A handbook for developing credit scoring systems in a microfinance context
This handbook is meant to be a guide for banks, microfinance institutions (MFIs) and donors who are considering applying credit scoring as part of their business model. The research team drew on the experience of microlenders from three continents to devise a four-step framework for designing and implementing custom credit scorecards. The framework is flexible, does not advocate any one rigid methodology or technology, and is thus appropriate to any organization with a clear strategy and some experience lending to its target market.
Credit scoring systems help to:
- Streamline the lending process;
- Improve loan officer efficiency;
- Increase the consistency of the evaluation process;
- Reduce human bias in the lending decision;
- Enable the bank to vary the credit policy according to risk classification, such as underwriting or monitoring some lower risk loans without on-site business inspections;
- Better quantify expected losses for different risk classes of borrowers; and
- Reduce time spent on collections.
One conceptual difficulty with embracing credit scoring for microfinance is that a data-driven business approach does not intuitively seem like a good fit for reaching data-poor clients who have been typically excluded by banks. In the light of such limitations, thoughtful innovation is required to identify meaningful risk factors for microfinance clients and to measure them in terms of characteristics that are feasible to collect.
Developing scorecards appropriate to microfinance requires a combination of technical modelling skills and practical knowledge of the credit risks associated with borrowers in the micro segment. Banks and MFIs often lack the technical expertise in-house, but it can be purchased for varying costs from large international credit bureau operators and a wide range of consultancies. However, practical knowledge of the credit risks associated with micro-borrowers should come at least partially from the microfinance organization itself.
After setting out the background and scope of the research, this handbook goes on to give an overview of the banks and MFIs that were included in the study. Detailed information about each can be found in the appendices. The main part of the book contains guidelines on how to apply credit scoring in a microfinance context. It is a very useful document for any institution interested in this technique for enhancing loan appraisal.