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In most developing countries, financial service providers are not yet in a position to use modern credit risk management techniques. Many developing economies still need to establish functional credit information systems in order to improve the quality of financial information. Will they?
Enterprises in developing and transition economies are becoming increasingly aware that successful international, regional and domestic trade requires access to trade finance and e-finance on competitive terms. Enterprises in the formal economy may not have access to credit, partly owing to their own weaknesses and partly owing to structural and institutional deficiencies. These may include inefficient public records systems, inadequate credit reporting and a lack of sharing and pooling, by financial service providers, of information on borrowers. The situation is further aggravated by the fact that many companies still operate in the informal economy. They are not officially registered and they do not pay taxes. Such firms mainly transact with cash and are subject to usurious terms of credit, and they are excluded from the formal financial intermediation. In developing and transition economies, the problems of transparency and information sharing in the formal sector and the persistence of the informal economy are the main obstacle in introducing innovative electronic credit information and risk management techniques. As a result, many of them are forgoing the opportunity for considerable improvements in access to trade-related finance and e-finance. Internet-based information and communication technology permit firms to communicate, network and transact at much lower costs, and are improving the quality of information flows. Credit information systems can develop only if an adequate regulatory and institutional framework encouraging financial reporting and data disclosure is in place. That should give rise to well-developed public records, including public and court registers, availability of data from independent sources, and a readiness on the part of enterprises and financial service providers to share and pool credit information. The main functionalities of e-credit information providers include credit information databases presented in a highly standardised and commoditised manner. It is possible to construct such databases as a result of the regular inflow of detailed information on companies. The software and credit risk management firms offer a variety of software tools to help companies automate their credit analysis and management processes, which frequently involve internal credit scoring of their customers. Such programmes collect and aggregate the data throughout the organisation and make it available for all departments of companies and especially for those taking decisions to sell on credit. While many SMEs may not be able to afford in-house sophisticated credit decisions systems, large companies may be able to use modern software tools to support their credit decisions and improve the efficiency of their credit and collection functions. As the trends show, all the major credit insurance companies worldwide have developed their in-house e-credit information databases on credit risks. They also buy credit information on the market. Both sources help them to overcome information asymmetry and extend credit information coverage, issue bonds and guarantees, develop e-credit rating and scoring, and provide credit management services for the enterprises. Typically, e-credit insurance platforms insure online sellers against the risk of buyers' non-payment. They also provide such services as e-credit opinion and e-credit rating. Thus far, the development of credit insurance in India, China, Thailand, Malaysia and other Asian countries is tremendous. These countries have succeeded in developing national export credit agencies focussing on insuring national exporters against possible defaults of foreign buyers. All of them are building up online services locally and are trying to join various regional and global networks. While the Indian Export Credit Guarantee Corporation and Malaysia Export Credit Insurance Berhad are already established institutions and are instrumental in supporting exports of goods and services especially by SMEs. The process of creation and development of credit information in other countries of Eastern Europe, the CIS, Asia and Latin America is also under way. However, the situation is worse in the respect of Africa, and especially its sub-Saharan region. Unfortunately, the majority of developing and transition countries do not yet have credit insurance facilities. Meanwhile, many countries are just starting to take steps in building credit information, credit insurance and other trade-finance-related facilities. Well functioning national credit information systems and efficient linkages with sources of information on foreign risks are crucial for managing financial risks. Given the lack of legacy electronic systems for both credit information and credit insurance in many developing countries, it is quite feasible for them to start from the outset using internet-based electronic platforms to accumulate information on credit risks or to extend e-credit insurance. Such platforms are easier to link to major ones, as small credit insurers need the reinsurance capacity of major credit insurance or reinsurance companies. By joining such major e-credit information databases, they may start getting online reinsurance cover for their insurance policies. Initially, that would be policies issued for local traders selling OECD or other low-risk markets. With more positive experience, the appetite for higher risks will increase.
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