Credit Reporting When There’s No Credit Footprint
By admin April 19, 2018


Evidence shows that expanding access to credit can produce significant benefits for borrowers—from job retention to higher incomes, according to the Economic Growth Center. Recent years have seen an unprecedented growth in access to formal credit for individuals at the base of the pyramid. In some countries, this rapid growth has outpaced the financial institutions’ ability to monitor the number and amount of loans that potential borrowers have with other institutions. The prevalence of unregulated or informal financial institutions adds to this challenge, as does the growing overlap between the client bases of Microfinance and consumer credit in many countries.


Without complete and up-to-date information on borrowers, lenders are less able to predict the borrowers’ risk for lending. According to the Consultative Group to Assist the Poor, this can have negative consequences for both the provider by leading to a higher risk loan portfolio, and for borrowers by making it easier to go into over indebtedness. Lack of comprehensive data on base-of-the-pyramid borrowers also denies the borrowers a potentially valuable asset: the “reputation collateral” and that a positive credit history represents.


Credible estimates of the number of micro-borrowers from Microfinance Institutions range between 120 million and 190 million worldwide. But, an estimated 2.7 billion adults worldwide do not have savings or credit accounts in their name with a bank or other formal institution (CGAP and World Bank, 2010). Most of these “unbanked” people are poor, many are informally employed, and their incomes tend to be irregular. For these consumers at the base of the pyramid, developing their “reputation collateral” in a credit reporting system can be a highly valuable asset, one that facilitates credit with their existing lender(s) and that enables them to seek other sources of finance rather than being tied to one provider.


To help address these information gaps, there has been a movement in recent years to develop approaches to credit reporting that better incorporate base-of-the-pyramid consumers and the financial institutions that serve them. Namely, utilizing social media and mobile phone usage to predict risky behavior.


Credit reporting agencies, like Fair Isaac Corporation (or FICO) in the United States, are implementing new strategies for assessing a consumer’s creditworthiness. In addition to looking at the information offered on social networking sites, the agencies will also be looking at smartphone records, assigning risk distribution based on certain behavior. According to FICO, “using the right alternatives to traditional credit bureau data, lenders can reliably identify millions more consumers who qualify for credit.”


In China, the government has proposed the Social Credit System initiative for developing a national reputation system. Paired with surveillance and big data, the government plans include developing more dynamic credit scores for all Chinese citizens, as well as businesses operating in China. The government plans to have the Social Credit System in place by 2020 and critics are cautioning against the concept of possible influence on individual and private business behavior.


The process of closing information gaps for those at the bottom of the pyramid consists of a variety of different approaches. With the current state of global penetration of mobile phones, ranging from 55 percent in Sub-Saharan Africa to 97 percent in North America (World Bank) and 2 billion monthly subscribers to social media sites like Facebook (Techcrunch), credit reporting agencies are looking towards the future of economic behavior data collection. Caution remains around influencing economic behavior via these credit monitoring schemes. However, promising and inclusive reporting could be the start towards developing “reputation collateral” for the 2.7 billion individuals who remain unbanked, globally.


 For More Information






Thanks for sharing !

Comments are disabled.