Credit Scoring: Why Scepticism Is Justified

Providing loans to micro and small businesses has been at the heart of IPC’s activities for more than 20 years. In 2005, ProCredit Banks in Eastern Europe, Africa and Latin America disbursed more than 60,000 business loans per month. The ProCredit Banks achieved a return on equity of 15% in 2005. IPC also advises private commercial partner banks on behalf of international financial institutions (IFIs) in “downscaling” projects, which are designed to build capacity in MSE (micro and small enterprise) lending. These banks disburse 75,000 MSE loans per month. An indicator of the profitability of the partner banks in the downscaling projects is that only about 15% of their combined MSE loan portfolio is being funded by IFIs. The remaining 85% is financed with resources these banks have mobilised in their domestic markets. The levels of profitability implied by these figures are being achieved because the lending methodology – or “credit technology” – which the banks use is efficient and keeps credit risk under control. A recent in-depth vintage analysis of bad loans within the ProCredit Group revealed that only 0.5% of all loans disbursed were not recovered. From this analysis, we also learned – once again – that in the vast majority of cases, loan defaults are triggered not by the borrower’s “individual” inability to repay the amount outstanding, but rather by an unwillingness to repay or by an inability to fulfil payment obligations brought about by events such as crises, natural catastrophes, civil unrest or fraud. Another type of risk – “operational risk” – that can contribute to loan delinquency is a lack of institutional discipline, which in most cases is a result of insufficient management attention, specifically on the part of middle management staff.