The Role of Credit Scoring in Micro Lending

This chapter aims to present credit scoring as a technology meant to improve micro lending significantly. We consider that credit scoring is an advanced technology because statistical procedures, some sophisticated, are required to design powerful scorecards. In the same time, we want to show that scoring is not an elitist tool. It is not for every institution, as some prerequisites are required, but we are convinced that there is an enormous potential market for credit scoring in micro lending. Credit scoring can be efficient only in massive homogeneous markets. Microfinance usually addresses this kind of markets. This is the opportunity we want to exploit. On the other hand, quantitative measurements, required for statistical developments, suffer from the fact that micro-entrepreneurs operate mostly in the informal or semi-formal sectors. Some variables like the profit of the business or the turnover cannot be measured accurately because there is no reliable source. This is a challenge. Implementation of credit scoring and follow-up in an environment that has limited access to data infrastructure solutions could also be considered as a challenge. Here we describe in detail possible applications of credit scoring in micro lending. We explain main technical aspects and point expected benefits versus implementation and maintenance efforts. This chapter is written from the point of view of several scoring experts that develop credit scoring models for micro and SME lending on a commercial basis.