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Innovation in finance and movement to client-centered credit

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  • J. D. Von Pischke

    (FFI, Washington, USA)

Abstract

Progression from product-centred to client-centered lending is made possible by innovation, which is by definition cost-reducing. Innovation in finance occurs in three ways: lengthening term structure, reducing transaction costs, and refining valuation processes. Each of these involves risk. The Thesis Statement is consistent with observed market behaviour but may be criticized for insufficient attention to risk as part of the mechanics of the progression it portrays. As is rapidly occurring in the US, personal credit in other countries will move toward being based almost entirely on empirical probability and hence client-centered as foreseen in the Statement. In the meantime, the market for money progresses at various speeds from being product-centered to being client-centered. When this progression is complete, marketing will be as strategically important as risk management. To the extent that marketing is thought, prematurely, to trump risk management as the key to success, and to the extent meeting client 'needs' is viewed as the primary objective, attempts at innovation are likely to fail. When this failure occurs, the social and economic benefits of denying loans will be foregone, hindering development. Questionable projects with problematic sponsors and improper financing will be taken on, limiting growth. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • J. D. Von Pischke, 2002. "Innovation in finance and movement to client-centered credit," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(3), pages 369-380.
  • Handle: RePEc:wly:jintdv:v:14:y:2002:i:3:p:369-380
    DOI: 10.1002/jid.885
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    Cited by:

    1. Berg, Gunhild & Schrader, Jan, 2012. "Access to credit, natural disasters, and relationship lending," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 549-568.
    2. Müller, Kirsten & Musshoff, Oliver & Weber, Ron, 2014. "The more the better? How collateral levels affect credit risk in agricultural microfinance," DARE Discussion Papers 1402, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    3. Hering, I. & Mußhoff, O., 2016. "Dynamic Incentives in Microfinance – What about the Farmers?," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 51, March.

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