Credit Scoring in Microfinance: Guidelines Based on Experience with WWB Affiliates in Colombia and the Dominican Republic
This note presents the findings of a project by Women’s World Banking (WWB) affiliates on design and implementation of a credit scoring model.
Credit scoring can increase efficiency, outreach, and sustainability by improving the time allocation of loan officers. It can reduce time spent collecting overdue payments from delinquent clients by prioritizing visits to borrowers most likely to default. It can also dramatically improve portfolio management for repeat customers. The paper suggests that MFIs look at the following factors when considering use of loan scoring:
- Proven lending methodology;
- Database of client characteristics and past repayment behavior;
- Data requirements such as client’s socio-economic characteristics, loan, and lender characteristics, etc.
Scoring provides the possibility of making decisions based on quantified risks and explicit tradeoffs. The paper provides guidelines to warehouse quality data, and describes the credit scoring implementation process. It lists the limitations of scoring in microfinance such as lack of information on client revenues and marginal coverage of credit bureau networks in developing countries.
