Credit Bureaus and the Rural Microfinance Sector: Peru, Guatemala and Bolivia

This paper presents the experiential lessons in credit reporting systems, using the case studies of Peru, Gautemala and Bolivia; countries where such systems have already achieved extensive presence. Each of these country case study presents:

• Evolution of the microfinance sector;
• Development of credit bureaus;
• Impact of credit bureaus on the microfinance sector;
• Perceptions of microfinance clients about the implications of credit reporting systems on them.

The paper finds that effective credit reporting systems can:

• Reduce adverse selection in recognizing borrower types;
• Increase competition among microfinance lenders as their best customers can now explore alternative sources of supply;
• Reduce lending costs as the risk of moral hazard is lowered;
• Reduce the risk of borrowers being over-extended in debts without the knowledge of the lenders;
• Reduce the ability of borrowers to pledge collaterals with multiple lenders beyond the market value.

The case studies suggest extraordinary changes in micro-lending practices. Borrowers have been able to graduate to formal sector lending as a consequence of penetration of credit reporting systems. However, there are a few constraints that need to be overcome before the benefits of credit reporting systems can be fully utilized:

• Multiplicity of credit bureaus operating under different rules and offering different services;
• Uneven regulation across institutions and countries;
• Incomplete client coverage;
• Incomplete understanding among microfinance sector borrowers of implications for them of partial credit reporting.