Impact Story

The Banking and Payments Authority of Timor-Leste (BPA), the nation’s embryonic central bank, approached the World Bank, and through them FIRST, with a request for technical assistance to help create a credit registry in June 2005. The project had proposed that the BPA would be the operator of such agency during the initial period that the institution would not be able to function independently. The BPA requested assistance in drafting/agreeing the necessary guidelines/changes in regulation for the credit registry to operate effectively and in selecting an accurate technology application to run the system.

The Financial Sector

Timor-Leste has been in the process of being rebuilt from scratch from the time that the United Nations Transitional Administration took over in September 1999. Since independence in May 2002, the Government has continued this task. Timor-Leste had a unique opportunity to design and implement its entire legal and economic framework, with international assistance, in accordance with the most modern and the best international practices and standards.

The commercial banks were engaged in the provision of short-term finance but also provided long term finance for housing and larger corporate borrowers. They offered traditional retail banking services, including current, savings and term deposit facilities, short-term and medium lending facilities, trade finance, foreign exchange trading activities, safe deposit facilities and other banking services.

Credit Culture

BPA considered that a poor credit culture was a particular weakness in the financial sector. Micro-finance institutions had reported severe losses on lending activities. The Microfinance Institution of Timor-Leste (IMFTL), the licensed quasi-bank, had also reported severe losses on micro-finance activities and had moved to the financing of civil servant loans with repayment by means of payroll deductions. The First Small Enterprises Project, a project financed by The World Bank, reported a loss of around 25% on its credit portfolio. Before 1999, Timorese lived in a culture where reimbursement of credit was not expected.

Furthermore, a complete commercial legal framework was lacking. The BPA believed that insufficient availability of credit information, a deficient legal framework, a volatile macroeconomic environment and a poor credit culture explained the high cost of credit in the country and kept the number of borrowers relatively low. The poor credit culture was partially due to the lack of precision in identifying creditworthy borrowers, and this could be mitigated through the activities of a credit registry. The credit culture had implicitly forced the best credit risk to subsidise the worst credit risk, which had adversely affected the general growth of credit and prevented the diversification of credit products in Timor-Leste.

Furthermore, it was quite possible for borrowers not only to default on loans without affecting their credit standing with other financial institutions but also to obtain loans in two or more institutions with the same guarantee or collateral. There was also a tendency among borrowers to have their assets (used as collateral) overvalued in relation to the amounts of the loans they obtained. This resulted in losses on defaulting loans.

Lessons learned:

A strong commitment from the Central Bank is crucial if some key stakeholders are not fully supportive initially of a credit registry or if they want to limit its membership.   BPA played a key role in convincing banks to agree to the consent clause and to accept that the microfinance banks could be part of the Credit Registry.

Reports:

• The Consultants Report which provides a useful Guidance on the steps needed to develop a Credit Registry where none had existed before. The Central Bank is the initiator and this follows practice elsewhere: seems almost a pre-condition before any private Credit Bureau sector can develop.