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Credit Scoring for Microfinance: Can It Work?

Author

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  • Mark Schreiner

    (Washington University in St. Louis)

Abstract

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.

Suggested Citation

  • Mark Schreiner, 2001. "Credit Scoring for Microfinance: Can It Work?," Development and Comp Systems 0108003, University Library of Munich, Germany, revised 27 Dec 2001.
    • Handle: RePEc:wpa:wuwpdc:0108003
    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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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/dev/papers/0108/0108003.pdf
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    References listed on IDEAS

    as
    1. 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, September.
    2. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
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    Cited by:

    1. Labie, Marc & Méon, Pierre-Guillaume & Mersland, Roy & Szafarz, Ariane, 2015. "Discrimination by microcredit officers: Theory and evidence on disability in Uganda," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 44-55.
    2. Marek Hudon, 2007. "Social justice with credits to the poor," Working Papers CEB 07-003.RS, ULB -- Universite Libre de Bruxelles.
    3. Mermelstein, David A., 2006. "Defaults en carteras hipotecarias, macroeconomía y arreglos institucionales: Más allá de los modelos de Credit-Scoring tradicionales [Mortgage defaults, macroeconomics, and institutional arrangemen," MPRA Paper 7535, University Library of Munich, Germany.

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    More about this item

    Keywords

    scoring; credit scoring; classification; microfinance; repayment;
    All these keywords.

    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Political Economy and Comparative Economic Systems

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