A Handbook for Developing Credit Scoring Systems in a Microfinance Context

This research draws on the experience of seven microlenders from three continents to illustrate a four-step framework for designing and implementing custom credit scorecards. The study:

• Describes a four-step process for developing a credit-scoring model in the microfinance context;
• Offers recommendations for situations in which historic data are limited or do not match future strategy and objectives;
• Provides guidelines on how to apply credit scoring in a microfinance context:
  • Defining the scoring segment;
  • Selecting the type of scorecard;
  • Designing the credit scorecard: Definition, discovery, and development;
  • Testing, implementing, and managing the scorecard: Back testing, pilot testing, training, integration with IT systems, and long-term model management.

The handbook also lists the benefits of the framework:

• Framework is flexible;
• It does not advocate any one rigid methodology or technology;
• It is appropriate to any organization with a clear strategy and some experience lending to its target market.

It finally concludes that a scorecard properly developed and managed can:

• Speed loan processing;
• Inform pricing and provisioning;
• Can help banks and MFIs save costs, reduce subjectivity, and improve risk management.