As a new and young banker back in the 1980s, CIBI was viewed as the pioneer credit bureau in the Philippines. Times have changed and it is now just not the same. I now know there’s a new credit bureau agency (called the Credit Information Corp or the CIC) created by law in 2005 which unfortunately will only now will be establishing a national credit bureau and will be maintaining a database which will capture data from a variety of data sources in addition to just bank loans. Pension account (SSS andGSIS). NSO (National Statistics Office). Land Registration Authority (LRA). Home Mutual Development Fund (HDMF). In fact around 11 government agencies. All this to ensure literally the entire 100 million residents in the country will each have a credit record. Let’s hope one end result of the CIC is giving a credit score for each resident that can help them have a better access to credit. In the interim, please read this article of how CIBI has helped in the development of the local capital market.
IT has been 30 years since Credit Information Bureau Inc. or CIBI was organized to promote capital market development, more specifically, to establish a nationwide credit information system in aid of better credit decisions: Now renamed CIBI Foundation, Inc., it is an example of public sector-private sector cooperation that has generated rewarding results, and continues to provide social dividends. Here is a bit of its history, instructive in the way government takes the initiative, then leaves it to the private sector to carry on.
The Dewey Dee scandal precipitated it all
On January 15, 1982, the newly-appointed Central Bank Governor Jaime Laya now faced with a headline-grabbing financial scam called the ‘Dewey Dee scandal.’ Dewey Dee was a high-profile businessman who had managed to accumulate a pile of debts from several banks and other financial institutions which all gave him credit liberally. By the end of December 1981, Dewey Dee and his family hastily moved out of the country, leaving all his borrowings unpaid and his creditors fuming in helplessness. A large part of the problem was that the bank lenders were unaware of what each one had lent to Dewey Dee, which, if they knew, could have alerted them to the unduly high risks which had built up. In other words, there was a failure of credit information exchange.
A Credit Information Bureau
CB Governor Laya had mentioned then that his basic policy choices to address the financial system-wide problem was either to impose additional, stricter regulation on lending practices (under a martial law regime, this seemed a very feasible approach), or to create the conditions for a wider availability of credit information to allow lenders to make better credit decisions. To the credit of Jimmy Laya, he opted to develop the better sourcing and exchange of credit information as a longer-lasting solution to the need for the responsible dispensing and use of credit. To implement this idea, he thought of creating the Credit Information Bureau, Inc. or CIBI.
CIBI, he envisioned, should be a non-stock non-profit company that should be a private sector endeavor since it will largely serve the needs of private business, but it would have to be supported by government, particularly the regulatory agencies, i.e. the Central Bank and the Securities and Exchange Commission. The Financial Executives Institute of the Philippines (FINEX) of which Jimmy Laya was a member, was the institutional partner chosen from which to recruit the private sector representatives in CIBI. FINEX, after all, was the leading organization of financial executives and practitioners, and in its ranks were represented the major credit providers and credit users.
The incorporators for the CIBI were recruited from representatives of the Central Bank, Securities and Exchange Commission (SEC and FINEX.
The Articles of Incorporation of CIBI mentions its Primary Purpose:
To engage in the business of collating, developing and analyzing credit information on individuals, institutions and all types of business concerns; develop and undertake the continuing exchange of credit information among its members and subscribers; provide an impartial source of credit information for debtors, creditors and the public; and to cooperate with and assist government agencies in their credit information requirements.
Since CIBI was starting from scratch, the Central Bank, through Governor Laya, provided a special grant of P1.5 million for initial operations. The first office was located at the Philippine International Convention Center (PICC).
The Credit rating business
Manuel “Manny” Abello was some kind of consultant to Central Bank before he was appointed chairman of SEC. He had come from the law firm Angara, Abello, Concepcion, Regala and Cruz (ACCRA), at that time widely known as a favored law firm of President Marcos.
Manny wanted to promote the issuance and trading of corporate commercial paper (or CPs). To protect investors, he thought SEC should require CP issuers to backstop their issuances with a stand-by letter of credit equivalent to, as I recall, the value of 25% of the issue; or to have a credit rating. The stand-by L/C would have been very expensive, and so the more feasible arrangement would be to have a credit rating. Since there was no credit rating agency operating at that time, Manny asked CIBI to do the credit rating since its credit information bureau function was related to credit rating some way. Thus started the credit rating function of CIBI.
Lacking the track-record and credibility, CIBI proceeded to perform credit ratings through two layers of evaluation. A full-time staff did the credit rating research and analysis and produced the first layer of credit opinion. This was submitted to an External Credit Rating Board, which reviewed and deliberated on the credit opinion, and produced the final credit rating.
THE External Rating Board members were not Cibi employees but were active practicing professionals or business executives, recognized for their expertise in their respective fields of specialization, and above all, for their integrity. They represented various business sectors which provided the External Rating Board the depth and breadth of knowledge and experience to bear down on the credit rating deliberations. These circumstances, it was thought, would give the initial credit-ratings the credibility that a start-up analytical staff may not have. In fact, the External Rating Board proved to be most useful for assuring not just quality but consistency in the ratings process, when in the beginning staff turn-over was fairly high.
The External Rating Board members were originally mostly recruited from the trustees. Understandably, many were expert accountants and finance practitioners but care was exercised to bring in others who represented different business sectors or industries. The unanimous acceptance of a new member by the whole board was the observed norm, since the board members were collectively responsible for every credit rating issued.
The External Rating Board was convened when a rating was submitted for review and finalization. Where there was a possible conflict of interest in a member’s participation, he or she would inhibit from the deliberations and would not have any access to the information about the subject matter of the rating. This rule was strictly observed and, further, the Issuer subject of the rating could request the exclusion of a board member in the rating process on grounds of conflict of interest.
IT is important to recall that it was martial law that prevailed in 1982, when Cibi was founded, and it was Presidential Decree 1941 issued by President Ferdinand E. Marcos on June 27, 1984, which greatly facilitated the start-up and viability of Cibi’s operations as a credit information bureau. In fact, PD 1941 was entitled “Recognizing and Supporting the Credit Information Bureau Inc.,” and was very specific about directing government support to Cibi.
“Although pursuant to a Letter of Instructions 1107 the Central Bank organized the Credit Information Exchange System, operating under the Central Bank’s Department of Loans and Credit, this did not suffice to grant the System access to all the needed credit information from government agencies and private institutions “because of certain doubts” regarding the legal ability of said agencies and institutions to make available to them credit information. PD 1941 addressed this concern and removed any legal obstacle. The recital of PD 1941 provided that “it is advantageous and in the public interest to make legally available to the Credit Information Bureau Inc. credit information in the possession of government and private entities…”
PD 1941 was a complete enabling legislative authorization to access information comprehensively from government and private sources.
Contribution to capital market development
THE greatest contributions of Cibi Foundation in the last 30 years are the establishment and nurturing to growth of two Philippine capital market institutions: CIBI Information, Inc. and PhilRatings, which are essential components in the framework of capital market development in the Philippines.
Cibi Foundation now moves to new areas of endeavor to promote the growth of our domestic capital market, keeping in mind the contemporaneous efforts to develop as well and to integrate the Asian regional financial markets.