Predicting Creditworthiness with Publicly Observable Characteristics: Evidence from ASCRAs and RoSCAs in the Gambia

While informal finance flourishes in Africa, formal finance flounders. This is especially true for poorer households. This paper investigates whether publicly observable characteristics help predict which households get access to informal finance and which do not. It also examines whether Accumulating Savings and Credit Associations (ASCRAs) reach poorer borrowers than do Rotating Savings and Credit Associations (RoSCAs). Because informal lenders are astute judges of creditworthiness and because publicly observable characteristics are cheap for formal lenders to observe, formal lenders may be able to follow in the footsteps of informal lenders if publicly observable characteristics predict the decisions of informal lenders well.

It is found that, for some characteristics, this is indeed the case. In particular, being female and having borrowed from other informal sources are good predictors of whether an informal lender will judge a potential borrower to be creditworthy or not. Thus, knowledge of these characteristics may help a formal lender to make good loans. It is also found that both ASCRAs and RoSCAs reach borrowers of similar poverty levels. Lessons from informal finance may help reform formal finance in Africa.