Credit Scoring for Microfinance: Can It Work?
AbstractIn 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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Bibliographic InfoPaper provided by EconWPA in its series Development and Comp Systems with number 0108003.
Length: 25 pages
Date of creation: 02 Sep 2001
Date of revision: 27 Dec 2001
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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scoring; credit scoring; classification; microfinance; repayment;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-09-10 (All new papers)
- NEP-IAS-2001-09-10 (Insurance Economics)
- NEP-LAM-2001-09-10 (Central & South America)
- NEP-MFD-2001-09-10 (Microfinance)
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