Can there be affordable and appropriate information sharing?

As financial sectors deepen and become more competitive, credit information sharing will increasingly become a necessity for the healthy functioning of markets.

In many countries, microfinance institutions are beginning to compete with each other and with other commercial players that offer similar products, such as consumer loans, to vast numbers of low-income clients.

Like the consumer lenders before them, microfinance institutions are also beginning to see the value of sharing information. Yet, credit information markets are generally in their infancy in most developing countries, and if developed, are generally quite fragmented.

Microfinance institutions, particularly those in competitive markets, need to share information and will benefit from credit bureau consultation:

• sharing information on client histories will minimise the risks of lending and help maintain the healthy portfolio quality, ensuring institutional survival
• credit bureau consultation helps reduce transaction costs and increase institutional efficiency by rapidly identifying clients with poor repayment histories
• savings derived from greater efficiencies produced by checking can be passed on to the customer
• information sharing is constrained because credit bureaus are unavailable, inaccessible or inappropriate to unregulated microfinance institutions
• governments, microfinance institutions, and donors can help promote healthy credit information markets

Setting up a credit bureau requires superior technology, business marketing

However, setting up a credit bureau is not a simple matter. It requires superior technology, business marketing sophistication, and the ability to attract as subscribers large and multiple clients. With a large subscriber base, a bureau can have something useful to offer, in addition to securing its financial sustainability.

Linking up with a private credit bureau would appear to be a good alternative for microfinance institutions

Where available, linking up with a private credit bureau would appear to be a good alternative for microfinance institutions. Cost is a real issue, particularly for small microfinance institutions that lack the volume of transactions to negotiate better deals with credit bureaus. An idea that should be explored is the possibility of negotiating a "bulk" price with a private credit bureau through an association of microfinance institutions.

Without the burden of bank secrecy laws, public credit risk agencies could hold considerable potential, particularly if the management of the credit reporting aspects were subcontracted to a private firm. This model combines the power of mandatory reporting and responsiveness to client information needs with universal access for those who require positive and negative information for making business decisions.

All actors must develop an effective policy and institutional framework for client information sharing

As markets become more complex, the development community must be prepared to respond. Government authorities, donors, technical assistance providers, microfinance networks, banking and commerce associations, and large institutional users must work together to develop an effective policy and institutional framework for client information sharing. Providers of goods and services and consumers alike will benefit.

In the end, this will also help the microfinance sector, which, as is becoming clearer and clearer in many countries, is no longer the marginal entity it once was.