A new report released by the Makati Business Club (MBC) and the Policy & Economic Research Council found that the Credit Information Sharing Act (CISA) in the Philippines has resulted in an underperforming credit information sharing system. The report, titled Philippine Credit Information Study, offered recommendations and possible amendments to CISA in order to improve and modernize the credit information sharing system.
CIC “Identity Crisis” Must be Fixed — Stakeholders across the credit information ecosystem noted the “multiple roles” of the CIC as a body with regulatory functions, a PCR, and as a competitor to private credit bureaus/SAEs. This increases business uncertainty and results in an unfocused CIC. The multiple roles of the CIC, which may be causing systemic harm to the credit information sharing market, is due in large part to its efforts to cover operating expenses.
Government Should Boost Funding for the CIC — One of CIC’s biggest challenges is its need to earn revenues and cover operating expenses. CIC has faced continual budget shortfalls which have required its leadership to spend considerable time raising revenue from outside sources rather than advancing the CIC’s mission, growth, and development. As a result, CIC leadership was forced to put the CIC in direct competition with nascent SAEs in the credit reporting market—the primary means by which early-stage credit bureaus earn revenue. The result of this market distortion—a government agency competing with private sector companies—has been detrimental, including under-investment by all SAEs and the exit from the Philippine market by the world’s largest credit bureau. The value of an optimally structured, well-functioning credit information sharing system to the national economy is in the (hundreds) of billions of pesos (e.g. up to a 45% increase in lending) each year. Given this upside, the government of the Philippines would be well-justified in covering the cost of maintaining an effective traditional PCR, which CIC puts at more than Php 150 million per year.
CIC Data Quality Needs to Be Improved — The CIC’s achievements with regard to consolidating credit data from a diverse set of contributors from across all sectors of the financial system within the last five (5) years, and ultimately becoming the largest and most comprehensive credit database in the Philippines is deserving of merit. However, the SAEs and some of the largest SEs are not satisfied with the quality of its data. A possible solution to address this is to effectively offload the challenge of data matching and data quality to the private sector, i.e. the SAEs/PCBs. SAEs would then compete on data quality, and the dynamic of a competitive market would greatly improve this situation to the direct benefit of the financial sector and the Philippine economy. However, this would require further study on its feasibility.
CIC is Best as a Traditional PCR— The CIC should focus on gathering consumer credit payment data for use in micro- and macro-prudential oversight and regulation, generating and publishing statistics, informing policy (monetary), and helping to ensure the safety and soundness of the Philippine financial sector, in addition to helping close data gaps in the overall information sharing market.
BSP may be a Better Regulator of the CIC — The SEC has limited regulatory authority in the context of credit reporting and has been an arm’s length supervisor of the CIC over the years—in some measure owing to a lack of clear oversight authority in the CISA. This arrangement is also inconsistent with well-established international best practices which overwhelmingly involves housing the PCR squarely within a nation’s central bank. The reasons for this are straightforward—the central bank’s primary functions are enhanced by data gathered and maintained by a public credit registry. In the case of the Philippines, the BSP also collects data from regulated lenders that can be used for cross-referencing with the CIC’s data to ensure broader and more robust compliance with CISA—something the SEC cannot do. The BSP also appears interested in pursuing a commercial credit database for SMEs. Since CIC already collects such data, unneeded, redundant data collection efforts should be minimized (this should be the case regardless of where the CIC is housed). Moving the CIC to the BSP and clarifying the BSP’s supervisory powers would serve to enhance the overall value of the CIC to the CIS ecosystem, would increase SE compliance with the CISA to the benefit of the financial sector and the economy, and would reduce business uncertainty in the credit reporting and credit scoring markets, also to the benefit of the financial sector and broader Philippine economy. This recommendation will require further study on its feasibility and viability.
CIC Adding Value Despite Real Constraints—Despite the CIC’s current identity crisis and myriad other challenges (some of which have nothing to do with the CIC and are more the product of non-compliance by SEs, and pressure on the CIC to raise revenue to cover operating costs), the CIC has notched some notable accomplishments. Firstly, the volume of data submitted to the CIC for use in credit reports and value-added services has increased steadily overall and dramatically of late. This outcome seems highly unlikely but for the dedication and effort of a mission-oriented CIC leadership and staff. Secondly, the use of CIC data, while still relatively low compared to an optimal use rate, has also grown steadily in large measure owing to education and awareness-raising by the CIC.
Some Amendments to the CISA Need to be Considered — A financial infrastructure as vital as the national credit information system cannot be permitted to continue to underperform relative to where it should be 12 years after the enactment of the CISA. Failure to act will dampen competition and innovation in the financial sector (e.g. under-development of FinTech), resulting in higher priced credit, more systemic risk, and less credit available overall to borrowers and MSMEs. The net result is a broken credit information system that stymies lending to the private sector. This, in turn, dampens overall economic growth and performance.
“Despite real progress in building a database to drive financial inclusion for MSMEs and individuals, much work remains to be done. At this point, the largest impediment to progress is the CISA itself. Reforms will go a long way toward putting the financial sector on the right path,” said Dr. Michael Turner, President and CEO of PERC.
This report was presented at the Philippines Credit Information System Forum, attended by over 400 people. The livestream can be accessed here and our presentation here. A roadmap for change is forthcoming!