Do credit bureaus improve credit availability and if so, for whom?

The conventional wisdom is that the exchanging of information on an individual or firm will go a long way in determining credit worthiness, thereby improving credit availability. When a bank evaluates a request for credit, it can either collect information on the applicant first-hand, or it can source this information from other lenders that have already transacted with the applicant. Information exchange between lenders can occur voluntarily via “private credit bureaus” or it can be enforced by regulation via “public credit registries.”

The process that is used in a given economy is an important determinant of credit market performance. Information sharing may mitigate adverse selection in the credit market and reduce moral hazard by raising borrowers’ efforts to repay loans. It can also reduce excessive lending as borrowers may consult multiple banks. Perhaps for these reasons, collecting cross-country information on credit bureaus and credit registries is now becoming the focus of a number of initiatives such as the World Bank’s Doing Business project.

However, one cannot help wondering whether the conventional wisdom outlined above is accurate or not. If it is true then does it apply equally to all types of firms and countries? As important as this questions is, attempts to answer it are still in their infancy. One example is a recent study by Brown et al. (2009) published in the Journal of Financial Intermediation. The study attempts to empirically verify the impact of information sharing on credit availability and how the size of the impact varies across different types of firms and countries.

Using data on 24 transition countries in Eastern Europe and Central Asia (ECA) from the Doing Business project and Enterprise Surveys (BEEPS), the study confirms that better information sharing improves firms’ access to credit, as measured by cost and availability. More interestingly, the study confirms that information sharing is particularly valuable in settings where the contracting environment is unfavorable to lending activity, either because low accounting transparency increases the cost of screening potential borrowers, or because poor legal protection makes loan contracts hard to enforce.  The main findings of the study can be summarized as follows:

1. On average, information sharing is associated with significantly more abundant and cheaper credit.  For example, in the baseline model specification, raising the level of information sharing from its lowest to highest value (0 to 4.6) increases the credit access indicator by about 24 percent of its mean value.
2. The relationship between credit availability and information sharing is stronger for opaque firms than transparent ones, where transparency is defined as the reliance on external auditors and the adoption of international accounting standards.
3. Information sharing improves both credit access and loan contract terms in countries with worse protection of creditor rights.  In countries with good creditor protection, information sharing actually decreases credit access and makes loan contract terms less favorable.

How relevant these findings are in other developing countries remains to be answered. Let’s hope the important issues discussed here receive greater attention from empirical economists in the future.