In conversations this year with industry experts, we repeatedly heard comparisons between credit reporting and modes of transportation. The “credit information highway” in many countries is open and ready for use.
In conversations this year with industry experts, we repeatedly heard comparisons between credit reporting and modes of transportation. The “credit information highway” in many countries is open and ready for use, as actors from legislatures to industry associations have been building mechanisms for checking the creditworthiness of prospective clients. FI2020 has seen a very significant uptake in use of credit reporting mechanisms around the world. According to the Doing Business Survey at the World Bank, in the past year, 16 countries have either implemented or increased the depth of information contained in their credit reporting systems. In India, for example, regulation now requires a credit check for commercial banks, and the microfinance industry association, MFIN, requires its members to perform a credit check on each borrower and to report back to credit rating systems on borrower repayment history. This industry-regulated credit procedure, implemented in the past year, now covers over 90 percent of India’s microfinance sector.
One of the biggest challenges has been getting institutions to use credit reporting systems. The Policy and Economic Research Council (PERC) is testing the business case for credit reporting and scoring for microfinance institutions in India and Mexico through randomized control trials. Its study, to be released in 2015, will examine the costs and benefits to MFIs of reporting loan information, utilizing credit reports, and developing scoring solutions.
The enthusiasm for alternative credit reporting systems using “big data,” identified in last year’s roadmap, continues to grow. Start-ups like DeMyst, Cignifi, Lenddo, and eMoneyPool are using cutting-edge analytics on alternative data to better target, assess, and offer credit to underserved customers. The jury is still out, however, on whether these new players will be able to scale up to reach critical numbers of underserved consumers. Even if they don’t, they may still change the broader financial services ecosystem: all the largest credit bureaus in the U.S. have begun to experiment with alternative data. At the same time, observers are increasingly asking about the implications of big data for consumer protection topic such as privacy, informed consent and problem resolution.
Credit Reporting
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Smart Campaign Findings on Credit Bureas and
Humane Collections
In a three-country study on collections practices at microfinance institutions, the Smart Campaign found that effective credit bureaus allow lenders to treat late repayers more humanely. In Peru, four private credit bureaus and one state run registry provide up-to-date records that cover the whole market. Peruvian borrowers recognize that defaults on their credit reports will hurt their future credit access. This accountability allows lenders the freedom to give people a few extra days or negotiate settlements – in contrast to the harsh tactics often seen in markets like Uganda and India, where credit reference information is less complete or widely used.
Financial Inclusion 2020: Round-Up 2014