Know Your Borrower: The Case for Microfinance Credit Reporting
This paper discusses the advantages of credit reporting in microfinance.
Microfinance has grown rapidly and is in need of some checks and balances. There are growing instances of over-indebtedness and multiple borrowing among microfinance clients. Effective credit reporting would help MFIs make informed lending decisions that result in healthy portfolios. They can monitor level of indebtedness of existing borrowers and make subsequent lending decisions. Credit reporting would also help MFIs reduce reliance on information from loan officers. They can assess new applicants based on their credit history instead, and determine their suitability for credit.
Successful integration of credit reporting in microfinance, however, faces some challenges. They include:
- MFI lenders’ lack of willingness to participate in a credit reporting system and lack of awareness about its benefits;
- Lack of legal and regulatory support;
- Data challenges;
- Challenges in borrower identification;
- Inadequate systems;
- Lack of skilled employees who can use and analyze information received from a credit bureau;
- High costs of credit reports and compliance;
- Infrastructure problems.
