Microfinance Loans to Give the Poor a Working Chance - Opportunity Blog

The Challenge of Credit Scoring

By Sonja Egeland Kelly on January 11, 2010
Much of Africa does not have credit scores. In fact, in all of the countries in Africa where Opportunity International works, except for South Africa, credit scoring is not widely utilized.

Much of Africa does not have credit scores. In fact, in all of the countries in Africa where Opportunity International works, except for South Africa, credit scoring is not widely utilized.

A lack of a formal credit score makes risk mitigation particularly difficult and thus has the potential to reduce the effectiveness of microfinance. A lack of some type of credit information can cause microfinance institutions to make decisions that are not in the best interest of the client. In the worst case scenario, either someone who deserves a loan is denied it or someone who cannot pay back a loan is granted it.

To mitigate this risk, Opportunity hopes to track the qualitative characteristics of loan applicants, together with their repayment abilities, in order to to create a predictive model for effective credit scoring. In essence, Opportunity is finding ways to introduce its own credit scoring system while it waits for a more formal system to be introduced. By consulting character references, keeping track of previous loans and transactions, and sometimes collaborating with other microfinance institutions, Opportunity tries to make decisions that are both informed and in the best interests of its clients.

Beyond setting up a system, however, our staff tries to go further. Turning risk into opportunity, loan officers reach out to get to know clients on a personal level. They set up Trust Groups to allow clients to vouch for one another, thereby spreading potential risk across a broad range of people and businesses. While I was in Ghana, one supervisor told me that every once in awhile he takes a pile of applicant files to his competitors to make sure that the applicants do not have a loan with another institution.

Challenges like this only further allow Opportunity to innovate, educate and engage both clients and industry peers alike.

 

Posted in Loans, Our Work, Trust Groups
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Comments

  • Elizabeth Cates

    Good points on a topic that has been of concern to me for years. I would like to find a way for the little businesses compete with the big ones. This will create more competition and prevent domination of the many by the few.

    One way to use existing data while developing microfinance data is to use trade receivable data by industry (ie, non-payment and timeliness of payment) as a proxy for microfinance. If there is a default, then you can rely on various risk mitigation techniques (which is effectively what happens when you have a the Trust Groups–they help guarantee repayment).

    Ideally, over time, microfinance would generate its own transaction data. The information could be pooled and shared, then you would be able to (1) dynamically score since things are always changing such as patterns of repayment, and (2) no outside loans or over leveraged borrowers.

    There will always be some who are mis-scored with any credit scorecard–so judgment is always a necessary component.

  • Elizabeth Cates

    Good points on a topic that has been of concern to me for years. I would like to find a way for the little businesses compete with the big ones. This will create more competition and prevent domination of the many by the few.

    One way to use existing data while developing microfinance data is to use trade receivable data by industry (ie, non-payment and timeliness of payment) as a proxy for microfinance. If there is a default, then you can rely on various risk mitigation techniques (which is effectively what happens when you have a the Trust Groups–they help guarantee repayment).

    Ideally, over time, microfinance would generate its own transaction data. The information could be pooled and shared, then you would be able to (1) dynamically score since things are always changing such as patterns of repayment, and (2) no outside loans or over leveraged borrowers.

    There will always be some who are mis-scored with any credit scorecard–so judgment is always a necessary component.