data can be received in
different forms depending on the reporting entity. The infrastructure should readily and easily address
this particular problem. Validation shall be the sole responsibility of the CCIC. Accordingly, the CCIC
platform must include the necessary automated processes to check for complete, conformed, and
quality data. After the data has been verified, the system should merge the data into the database of
the CCIC.

4.2.2. Generate and Distribute Reports

Capability to be accessed with ease is a very important character of the future CCIC system.
Typical modes of access are the following: 1) On-line access; 2) Dial-up or Web access; and, 3) Batch
access. The first two (2) types of access rely on either “host-to-host” access or Internet access. The
third depends on DVD, CD, magnetic tape or electronic delivery. This usually is used for large client
portfolios.

4.2.3. Provide Data Security and Back-up

As mentioned earlier, security of data is on top of the list for most credit bureaus. Therefore,
the system to be chosen should be very secure. Some of the security features of the system should be
the following: 1) Strict access through proper identification and authentication; 2) Proper protection
from hackers; 3) Clear delineation of authority among network administrators; 4) Automated data
updates; and, 5) Periodic testing of back-up hardware and some recovery procedures.

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The cost of the appropriate technology, according to one existing credit bureau in the industry,
can run up to about USD$1.5 million. Under the CISA, CCIC is authorized to procure the necessary
hardware and software to carry out its mandate.

4.3. Specific Best Practices on Credit Bureaus and Creation of Credit Information Systems

Best practices are very important to help improve and develop the Philippine credit and
financial markets. Below are a few successful credit bureaus, both private and public, from around the
world. The Philippine model should emulate the strengths and minimize the weaknesses of these credit
bureaus cited. The set-up should be emphasized here whether a central credit bureau should be
shared equally by both private and public institutions or should be largely-owned by government or
largely-owned by the private sector.

Table 4.4: Model Credit Bureaus and Best Practices


Specific Credit Bureaus Highlighted Best Practices
1) CompuScan (South Africa) - Started as a provider of credit bureau services to micro-
lenders in South Africa
- Incorporated both positive and negative credit
information and can be accessed easily through the
Internet
- Other value-added services were the selling point of
CompuScan’s success
2) TransUnion Central America (TUCA) - Regional credit bureau that effectively brings down costs
- Provides services to Guatemala, Honduras, El Salvador,
Costa Rica and Nicaragua
- TUCA has raised awareness and highlighted importance
of private credit bureaus
3) SIMAH (Saudi Arabia) - Jointly owned by ten (10) banks
- In absence of a legislative framework to support the
establishment of a credit bureau, Saudi Arabia’s central
bank and participating banks agreed on a Code of
Conduct until the appropriate legislation was approved
- Major telecommunications providers will be joining the
network soon
Source: International Finance Corporation, 2006.

On an international note, a recent World Bank study, that has included fifty-one (51) countries;
it concluded that a credit bureau resulted in crucial improvements in the overall performance of the
respective financial sectors. The study has shown that the creation of credit bureaus is followed by a
noteworthy increase in the quantity of borrowing, particularly to previously excluded sectors like the
micro, small and medium enterprises. Furthermore, there has been a significant increase of lending
probability of a small firm 28 percent to 40 percent. In addition, Brazil’s noted complete reporting of
credit information has lowered the country’s default rates from 3.37 percent to 1.84 percent. It is
expected by the BSP that a centralized credit bureau will reduce non-performing loans in the future
(BSP, 2008).

Center for Business and Economic Research and Development (CBERD)


De La Salle University, Manila
Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

Miller and Mylenko (n.d.) pointed out various best practices that can be adopted from
successful stories around the world about credit reporting. Some of the best practices pertain to the
following:

1) Passing of specific laws regarding the regulation of credit reporting entities – U.S.,
Peru, Israel, Mexico, Sweden, Thailand, Korea, etc. are some of the countries into regulating
credit reporting entities. On the other hand, data protection laws are prioritized by Australia,
New Zealand, Hong Kong, Taiwan, Argentina, and almost all European countries. These
particular nations recognize the importance of the focus on regulating data management rather
than credit reporting agencies as institutions. The Philippines need to further strengthen
current legislation, i.e., the CISA with specific data protection laws to protect all stakeholders in
the financial system.

2) Competition-driven data processing systems and data safety - Most countries rely on
industry self-regulation for protecting data. In other countries, a data protection regulator are
created and given mandate to protect information being collected and distributed. High
technology and competition within the industry also contributes to the efficiency of credit
reporting.

3) Defining purposes for disclosure of credit reports – The definition of a set of legitimate
purposes is a major factor in ensuring privacy and only authorized access to the data. It can be
that credit reports be used for employment purposes. Purposes for disclosure, however, should
be defined well. Disclosure, under the CISA, should be addressed in the implementing rules
and regulations.

4) Consent on credit report disclosure – Germany, Thailand, and Australia laws demand
that a consent of an individual to authorize issuance of a credit report by a credit registry.
However, international best practice proposes that access by tax authorities to the database
should be limited.

5) Notice of refusal of credit as protection to consumers – Credit reporting and data


protection laws world-wide are said to be self-enforcing. Viewing own records by customers
should be in-place and proper notification of refusal of credit should also be established.
International best practice indicates probable success with these important aspects of credit
reporting in place. Nothing specific in the law will inform consumers of refusal of credit under
the CISA.

6) Information on who has accessed the credit report – Reporting by individuals or firms
that has accessed their credit data through the mechanisms in the data base will greatly deter
the mishandling or unauthorized access of credit information.

Center for Business and Economic Research and Development (CBERD)


De La Salle University, Manila
Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

7) Non-judicial mechanism for dispute resolution – In case of erroneous data, procedures


to correct and contest such should be properly included in legislation; CISA will allow this non-
judicial mechanism to facilitate accuracy and reliability of credit information ready to be
efficiently used and processed by the financial system to carry out its functions with ease.

8) Consumer outreach and education – Regulators should take advantage of the


opportunity to re-introduce credit reporting as positive rather than negative in the mindset of
customers and/or consumers. If handled right, the enabling legislation will definitely help re-
orient people of the right attitude about credit that will eventually lead to the development of the
financial system as a whole; The CISA mandates the CCIC to properly disseminate information
about the benefits and costs of credit reporting to stakeholders in the financial system and
educate everyone on the benefits of credit and active participation in the growth and maturity of
the financial markets in the Philippines.

These international best practices have been partly discussed in the previous parts of the
paper. The important aspect to consider at this point is the opportunity that the Philippines has with the
new legislation, i.e., the CISA of 2008. So far, almost all of the international best practices have been
seemingly incorporated. But, as earlier commented, much is yet to be seen and much is expected
about the full implementation of the CISA and the establishment of the CCIC.

4.4. Perception on Credit Bureau Creation and Development in the Philippines

Selected Philippine banks were surveyed regarding the general perception on credit bureau
creation and its development in the country. All the banks who returned the survey questionnaire
expressed general optimism about the banking system’s benefit from the CISA. Almost all the banks,
as well, expressed that existing credit bureaus do help minimize the information gap between borrower-
clients and lending firms. In general, the creation of more credit bureaus will be greatly beneficial in
terms of providing an enabling business environment for all stakeholders in the Philippines’ credit
information system.

This general optimism about expanding credit bureaus, however, should be viewed with much
caution with the seemingly inadequate existing credit reporting laws in providing an enabling business
environment. It must also be noted that the survey revealed the perception about existing consumer
and corporate data protection laws to be lacking. This also includes the apparent insufficiency of
existing privacy and secrecy laws. Although a lot of those surveyed banks agreed that laws regarding
credit and its management, a number seem to disagree as well.

On the side of existing private credit bureaus and private credit-rating agencies, there seems to
be apprehension on the part of private credit bureaus that have existed for quite some time now. This
apparent caution comes from the direct competition that the CIC will provide once its starts operations.
However, this fear of competition may be only in the short-run if current private credit bureaus and
credit-rating agencies fail to competently adjust to the facilitation and ease of credit information transfer
provided for by a central credit information entity.
Center for Business and Economic Research and Development (CBERD)
De La Salle University, Manila
Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

In considering a model country in terms of credit bureau operations, a number of the surveyed
banks chose Singapore among the ASEAN countries and Japan for East Asian nations. The feasibility
of establishing a regional credit information database for the ASEAN seems to look forward to the long-
term according to the surveyed Philippine banks. Harmonization of the credit information processes
and necessary laws was said to be a huge prerequisite.

3.5 Conclusions and Recommendations

Credit bureau creation and development in the Philippines needs the healthy partnership of
government and the private sector, the regulator and the customer, respectively. It seems that the
Philippine experience so far merits the close working of the State and the financial and credit system
that needs to be developed further especially that there is a greater threat that lurks which is the recent
global financial crisis that threatens the bigger financial system of the world.

Note that the existing legal and regulatory framework of credit bureaus is weak and leaves
stakeholders so much to be done. As mentioned earlier, there should be a strategic partnership built
between the regulators and the private sector in the creation and development of credit bureaus and
other related entities.

With the legislation and enactment of the CISA of 2008, the government, private sector, and
other various stakeholders are set-up to improve and address current weaknesses of legal and
regulatory framework issues of existing credit bureaus and other existing credit-related firms.
Specifically, these are the recommendations moving forward:

1) The ideal set-up for the CCIC would be a 50-50 ownership by government and the private
sector (this is based on the relative success of BAP-Credit Bureau Inc. and Dun & Bradstreet
Philippines, Inc., and the need for a healthy partnership of the State and the private businesses
and firms). However, it must be noted that the current law mandates the initial 60-40 ownership
set-up for the CCIC by the government under the lead of the Securities and Exchange
Commission (SEC), but the National Government shall continue to hold such larger ownership
for a period not to exceed five (5) years from the start of CCIC’s operations;

2) In Figure 4.2 where the flow of credit information under the CISA is illustrated, it should be
noted that SME financing can be given focus here. If government is serious in helping SMEs
access the needed financing for expansion and growth, there should be a special focus on
SMEs by the CISA;

3) Technology is high on the list for the success of the CISA and the CCIC. An effective and
reliable infrastructure should be in place. Without appropriate and efficient technology for
database management, success will not be attained. However, it should be carefully stressed
that the price tag will be steep;

Center for Business and Economic Research and Development (CBERD)


De La Salle University, Manila
Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

4) With regional integration as the ultimate goal, international best practices should be carefully
adopted, and it seems that the main features of the CISA were likened and adopted according
to much of world-wide successful stories;

5) To strengthen and acknowledge public-private partnership in the creation and development


of credit bureaus and credit information systems in the Philippines, existing credit bureaus and
credit-related entities should be allowed to thrive and continue doing business with growth in
mind in the long-run. This can only happen if the SEC will have an all-encompassing mindset
in finding consensus in drafting of the implementing rules and regulations of the CISA; and,

6) Government should work from the values of transparency and openness especially at the
beginning of the CCIC. Special interest groups and political favors from all sectors should not
be tolerated.

Center for Business and Economic Research and Development (CBERD)


De La Salle University, Manila
Development of the Philippine Credit Information Database and Credit Guarantee System: Information
Sharing Facilitation and Credit Guarantees for Small and Medium Enterprises

References:

“A Primer on the Credit Information System Act”. 2008. Bangko Sentral ng Pilipinas, Philippines.

“Credit Bureau Knowledge Guide”. 2006. International Finance Corporation-World Bank Group,
Washington, DC, USA.

“Credit Information System Act”. Republic Act No. 9510, 2008. Senate of the Philippines and the House
of Representatives, Philippines.

Interview with Mr. Manuel R. Batallones, Manager, BAP-Credit Bureau, Inc. 2008.

Miller, M. and N. Mylenko. N.d. “Legal and Regulatory Framework for


Credit Reporting: An International Experience”, OPD, World Bank, USA.

Philippine Deposit Insurance Corporation:


http://www.pdic.gov.ph/index.php?nid1=11&nid2=4&rid=2

Primer on the Banking Secrecy Law: http://www.abogadomo.com/primer_bsp.html

Survey of Banks and Other Credit-Related Agencies, 2008. De La Salle University-CBERD.

Tetangco, Jr., Amando M. 2007. “Opening Remarks at the 8th Environmental Scanning Exercise: Basel
II and Risk Management”, Central Bank of the Philippines, Manila.

“The Consumer Act of the Philippines”. Republic Act No. 7394, 1991. Senate of the Philippines and the
House of Representatives, Philippines.

Center for Business and Economic Research and Development (CBERD)


De La Salle University, Manila