THE FIRST CREDIT BUREAU

UV0893

This case was written by Bidhan Parmar (MBA/PhD ’09) under the supervision of Wei Li, Associate Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2006 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 9/06.

THE FIRST CREDIT BUREAU

Javier Piedra was anxious. Piedra was a senior consultant in the Financial Sector

Initiative (FSI) of The Pragma Corporation. Pragma, a northern Virginia–based international development consulting firm, had won a bid put out in 2001 by the United States Agency for International Development (USAID) to help develop a credit bureau in Kazakhstan. Piedra and a team of four local consultants had spent the last two years assessing the market opportunity, preparing a business plan, and making the case to senior Kazakhstani government and private-sector officials that it was possible to develop a well-functioning private credit bureau based on international best practices. Key stakeholders accepted much of FSI’s theoretical argument but it was not clear that the financial community was willing to transfer their proprietary data, perhaps their most important asset to a credit bureau.

By 2003, the project had proven exceedingly difficult because of the financial

institutions’ reluctance to share their customers’ private account information. The banks wanted a guarantee that the information would remain secure and be used responsibly. Much of the information in the central bank database had been collected without obtaining customer consent. Because there was no clear legal and regulatory framework in Kazakhstan for data-sharing and the existing legislation favored bank secrecy, one solution was for the National Bank of Kazakhstan to mandate the data-transfer and become a majority shareholder in the credit bureau. FSI strongly believed that a privately owned credit bureau would function more efficiently than a public one. With complications increasing, it seemed that the development of a best practices credit bureau was unattainble in the foreseeable future.

There was, however, strong support for the idea from USAID, FSI, and many banks in

Kazakhstan. In order to move forward, FSI had to navigate around three complex issues—it had to decide on the best ownership and governance structure for the credit bureau, secure a legal basis for sharing credit data, and convice a majority of the banks to share their data. Piedra began to think carefully through his options.

This document is authorized for use only by Wenjing Chen ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

UV0893

-2-

A Country in Transition

Before the 18th century, the region called Kazakhstan was embroiled in tribal conflict. Mongol and Turkic nomadic groups vied for control of this Central Asian land until it eventually succumbed to the growing Mongol empire. The Mongol Khans fortified their position in Asia through unified control of the Silk Road. The later discovery of sea routes to the East weakened the Mongol trading position and ultimately left their empire vulnerable to attack.

Successive invasions brought the region under Russian control in the 1820s. For the next

hundred years there were sporadic but unsuccessful attempts at rebellion by non-Russian Kazakhs, a Turkic people. In the 20th century, the Soviet government began to remold the region by persistent settlements of people, farms, and factories, ultimately transforming the region into a full-fledged Soviet state by 1936. The few remaining nomads were forced to integrate into the centralized economy. The Soviet era increased industrialization particularly in the mining and metallurgy industries. During this period, Russians became the ethnic majority in the region.

As the Soviet Union began its decline, Kazakh nationalism resurfaced; the groundswell

was led by prominent communist party leaders. When it collapsed in 1991, Chairman of the Council of Ministers of the Kazakh Soviet Socialist Republic Nursultan Nazarbayev became the first president of the Republic of Kazakhstan. A map of the Kazakhstan is shown in Exhibit 1.

Kazakhstan was a constitutional republic with an expanded role for the executive branch.

A new constitution adopted in 1995 further increased the powers of the president. President Nazarbayev, the dominant political figure in the country, had been the head of state since 1991. The Kazakhstani legislature consisted of a bicameral parliament, the Majilis (the popularly elected lower house) and the Senate (indirectly elected and appointed by the president). While the legislature had legal power, it was subject to veto from the president.

In the post-Soviet era, Kazakhstan’s infrastructure remained closely tied to Russia’s. The

first seven years of independence were wrought with economic turmoil. Between 1991 and 1995,Kazakhstan’s GDP fell 31%. GDP fell again in 1998 following the 1998 Russian crisis. In 2000, discovery of a vast new oil reserve—perhaps the largest oil discovery anywhere in the world since 1979, in the northern Caspian Sea off the coast of Kazakhstan by a consortium of Western oil companies—boosted investment and confidence in the economy,1 GDP had grown each year after 2000, with 9.3% growth in 2003 (Exhibit 2). The national currency, the tenge, was devalued in 1999, which caused a spike in inflation. Since that time, the inflation rate had been steadily decreasing.

Like most formerly communist regimes, Kazakhstan went through a painful transformation of its formerly Moscow-directed central planning economy. In 1994, the country completed the painful process of price liberalization. In hopes of eventually joining the WTO, government officials reconfigured the economy in several stages. The first phase of privatization

1 David B. Ottaway, “Vast Caspian Oil Field Found ,” Washington Post, 16 May 2000, A01.


UV0893

-3-

transferred small- and medium-size enterprises (SMEs) from state control to employees and powerful insiders. The second phase offered 13,000 SMEs for sale for cash. The privatization was carried out by selling 51% of the companies, with the remaining shares held by the State Investment Privatization Funds. For larger companies, owners were found on a company-by-company basis.

The banking sector had changed dramatically since independence. In the Soviet era, the

central bank of the Soviet Union, the Gosbank, and five specialized banks under its supervision, were reponsible for allocating all financial resources in the economy. Immediately after independence, the banking system in Kazakhstan consisted of the National Bank of Kazakhstan, which had been a branch of the Gosbank, the five specialized banks, and 72 new commercial banks established by enterprises. The banking system then experienced rapid expansion, boosting the number of licensed financial institutions to 191 by 1994.2 After years of privatization, restructuring, and consolidation in the banking sector, there were only 34 private or joint-stock banks left in the country by 2003, with the seven largest holding 79.4% of the country’s banking assets.3

Banks were clustered in big cities, which meant there was more competition for urban

deposits and loan opportunities than in smaller towns. The largest banks improved their financial strength after Soviet-era nonperforming loans were dropped from their balance sheets. Most of the nonperforming loans were transferred to government-sanctioned asset management companies (AMCs).4 Internationally accepted accounting standards, improved prudential regulation, and the establishment of the National Bank—as the country’s central bank—and the National Securities Commission also helped modernize the banking and financial sector.

The efficiency with which the banking sector worked could be assessed by analyzing a

country’s net interest margin and other measures of financial development reported in Exhibit 3. Net interest margin measured the difference between the average rate a bank charged for lending and the average rate a bank paid for deposits. “A high spread might reflect high overhead costs, high costs of gathering information on borrowers, high loan-loss provisions, high unremunerated reserve requirements, few sources of alternative incomes, and scale diseconomies in small markets.”5 The net interest margin had declined steadily since 1996 in Kazakstan. As a sign of improving efficiency in the banking sector, a majority of banks remained profitable in 2003 despite the norrowing of net interest margins. When compared with other middle-income countries in 2003, however, Kazakhstani banks’ net interest margin was still quite high.

Despite several positive steps forward after independence the financial sector remained

underdeveloped. While the market for government bonds (Treasury securities) had growth in scale, the market for corporate bonds remained immature. The stock market was also small with

2 David S. Hoelscher, “Banking System Restructuring in Kazakhstan,” IMF Working Paper WP/98/96, 1998. 3 IMF country report No. 04/336 page 24. 4 These AMCs included the Rehabilitation Bank, the Agricultural Support Fund, and the EXIM Bank. 5 IMF country report No. 04/336 page 4.


UV0893

-4-

market capitalization at about 8% of the GDP. The REPO (repurchase agreement) market, with a trading volume of $25 billion, was by far the largest and most liquid market in Kazakhstan in 2003. REPOs were contracts for the sale and future repurchase of financial assets, typically Treasury securities. The presence of an active REPO market signaled the degree to which the securities market played a role in short-term government financing; it also signaled a weak long-term corporate securities market. Low levels of market capitalization and liquidity, very few listed companies, as well as little foreign investment made investors cautious about opportunities in Kazakhstan. On the positive side, there was a relatively advanced market infrastructure, moderate economic growth, and a strong plan for privatization. The country was poised to make another significant transition. Setting the Stage for The First Credit Bureau

In September 2001, the Pragma Corporation, a U.S.-based international development consulting firm, won a bid put out by USAID to help develop Kazakhstan’s financial sector. Entitled USAID’s Financial Sector Initiative (FSI), the project had four components: developing infrastructure to support mortgage lending, financial instruments development, pension reform, and formation of a credit bureau. In the words of FSI’s Chief of Party, David Lucterhand, “FSI is developmental investment banking. That’s what we do best—investment banking.”

By end of the fourth quarter 2001, FSI had completed a feasibility study regarding a data-

exchange system in Kazakhstan. It pinpointed the specific opportunities, identified barriers, and concluded that it was possible to establish a credit bureau. Based on those results, USAID gave FSI’s credit bureau component the green light to proceed. Before 2002, the country had a rudimentary credit-reporting system, housed at the National Bank, which collected loan information and other personal information from banks monthly. To complicate matters, none of the information in the credit registry was collected with customer consent.

The feasibility study identified that an important roadblock to developing a credit bureau

in Kazakhstan was that no clear legal basis existed for the level of information-sharing required by a well-functioning credit reporting system. “Kazakhstan law … prohibits and/or significantly restricts the accumulation and distribution of certain types of personal data.” It became clear to FSI that in order to lay the foundation for success, the country would need a new legal framework. The current laws against dissemination of personal information would threaten the viability of a private credit-reporting system. In addition, early drafts of the law envisioned mandatory transfers of personal data into the database—a clause FSI did not support because it would not respect a person’s right to privacy and was fundamentally at odds with generally accepted data-sharing principles around the world. Mandating data transfers, however, was the only way to get around banking secrecy legislation, according to sources in both the public and private sectors.

FSI realized that in order to build the necessary trust, the credit bureau would have to

begin by using data only from consenting customers and make the process as transparent as


UV0893

-5-

possible. FSI continued to deliver a consistent and simple message in a series of presentations and tête-à-têtes highlighting best practices of successful credit bureaus. FSI and leading government officials outlined the necessary parameters of a new legal framework:

• Define a credit bureau and its functions, obligations, and rights under Kazakhstani laws.

• Establish the basis for a fully functional and independent private-sector institution.

• Protect the privacy and confidentiality of personal and corporate financial information.

In 2002, government officials agreed that a credit bureau would be favorable for economic development. Vigorous discussion ensued about how best to organize the credit bureau. An initial agreement was that the National Bank be the founder and shareholder of the credit bureau. Officials believed that the role of the central bank would help in the early developmental stages of the credit bureau. They also envisioned selling the National Bank’s shares to private banks within three years of establishment, thereby privatizing the credit bureau.

Since the project’s inception, FSI believed government ownership, albeit temporary, was

a suboptimal solution, as it conflicted with international best practices. After another year of discussions and presentations, leading government officials agreed that at least part of the credit bureau should not be under state control. They decided to separate the credit bureau into two main branches—one that would handle credit reporting for legal and business entities and another that would be for consumers. They agreed that the consumer credit bureau should be established by an independent private organization. While a step in the right direction, FSI was still not satisfied with the arrangement, and doubled its efforts to have a single credit bureau that would avoid data fragmentation in the relatively small market of Kazakhstan.

Potential disagreement over the credit bureau’s ownership and management structure

posed significant problems in establishing a “full-service” credit bureau in Kazakhstan. Data fragmentation could arise as a result of some user groups holding their proprietary information in discrete databases that were closed to other users. For example, a group of large banks that constituted a significant portion of the lending market could decide, for competitive reasons, not to share their data with other commercial banks or vice versa. If the credit data were to become fragmented, the credit bureaus developed would experience a longer period to develop and mature, thus pushing out the financial breakeven point past the five-year range.

Getting banks to agree to share their data was only the first of many hurdles. The credit

bureau would have to build the appropriate IT infrastructure to allow seamless sharing of data from multiple and diverse sources, as well as quick credit-report interpretation and cross-checking. Fortunately, the banks in Kazakhstan had a well-developed IT infrastructure, mostly running on Microsoft Windows servers and workstations, making the challenge more manageable. The team would also have to find a general manager for the credit bureau as well as 15 full-time employees to run the day-to-day operations. They required $2 million of startup capital, and estimated breakeven would occur in two years.


UV0893

-6-

Getting Credit in Kazakhstan

Without a developed credit-reporting system, banks in Kazakhstan were concerned primarily with assessing risk exposures, avoiding potential frauds, and complying with regulations in their banking operations. To obtain a loan, an individual had to collect letters of certification from other banks regarding the status of their debts and accounts. Banks struggled to validate the identities of applicants and reduce fraud. The system was inefficient and burdensome for the banks as well as the applicants.

In contrast, when someone applied for credit in the United States, regardless of whether it

was at a bank, a car dealership, a mortgage broker, or a store, the process was straightforward. The lender could easily access a variety of credit profiles from large credit-reporting institutions such as TransUnion, Equifax, and Experian. Lenders could even cross-check applicants on multiple reporting services to get detailed descriptions of their credit histories. These reports helped lenders to better assess risk, to set pricing and loan amount, and to better judge the ability of the applicant to repay a loan. Building Infrastructure

To operate the credit bureau, the FSI team members had to establish some basic infrastructure. First they needed to aggregate and layer multiple data sets into a single database, which required pulling information from identification records, government credit databases, and banks. They also needed to put in place mechanisms that would update the database monthly. Because the data coming into the credit bureau would be diverse in its content, form, and style, the information had to be standardized, translated, and appropriately sorted. To better facilitate the data-collection process, the team needed to design a data-acquisition module to accept electronic data from customers. All the data had to be maintained by technicians who were responsible for troubleshooting, user assistance, and program monitoring. Some data would also have to be entered by hand into the database. All this had to be completed before the information could be customized and delivered in a final credit profile in an easily accessible format.

The credit bureau initially planned to offer lenders a single credit profile, which was

simply a report of pertinent demographic and financial data about an individual or company. The credit bureau system could also be used to validate identities, a very useful feature in a country where basic identification data were lacking. Early estimates of the price for a basic credit report fell in the range of $1.50 to $5, with expectations closer to $5 per report. The team planned to eventually expand its product profile to include insurance profiles, a service bureau for the National Bank (which would handle the database at the National Bank), database searches, real estate and automobile lien searches, enhanced credit profiles, and a generic risk-based scoring model. With initial operational needs and costs outlined, FSI turned to forcasting the financials.


UV0893

-7-

The Business Plan

The business plan for the credit bureau was laid out in three main stages. The first stage primarily comprised the collection of identification information from government agencies such as the Ministry of the State, taxpayer registration, and the database of RNN numbers (akin to taxpayer ID or social security numbers). The credit bureau would have to convince the authorities to share the data and then upload and process it into one large database. Phase two consisted of layering relevant consumer financial data on top of the identification data. FSI believed that the first two phases could be accomplished concurrently rather than sequentially. Phase three would begin the full-scale marketing and sales of the credit bureau’s products and services, and additional maintenance of the database. Revenues were estimated to begin in phase three.

The business plan presented financial projections for the first six years in operation; see

Exhibit 4. The pricing and market assumptions used in the financial model are listed in Exhibit 5. FSI used historical data on the demand for bank credit as a proxy to estimate the overall demand for credit bureau services over the short term. The initial growth projections were based on experts’ estimates of the potential size of various market segments and the credit bureau’s penetration in each market segment. Because banks did not generally extend credits to individuals with an monthly income below $130, they were not included in the demand projections. The business plan also reflected the fact that the credit bureau expected to finance itself through equity, and as a result, there was no debt and no explicit financing costs over the forecast period. As the business plan was drawn up, the credit bureau also received exempt status on corporate income tax from the government.

FSI had estimated the cost of manually processing a loan application without assistance

from a centralized database to be between $5 and $100, depending on the bank. Therefore, a price of $5 for a credit profile would reflect a great savings for banks. Recognizing the fact that it would be difficult for any entity to collect and maintain needed information for credit reporting, FSI assumed that the credit bureau would operate without a competitor. But competition could always arise in the future. During the development of the credit bureau, problems were expected to occur because the credit bureau’s primary product, the credit report, would exert intense competitive pressure on the current investigative process utilized internally by banks. Without a third party providing reliable credit reports, banks had traditionally employed individuals to investigate retail credit applicants through an extensive network of contacts. The credit bureau would minimize the importance of this privateinvestigative process. Individuals affected would feel threatened and most likely would be inclined to impede the credit bureau’s progress.

The initial financials did not reflect the costs of the R&D that USAID funded (2001–05).

Conservative scenarios assumed higher costs for technical assistance than more optimistic projections.


UV0893

-8-

Decisions

Piedra had many decisions to make. He and FSI had to develop a consistent and coherent plan to persuade banks to share their data, finalize the legal basis for consumer data-sharing, and launch the credit bureau as a private institution. All that had to be accomplished on a short timeline and in a sustainable way that would ensure a lasting and valuable market institution.


UV0893

-9-

Exhibit 1

THE FIRST CREDIT BUREAU Kazakhstan Map

Source: CIA World Factbook, http://worldfactbook.com/country/Kazakhstan/2005.


UV

0893

-10-

Exhi

bit 2

TH

E F

IRST

CR

ED

IT B

UR

EA

U

Sele

cted

Eco

nom

ic In

dica

tors

Kaz

akhs

tan

Sele

cted

Eco

nom

ic In

dica

tors

1992

1995

1998

19

9920

0020

0120

0220

03G

DP

grow

th (a

nnua

l %)

-5.3

-8.2

-1.9

2.7

9.8

13.5

9.8

9.3

GD

P pe

r cap

ita, P

PP (c

onst

ant 2

000

inte

rnat

iona

l $)

4843

3618

3824

4037

4595

5163

5636

6209

Infla

tion,

con

sum

er p

rices

(ann

ual %

) ..

176.

27.

18.

313

.28.

45.

86.

4

Hou

seho

ld fi

nal c

onsu

mpt

ion

expe

nditu

re, e

tc. (

% o

f GD

P)51

.667

.777

.968

.362

.360

.861

.257

.7G

ener

al g

over

nmen

t fin

al c

onsu

mpt

ion

expe

nditu

re (%

of G

DP)

18.2

13.6

10.8

11.5

12.1

13.4

11.6

11.3

Gro

ss c

apita

l for

mat

ion

(% o

f GD

P)

31.5

23.3

15.8

17.8

18.1

26.9

27.3

25.7

G

ross

fixe

d ca

pita

l for

mat

ion

(% o

f GD

P)30

.423

.115

.716

.217

.323

.724

.023

.0Ex

ports

of g

oods

and

serv

ices

(% o

f GD

P)

74.0

39.0

30.3

42.5

56.6

45.9

47.0

48.4

Impo

rts o

f goo

ds a

nd se

rvic

es (%

of G

DP)

75

.343

.534

.940

.149

.147

.047

.043

.0

Gro

ss d

omes

tic sa

ving

s (%

of G

DP)

30

.218

.711

.320

.125

.625

.827

.231

.1

Cen

tral g

over

nmen

t bud

get s

urpl

us/d

efic

it (%

of G

DP)

....

-2.4

9-2

.81

0.09

0.06

0.35

-0.6

1C

entra

l gov

ernm

ent d

ebt,

tota

l (%

of G

DP)

..

..16

.83

26.6

321

.62

17.6

615

.36

13.2

2G

over

nmen

t int

eres

t pay

men

ts (%

of r

even

ue)

....

6.7

10.1

10.0

8.1

7.0

4.9

Taxe

s on

good

s and

serv

ices

(% o

f rev

enue

)..

..41

.651

.040

.042

.938

.040

.8Ta

xes o

n in

com

e, p

rofit

s, an

d ca

pita

l gai

ns (%

of r

even

ue)

....

10.9

13.3

23.6

19.9

38.1

38.9

Taxe

s on

inte

rnat

iona

l tra

de (%

of r

even

ue)

....

4.7

5.4

5.2

5.7

7.0

6.1

A

id p

er c

apita

(cur

rent

US$

) 0.

714.

1414

.77

11.7

012

.71

9.97

12.6

718

.06

Aid

(% o

f cen

tral g

over

nmen

t exp

endi

ture

s)..

..6.

047.

307.

534.

936.

026.

29

Indu

stry

, val

ue a

dded

(% o

f GD

P)

44.6

32.0

31.2

34.9

40.5

38.8

38.6

37.6

Sour

ce: W

orld

Dev

elop

men

t Ind

icat

ors,

2006

.


UV

0893

-11-

Exhi

bit 3

TH

E F

IRST

CR

ED

IT B

UR

EA

U

Sele

cted

Indi

cato

rs o

f Fin

anci

al D

evel

opm

ent

1997

2003

1997

2003

1997

2003

1997

2003

1997

2003

1997

2003

Kaz

akhs

tan

5.0%

18.9

%4.

8%13

.9%

12.9

%5.

0%13

.6%

6.0%

70.2

%58

.4%

0.0%

1.3%

Aze

rbai

jan

6.0%

8.9%

7.7%

6.7%

98.3

%81

.8%

Bul

garia

21.6

%22

.3%

29.8

%29

.8%

11.4

%4.

7%6.

9%4.

7%82

.9%

43.1

%1.

0%B

elar

us17

.2%

7.7%

13.3

%7.

5%10

0.0%

71.0

%C

zech

Rep

ublic

67.7

%29

.5%

57.3

%61

.5%

2.0%

2.5%

3.1%

2.0%

85.5

%65

.6%

12.6

%9.

7%Es

toni

a19

.6%

28.9

%19

.3%

32.2

%4.

0%3.

9%4.

6%3.

3%96

.7%

97.4

%30

.1%

6.2%

Geo

rgia

3.3%

7.8%

2.3%

6.4%

7.3%

12.2

%65

.8%

Cro

atia

31.3

%49

.9%

31.3

%57

.1%

4.5%

4.5%

4.7%

5.1%

66.6

%54

.8%

1.7%

0.8%

Hun

gary

21.4

%38

.1%

37.1

%39

.1%

3.9%

4.8%

3.8%

5.3%

63.0

%56

.4%

16.3

%10

.0%

Kyr

gyz

Rep

ublic

5.3%

4.1%

3.8%

5.6%

8.0%

3.9%

100.

0%Li

thua

nia

9.8%

16.6

%10

.5%

21.3

%6.

7%3.

9%4.

4%2.

6%91

.4%

78.8

%2.

4%1.

1%La

tvia

7.7%

29.3

%13

.4%

24.3

%5.

7%3.

2%4.

4%2.

7%50

.0%

52.6

%1.

4%1.

3%M

ongo

lia6.

8%24

.9%

12.6

%34

.1%

4.6%

6.9%

86.4

%Po

land

18.8

%28

.1%

25.8

%35

.9%

3.8%

3.0%

5.5%

3.7%

57.0

%42

.7%

5.2%

4.0%

Rom

ania

8.1%

8.0%

18.2

%19

.2%

9.4%

7.4%

14.7

%6.

9%99

.2%

55.7

%0.

8%0.

8%R

ussi

a9.

0%17

.9%

15.8

%24

.2%

10.4

%5.

2%9.

8%5.

8%51

.2%

24.9

%4.

0%18

.8%

Slov

ak R

epub

lic47

.6%

35.0

%53

.6%

55.1

%2.

9%3.

4%3.

2%3.

5%67

.1%

74.3

%10

.2%

2.0%

Slov

enia

25.4

%39

.1%

33.8

%50

.4%

3.7%

2.7%

4.7%

3.5%

57.5

%58

.6%

1.8%

2.6%

Uzb

ekis

tan

3.2%

5.2%

3.7%

5.2%

100.

0%91

.1%

0.3%

Uni

ted

Kin

gdom

116.

4%14

0.5%

79.2

%11

0.0%

2.9%

4.3%

2.3%

2.6%

53.2

%45

.7%

62.3

%12

0.1%

Uni

ted

Stat

es36

.9%

43.1

%51

.1%

61.4

%3.

8%3.

5%4.

6%4.

0%33

.5%

26.0

%12

3.6%

142.

2%So

urce

: Wor

ld B

ank

Fina

ncia

l Stru

ctur

e D

atas

et, 2

006

Ban

k C

once

ntra

tion

Stoc

k M

arke

t Tot

al V

alue

Tr

aded

/ G

DP

Priv

ate

Cre

dit b

y D

epos

it M

oney

Ban

ks /

GD

PB

ank

Dep

osits

/ G

DP

Ban

k O

verh

ead

Cos

ts /

Tot

al A

sset

sN

et In

tere

st M

argi

n


UV0893

-12-

Exhibit 4

THE FIRST CREDIT BUREAU Business Plan (all values in US$)

Y1 Y2 Y3 Y4 Y5 Y6

Quantity and Growth Rate AssumptionsMembership 30 100% 70% 50% 40% 30%One-time Service Installation (Software) 3 3 3 6 5 5Service Bureau for NBK (Temporary) 0 0 0 0 0 0NBK Database Search for customers (Interim) 0 0 0 0 0 0Real Estate & Auto Lien Search 850 2400% 200% 80% 40% 30%Consumer and Commercial Credit Profile 0 6,000 700% 100% 70% 40%Enhanced Reports 0 0 0 500 50% 0%Risk Based Score 0 0 0 0 0 0Insurance Search 3000 350% 500% 60% 50% 20%Insurance "Batch" Requests 5 40% 20% 0% 0% 0%

Revenue$250 Membership Fees 7,500 15,000 25,500 38,250 53,550 69,615

$1,500 One-time Service Installation (Software) 4,500 4,500 4,500 9,000 7,500 7,500$500,000 Service Bureau for NBK (Temporary) 0 0 0 0 0 0

$1.00 NBK Database Search for customers (Interim) 0 0 0 0 0 0$3.00 Real Estate & Auto Lien Search 2,550 63,750 191,250 344,250 481,950 626,535$5.00 Consumer and Commercial Credit Profile 0 30,000 240,000 480,000 816,000 1,142,400$20 Enhanced Reports 0 0 0 10,000 15,000 15,000

$0.50 Risk Based Score 0 0 0 0 0 0$1.50 Insurance Search 4,500 20,250 121,500 194,400 291,600 349,920

$5,000 Insurance "Batch" Requests 25,000 35,000 42,000 42,000 42,000 42,000Total Revenue 44,050 168,500 624,750 1,117,900 1,707,600 2,252,970

ExpensesOperating ExpensesEmployee Payroll 112,200 135,900 150,600 158,400 167,400 176,400P/R Taxes & Benefits 36,735 43,118 48,510 50,460 53,160 55,860Rent 27,000 54,000 54,000 54,000 54,000 54,000Utilities/Services 1,800 3,600 5,400 5,400 5,400 5,400Office Operating Expenses 53,005 76,230 104,425 104,620 104,845 105,070Total Operating Expenses 230,740 312,848 362,935 372,880 384,805 396,730

Physical Location Setup CostsLeasehold Improvments 7,000 0 0 0 0 0Office furniture 25,000 0 2,000 2,000 2,000 2,000Telephone Equipment 7,500 500 500 500 500 500Computer Room Construction 6,900 0 0 0 0 0Backup Gas Power Generator 7,000 0 0 0 0 0Total Physical Plant 53,400 500 2,500 2,500 2,500 2,500

Computer Hardware & SoftwareDatabase Server Equipment 30,297 0 6,060 6,060 6,060 6,060Database Other Equipment 41,432 0 8,286 8,286 8,286 8,286Other IT Service Costs 216,386 19,000 19,981 19,981 19,981 19,981

Total Computer 288,115 19,000 34,327 34,327 34,327 34,327

Technical Assistance 500,000 300,000 250,000 200,000 200,000 25,000Training & Marketing 80,000 160,000 60,000 45,000 35,000 25,000

Total Expenses 1,152,255 792,348 709,762 654,707 656,632 483,557

Cash Flow -$1,108,205 -$623,848 -$85,012 $463,193 $1,050,968 $1,769,413

Pricing Assumption


UV0893

-13-

Exhibit 5

THE FIRST CREDIT BUREAU General Pricing and Market Assumptions Used in the Business Plan

General Pricing Assumptions

1. Membership fees priced at $250 per year

a) Alternative scenario: Membership fees waived during first two years

2. Service installation priced at $150 per customer, one-time fee

3. Service Bureau for NBK as a division of the First Credit Bureau offers a temporary service (proposed) for managing the Credit Registry housed at the NBK. Proposed service fee is $500,000 per year.

a) Acceptance by the NBK is not yet received

4. NBK database search priced at $1.00

a) Temporary service using NBK’s credit registry database until Credit Bureau is operating at full production

b) Depends upon acceptance by National Bank of Kazakhstan

5. Real estate and auto lien search priced at $3.00

a) Credit Bureau service charge only (excludes cost of lien)

6. Enhanced reports priced at $20.00 per report

a) Not available until year 4

b) Little development cost involved; can be implemented with existing staff

7. Risk-based score priced at $0.50

a) Future product development does not begin until year 4

c) Expected lengthy process development and testing period

8. Consumer and commercial credit profile priced at $5.00

a) Alernative scenarios: credit report priced between $1.50 and $5.00

9. Insurance products

a) Requests for insurance reports begin at end of year 1

b) Insurance “batch” requests begin in year 1. Assumes a fixed minimum $5,000 fee per “batch” request. Assume a “high demand” product


UV0893

-14-

Exhibit 4 (continued)

General Market Assumptions

1. We assumed certain real GDP growth rates for the Kazakhstani economy. In the base scenario, we used the following growth rates—year 2: 6%; year 3: 5.5%; year 4: 8.2%; year 5: 7%;year 6: 7%. Alternative worse scenario: Year 2: 4%; Year 3: 3%; Year 4: 3%; Year 5: 2%; Year 6: 1%.

2. An analysis of the demand for bank credit in Kazakhstan suggests that the number of bank loan requests will be between 222,000 and 364,000 in 2002. One hundred percent market penetration of loans, therefore, would equal 222,000 or 364,000 profile requests, respectively, in 2002. For the conservative scenarios, we therefore assumed that potential bank loan applications (market size) in year 1 would be 222,000, and would grow initially at 19% per year. We assumed 268,000 potential applications in the more “realistic” scenarios, growing initially at 29% per year. Growth rates came from the same study.

3. We assumed $130 per month as the minimum monthly personal income that a bank would require from a person applying for a consumer or retail loan. Official Kazakhstan government statistics indicate that as of 2001, there were approximately 417,200 wage-earners at the $130-per-month level. We assumed this figure would grow at the rate of the overall economy throughout the projection period We estimate that 417,200 represents between 2% and 3% of the total population. Interviews with banks support these assumptions.

4. As of year-end 2001, there were a total of 2,391,828 voluntary and mandatory insurance policies outstanding in Kazakhstan. Because of the lack of qualitative market research in Kazakhstan, the newness of the insurance industry, the unfamiliarity of specific Credit Bureau products, and population trends, we were conservative and assumed that the potential market for new policies, renewals, and general “shopping” for insurance policies would be approximately 30% of the total 2,391,828 or approximately 717,548. We assume this number will grow at the same rate as the overall economy.

5. Banks reported approximately 1,000 mortgages in 2000, and another 1,000 in the first two quarters of 2001. In addition, at year-end 2001, the mortgage market was approximately $30 million to $40 million at an average mortgage size of approximately $8,000 and $10,000; this implies that the total number of mortgages was between 3,000 and 4,000, respectively. Based on this information, and, given rising income levels, the general availability of credit, and the demand for new dwellings over 2000 and 2001 in Kazakhstan, and, the fact that applications always outnumbered actual mortgages, we estimated new mortgage applications in 2002 to be approximately 3,000 in theconservative scenarios, and 4,000 in the more “realistic” scenarios. We assumed that new mortgage requests would grow at rates slightly faster than the overall economy.


UV0893

-15-

Exhibit 4 (continued)

6. We assumed that major telecommunications providers had a combined customer base 2003 of approximately 800,000 customers, growing at the same rate as the overall economy.

7. We assumed that there were approximately 500,000 automobiles and 500,000 privately owned residential housing units in the cities of Almaty and Astana that could in theory be used as security for consumer loans. This number is assumed to grow at the same rate as the overall economy.

8. The banks reported that there were approximately 5,000 new cars purchased per year in Kazakhstan. These can generate revenue as profiles of car buyers are requested. This number is assumed to grow at the same rate as the overall economy.

9. We estimated that there were approximately 340,000 personal utility accounts and 25,500 commercial utility accounts in 2003 in Almaty, growing at the same rate as the overall economy.

10. Major retail banks processed approximately 515,000 debit/credit card applications in 2001–02. Most credit cards in use in Kazakhstan are either guaranteed by employers, or are actually debit cards. With easier and cheaper means of qualifying true credit card applications, the expectation would be for the industry to increase quickly and steadily, and even attempt to convert a large percentage of debit cards into credit cards. Throughout our scenarios, we conservatively assumed that this 10% “real credit card” ratio would remain the same, and we assumed that overall card applications would grow at the same rate as bank loan applications.


Documents

THE FIRST CREDIT BUREAU