Credit Scoring in Microfinance

This paper presents an overview of credit scoring for MFIs based on learning and experiences within the Opportunity Network and published best practice in the field. It discusses benefits and risks of credit scoring and describes how it works. It also explores the basic stages of implementing credit scoring, and outlines questions and guidelines that executives should consider prior to introducing it.

Implementing credit scoring is a rigorous and, sometimes, arduous process. Phases in the implementation of credit scoring include:

• Data collection;
• System development;
• Scoring analysis;
• Policy development;
• Roll out;
• Monitoring.

The paper states that credit scoring can be a powerful tool to improve an MFI's management of credit risk. While it does not replace the work of the loan officer and credit committee, it can significantly enhance the efficiency and effectiveness of the loan decision process. The end result is lower default, reduced costs, improved client retention, and the ability to serve more clients.