Credit Scoring for Microfinance: Can It Work?
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.
|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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- Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
- 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.
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