APRIL 2009 48678 ABOUT THE AUTHORS Creating Financial Infrastructure in a Large PRASHAN Transition Economy ­ Lessons from China's PARAMANATHAN is an analyst in IFC's Access to Finance team based in New Credit Bureau Chengdu, China. Prashan has been working with IFC for the past year in microfinance and financial infrastructure IFC and the World Bank have in recent years promoted the development. Prior to joining implementation of credit bureaus as a way of improving access to IFC, Prashan worked for a management consultancy firm, finance for both individuals and businesses. In 2003, no such structure Port Jackson Partners, based in Sydney, Australia. existed for consumer credit information in China. Not only was access LIN HUANG to financing reduced, but the quality of the entire lending industry is currently an Operations was also affected--nonperforming loans represented a significant Officer in IFC's Access to Finance team based in proportion of the portfolio, risk management practices were weak, Chengdu. Lin joined IFC in 2001 and has acted as the Task Team and loans were poorly monitored. However, as this SmartLesson Leader for several Access to Finance projects, including describes, creating financial infrastructure such as a consumer credit credit reporting and microfi- bureau in large countries presents a unique set of challenges. nance development. APPROVING MANAGER Jinchang Lai, head of the IFC Background Access to Finance team for thearea1. Butwasanon-financialgovernment China and Mongolia. China's banking system has historically been a department (especially one operating at the savings-dominated environment. One only third level of government) really the best needs to look at the ample liquidity that floods partner to create part of a national financial the big four banks today to be sure of that. services infrastructure? However, with increasing prosperity and the flourishingofthesmallandmediumenterprise Despite its eagerness and drive, the local SME (SME) market, lending (especially of the bureau was problematic for several reasons. personal kind) is playing a much larger role. As First, it was not in the business of finance, and is true in many developing countries, however, its staff did not have enough credit experience. there are many who have been excluded from In addition, the bureau operated in only one this lending boom. One of the major municipality, did not have the influence to impediments to providing banking access for convince all banks to provide information, and these people has been the lack of historical didnothavethepowertodemandnonpayment credit information. This SmartLesson describes information. While we are all keen to root for the experience and lessons learned from the underdog, unfortunately in this case it instituting a credit bureau in China. would not have been able to finish the race. Lessons Learned In the end, due to the problems encountered, our efforts with the local SME bureau only 1) The leader must be able to lead. produced a "credit investigation" (or business information services) center, which was later While the need for a credit bureau was clear privatized as a local company. While other to us, the concept was still somewhat foreign ministries in the central government also to the banking community at large. In 2003, expressed their interest in working together the main driver pushing us to act was actually on the credit bureau, their strong passion for a local, municipal-level government SME SME development unfortunately did not bureau that was willing to lead the venture, as they saw the benefits it could bring to SMEs in 1 China has five levels of government. The municipal level gener- ally comes below national and provincial, and above county. IFC SMARTLESSONS -- APRIL 2009 1 outweigh their lack of familiarity with banking and initially trust the data of their millions of customers with a finance. new private firm, especially one without any prior reputation.Althoughaprivatecreditbureauisbestpractice, Ultimately, in 2004, the People's Bank of China (PBOC) a public-private structure is a good starting point to build contacted us, seeking to engage IFC in a partnership to trust and cooperation in the system. Don't be tied to best develop a new consumer credit bureau. Due to a strong practice, as a transition to a purely private operating personal connection between our Program Manager and company can happen later. the Director General of the PBOC, among other factors, this partnership grew strongly, and we quickly gained the trust of the PBOC as a neutral party advisor. The PBOC, which had national coverage and influence and staff who were well versed in the world of finance and credit, stood in the best position to lead the development of China's new consumer credit bureau. Largecountrieshavelargegovernments.Largegovernments have a large number of departments and people, all of whom have different, and sometimes competing, interests. Choosing the right government department and the right people in that department to partner with and lead the initiative was crucial in creating China's credit bureau. 2) Understand the sensitivities of major stakeholders and be willing to accommodate their concerns, even if it is not "best practice." Stakeholders gather around the table to discuss how to set up the credit bureau. With the right partners on board, we set about convincing the Chinese banking community of the value of a new credit bureau. Together with the PBOC, we arranged 3) International experts know a lot ... but they need symposiums on best practice, translated best practice codes local solutions. from other countries, and held best practice workshops, which drew in all the relevant officials. In the period between 2003 and 2006, there was much discussion not only on whether the credit bureau should be Unfortunately, there was one big problem with the public or private, but on all the minute details of the design conventional best practice. It said that the credit bureau of the bureau and its operations. industry should be private. One of China's largest banks, with 170 million personal customers, did not trust a new, The central bank had strong ownership over the unproven private enterprise with its customer data2. It developmentofthecreditbureauandadetailedknowledge refused to participate if the credit bureau was purely of the financial services industry in China, but it did not private. Without this bank's participation, the project simply have institutional knowledge on how to create or operate could not progress. The experience begged the question-- the new financial infrastructure. The role of IFC is clear in is a private structure really the best starting point in a this kind of situation--bring in expertise from around the greenfield large country environment? world to build institutional knowledge. To get the bank on board, the partners, with help from IFC, But how best do we use these experts, especially in a large developed a public-private structure. While the new Credit country? Should they design a "best practice" credit bureau Reference Centre (CRC) would be overseen by the central themselves with some input from local sources? Or should bank, it would operate as an independent "public service they be completely hands off and only deliver workshops unit." A public service unit is an entity that charges fees to and symposiums that address large audiences? The question cover its costs of services. It is neither a private company per iscrucial,especiallywhenconsideringthecostofconsultants, se nor a civil service institution. the fact that they may not be familiar with the implementation realities in a large country, and the reality In 2006, the CRC started operations under its public-private that it is not always clear what assistance will be needed. structure. By 2008, the bank that had originally refused to cooperate had made 1.5 million inquiries to the bureau, We found that the most efficient way to use international avoided over 300,000 bad loans, and saved about US$1.2 experts was to engage them in a team with the central billion. Although starting as a public service unit, the CRC bank officials who were responsible for designing the credit has a vision of becoming a joint-stock company in due bureau. During these internal sessions, which sometimes course. stretched on for five days, the experts would answer questions that had arisen, provide input into the proposed Large countries have large banks. Very few of them will designs, and occasionally help structure the partner's 2 This was also a problem when Vietnam tried to establish its credit bureau. Com- thinking. The central bank retained ownership over the mercial banks were afraid that their competitors would steal their customers. See the project, but they had international experts on their team SmartLesson on "Developing a Private Credit Bureau in Vietnam." 2 IFC SMARTLESSONS -- APRIL 2009 that they could use to ensure that their ideas were sound. The method worked remarkably well, and ultimately, a more China-specific system was created and the partners had themselves developed institutional knowledge through the design process. It is difficult in a large country for a consultant to be responsible for designing a piece of the financial services infrastructure by him/herself-- the scope is simply too large, and there are too many actors and interests. Doing so runs the risk of having the recommendations gather dust on a shelf. A novel way of knowledge transfer to the local decision makers--involving international consultants as part of the design team with the local partners in an advisory capacity--not only is more efficient, but it creates a more tailored solution and saves IFC money. Conclusion Creating a financial infrastructure in large countries presents a unique set of challenges. Whether the challenges are who best to partner withamongthedozensofdifferentdepartments of government, how to build trust among large banks, or how to most efficiently transfer knowledge from international experts to local institutions--they all must be addressed in sustainable ways. In large countries, these challenges mean that financial infrastructure projects will have a long and somewhat unpredictable timeframe. The IFC needs to maintain enough flexibility in its approach to adapt to the changing and often ambiguous environment. In this context, a team approach which combines local knowledge and international expertise, working consistently on the project seems to be the best approach. DISCLAIMER Since 2006, the Credit Reference Centre has IFC SmartLessons is an awards been used by more and more lenders, and program to share lessons learned nearly every lender in China is linked into the in development-oriented advisory credit information system. Today, the system services and investment operations. The findings, covers over 620 million individuals, including interpretations, and conclusions some 100 million active borrowers. The success expressed in this paper are those of the CRC is in no small part due to the tailored of the author(s) and do not approach used to address the unique set of necessarily reflect the views of IFC challenges. or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. 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