Microfinance institutions that use credit scoring increase the productivity of their loan officers, thus leading to an increase in the number of borrowers, higher growth in the number of loans, and expanding financial inclusion and developmental opportunities.
Microfinance is a new credit segment that can benefit greatly from the advantages the credit scoring technique can offer. In the developing countries even the professionals are not familiar with the technique of credit scoring and many microfinance institutions that serve millions of borrowers do not consider using it. Since the credit scoring technique did not evolve fast enough to meet the needs of microfinance, its adoption by microfinance institutions is slow and resembles more a historic recurrence rather than a new historical stage. We outline a conceptual framework of credit scoring that enables the use of this technique in micro lending, avoiding the pitfalls of the past.
The use of poverty scoring is associated with increased outreach towards poor borrowers only in nonprofit microfinance institutions while, in for‐profit microfinance institutions, poverty scoring is associated with increased availability of financing. Poverty scoring allows for‐profit microfinance institutions to borrow funds from social investors in addition to funds borrowed from the market. As long as these social funds do not substitute market funds used in financing poor microborrowers, the share of poor clients served increases, so does financial inclusion of the poor.
This chapter aims to present credit scoring as a technology meant to improve micro lending significantly. We consider that credit scoring is an advanced technology because statistical procedures, some sophisticated, are required to design powerful scorecards. In the same time, we want to show that scoring is not an elitist tool. It is not for every institution, as some prerequisites are required, but we are convinced that there is an enormous potential market for credit scoring in micro lending. Credit scoring can be efficient only in massive homogeneous markets. Microfinance usually addresses this kind of markets. This is the opportunity we want to exploit. On the other hand, quantitative measurements, required for statistical developments, suffer from the fact that micro-entrepreneurs operate mostly in the informal or semi-formal sectors. Some variables like the profit of the business or the turnover cannot be measured accurately because there is no reliable source. This is a challenge. Implementation of credit scoring and follow-up in an environment that has limited access to data infrastructure solutions could also be considered as a challenge. Here we describe in detail possible applications of credit scoring in micro lending. We explain main technical aspects and point expected benefits versus implementation and maintenance efforts. This chapter is written from the point of view of several scoring experts that develop credit scoring models for micro and SME lending on a commercial basis.
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