July 13 2006

Ukrainian Credit bureaus to ride consumer borrowing wave

by Olga Gnativ, Kyiv Post Staff Writer

© Serhiy Zavalnyuk
Andriy Kiyak, the head of the International Bureau of Credit History

Three major Ukrainian credit bureaus are awaiting licenses to launch the country’s first regulated operations, catching the wave of increased borrowing by consumers and small businesses.

However, key legislation and a regulatory framework will need to be approved to safeguard information and guarantee public trust.

The International Bureau of Credit History (IBCH), owned partly by TAS Finance Group, which is controlled by former National Bank Chairman Serhiy Tyhypko; the Ukrainian Bureau of Credit Histories (UBCH), which is associated with top-five Ukrainian bank Privat; and the First All-Ukrainian Bureau of Credit History (FAUBCH), which was created by the Association of Ukrainian Banks, are all expecting to be approved by the Ukrainian Justice Ministry.

“Today in Ukraine only 20-25 percent of people who are able to make use of credit do so, because of banks’ strict requirements and complicated time-consuming procedures in assessing clients,” said Andriy Kiyak, the head of the IBCH board.

IBCH expects 80-90 percent growth in consumer loans, a 50-70 percent increase in mortgage loans and 70-80 percent in automobile loans in Ukraine within the next three years.

The availability of credit histories on-line will make it possible to assess a new client in 30 seconds, Kiyak said.

“It will be possible to give credits in 15-20 minutes, which could be an advantage for a bank in a competitive market that forces banks to make the supply of credits more customer-friendly,” according to Kiyak.

Currently, a Ukrainian bank can take up to a week or longer to issue a business loan, which has to be approved by the bank’s security service.

Credit bureau information could also facilitate a reduction in interest rates and collateral requirements, improving loan terms to borrowers with a positive credit history, according to Kiyak.

“In numerous markets around the world, a credit bureau is a primary tool to expand the use of credit for home ownership and small and medium-sized businesses,” said Javier Piedra, a senior American advisor with the Access to Credit Initiative project, which is funded by the United States Agency for International Development (USAID).

“Ukraine is one of the last to launch these services, for many complex reasons,” he added.

Piedra said that the introduction of regulated credit bureaus in Ukraine “will lead to more responsible borrowing and improve bank risk management, instilling confidence in the overall banking and economic system.”

Under the Access to Credit Initiative project, USAID is working with the Ukraine’s Justice Ministry and the Association of Ukrainian Banks to develop a credit bureau legislation system in Ukraine.

The establishment of a credit reporting system in Ukraine received a major boost in June 2005, when the parliament adopted the Credit Bureau Law, which cleared the way for data sharing and laid the foundation for the creation of credit bureaus in Ukraine.

Following the adoption of the Credit Bureau Law, the above-mentioned three credit bureaus were established.

“But the next steps essential for the development of a healthy credit reporting industry in Ukraine include the finalization of an effective and business-friendly regulatory framework, bringing it in line with the law,” said Piedra.

Ukrainian legislation covering the collection, processing and distribution of personal data is still in draft form, while the Justice Ministry continues to develop licensing regulations.

The regulatory framework has to be a basis of confidence for data sharing; information must be safeguarded, said Piedra.

“Those prudent requirements will prevent people with no experience from processing confidential data,” he added.

“In the meantime, it is necessary to conduct awareness campaigns aimed at both the public at large and market participants,” according to Piedra, who added: “Just to take one example – some banks, it is my understanding, still do not include consent clauses on their application forms – the whole credit bureau system is nothing without consent. No consent, no exchange of data.”

Until recently, most Ukrainian banks didn’t ask for their clients’ permission to create credit histories for them; therefore, they didn’t have the right to share it with other banks, said Vadym Beresovyk, deputy chairman of Ukrsotsbank, another top-five Ukrainian bank in terms of assets and liabilities.

“This kind of information has a special value. Credit history bureaus have to protect constitutional rights for information,” said IBCH’s Kiyak.

“It is a key point, which dispels fears that the information may be illegally, incorrectly or improperly used,” Kiyak said.

In Ukraine, private and commercial borrowers are assigned a tax number, with which a lender can find information about payments made on loans, insurance policies, utilities and mobile phones.

The State Tax Administration assigned Ukrainian citizens tax numbers in 1996, and despite protests by Orthodox Christian groups, only a small percentage of the population doesn’t have one.

Getting a license to open a credit bureau is more difficult.

A company or individual must have been registered as a business for at least three years and have no tax or other debts.

The Justice Ministry also requires a credit bureau to have a statutory fund of not less than Hr 5 million and a sophisticated software system that runs into hundreds of thousands of dollars.

An Icelandic company called Creditinfo Group is supplying the software to IBCH as well as FAUBCH.

Shareholders in Creditinfo Group, which has been in operation since 1997, include Kaupthing Bunadarbanki, one of the 10 largest Scandinavian banks, and two other Icelandic banks, according to the group’s website.

Creditinfo Group has had a subsidiary in Ukraine since last summer and holds a 33 percent stake in IBCH.

“We plan to get the license by September and then start working,” said Kiyak.

A credit bureau needs at least 500,000 individual credit histories to be able to operate, according to him, and this takes about six months to accumulate.

“Establishing a credit bureau is a cakewalk, developing a credit bureau takes years of hard work, especially in a voluntary system like in Ukraine. And it is impossible to say for sure when all the regulations and other work will be affirmed and brought to action,” said Access to Credit Initiative’s Piedra.

USAID is helping the Justice Ministry to draft regulations to facilitate the monitoring of credit bureaus.

“The regulations must find a balance between protection of confidential and private data processed by credit bureaus and the free flow of information that is essential for any market economy,” said Piedra.

Also important, according to the USAID advisor, is that credit bureaus cooperate and share information, as this will influence the quality of the general market and depth of each credit bureau in particular, he added.

“Fragmentation and lack of cooperation significantly damage the performce of credit history bureaus,” Piedra said.

“There can’t be a monopoly of one credit history bureau,” said Kiyak.

“Today, every bank has its own clients’ credit history database, which is not shared with other banks, and it is impossible to protect yourself from bad borrowers, who often switch banks,” said Ukrsotsbank’s Beresovyk.

“We would like to cooperate with all credit bureaus, but here it is more a question of database volume,” said Ukrsotsbank’s Vadym Beresovyk.

The demand for independent credit bureaus is pretty big,  Beresovyk stressed.