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Credit Scoring for Microfinance: Can It Work?

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Author Info
Mark Schreiner (Washington University in St. Louis)

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Abstract

In rich countries, lenders often rely on credit scoring--formulae to predict risk based on the performance of past loans with characteristics similar to current loans--to inform decisions. Can credit scoring do the same for microfinance lenders in poor countries? This paper argues that scoring does have a place in microfinance. Although scoring is less powerful in poor countries than in rich countries, and although scoring will not replace the personal knowledge of character of loan officers or of loan groups, scoring can improve estimates of risk. Thus, scoring complements--but does not replace--current microfinance technologies. Furthermore, the derivation of the scoring formula reveals how the characteristics of borrowers, loans, and lenders affect risk, and this knowledge is useful whether or not a lender uses predictions from scoring to inform daily decisions. In the next decade, many of the biggest microfinance lenders will likely make credit-scoring models one of their most important decision tools.

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File URL: http://129.3.20.41/eps/dev/papers/0108/0108003.pdf
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Publisher Info
Paper provided by EconWPA in its series Development and Comp Systems with number 0108003.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 25 pages
Date of creation: 02 Sep 2001
Date of revision: 27 Dec 2001
Handle: RePEc:wpa:wuwpdc:0108003

Note: Type of Document - Adobe Acrobat 3.0; prepared on Windows 98; to print on Adobe Acrobat 3.0; pages: 25; figures: Included in pdf file
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Web page: http://129.3.20.41

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Related research
Keywords: scoring; credit scoring; classification; microfinance; repayment;

Find related papers by JEL classification:
O - Economic Development, Technological Change, and Growth
P - Economic Systems

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. D. J. Hand & W. E. Henley, 1997. "Statistical Classification Methods in Consumer Credit Scoring: a Review," Journal Of The Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 523-541. [Downloadable!] (restricted)
  2. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marek Hudon, 2007. "Social Justice with Credits to the Poor," Working Papers CEB 07-003.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  2. Mermelstein, David A., 2006. "Defaults en carteras hipotecarias, macroeconomía y arreglos institucionales: Más allá de los modelos de Credit-Scoring tradicionales
    [Mortgage defaults, macroeconomics, and institutional arrange
    ," MPRA Paper 7535, University Library of Munich, Germany. [Downloadable!]
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