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The Challenge of Credit Scoring

By Sonja Egeland Kelly

A lack of a formal credit score makes risk mitigation particularly difficult and thus has the potential to reduce the effectiveness of microfinance. A lack of some type of credit information can cause microfinance institutions to make decisions that are not in the best interest of the client. In the worst case scenario, either someone who deserves a loan is denied it or someone who cannot pay back a loan is granted it.

To mitigate this risk, Opportunity hopes to track the qualitative characteristics of loan applicants, together with their repayment abilities, in order to to create a predictive model for effective credit scoring. In essence, Opportunity is finding ways to introduce its own credit scoring system while it waits for a more formal system to be introduced. By consulting character references, keeping track of previous loans and transactions, and sometimes collaborating with other microfinance institutions, Opportunity tries to make decisions that are both informed and in the best interests of its clients.

Beyond setting up a system, however, our staff tries to go further. Turning risk into opportunity, loan officers reach out to get to know clients on a personal level. They set up Trust Groups to allow clients to vouch for one another, thereby spreading potential risk across a broad range of people and businesses. While I was in Ghana, one supervisor told me that every once in awhile he takes a pile of applicant files to his competitors to make sure that the applicants do not have a loan with another institution.

Challenges like this only further allow Opportunity to innovate, educate and engage both clients and industry peers alike.

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