The experience of the over-indebtedness crisis amongst the poorest in Kosovo and other regions such Andhra Pradesh in India is still a clear memory to those who had to manage the human and financial fallout from these situations. This type of crisis is caused by 2 factors; excessive liquidity largely from donor funded institutions and secondly no credit bureau infrastructure, or usage of it.
Are we about to witness the same cycle in sub-Saharan Africa with the highly funded race to provide loans through the trend of alternative/big data, at a time when MFIs are yet to be integrated into the “credit bureau culture”?
The approach to use telco data and social media data to access stable and trustworthy individuals is a sound and positive approach to provide small loans to the poor. The concept mirrors the successful use of “voters roll” data in the 1980’s by the UK credit bureau to deliver stability indicators prior to establishment of positive credit bureau.
This delivers an excellent approach to broaden financial inclusion as long as it is done responsibly, with the use of credit bureaus to ensure multiple organisations are not serving the same financially unaware customers, as was the cases illustrated by CGAP in their excellent report “Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness” By Schicks & Rosenberg.
“In a review of four countries, Chen, Rasmussen, and Reille (2010) reported that delinquent loans, which averaged 2 percent of portfolio in 2004, skyrocketed to 2009 levels of 7 percent in Bosnia-Herzogovina 10 percent in Morocco, 12 percent in Nicaragua, and 13 percent in Pakistan. In some of these countries, subsequent levels have risen quite a bit higher. More recently, collection has collapsed in the Indian state of Andhra Pradesh.”
What are the key indicators that this situation may happen again? In the previous cases it was high donor liquidity to traditional micro finance and non usage of credit bureau. In this case the high liquidity is coming for support for “alternative/big data lending” and those MFIs using these approaches not using credit bureaus.
There is a misconception that credit bureaus in developing countries will create a barrier to new entrants to the formal financial system, as it is viewed only those with a credit record will receive credit in the future. This is not true. Credit bureaus create an environment that supports unsecured or non-guarantor credit which does not exist in markets prior to credit bureaus. This new form of credit then becomes the universal form for the masses that do not have assets. The exclusion situation of those without credit records will only exist in highly developed markets such as the US where lending is 100% bureau dependent. Having said this, the process can be accelerated by alternative data in parallel with credit bureaus.
The focus in recent years has been largely on research and development of alternative data lending. The international donor organizations like The Gates Foundation invested heavily in projects in Sub-Saharan Africa focused on alternative data usage for creation of greater financial inclusion. There are number of companies, which with such support, developed various scoring models, majority being based on telcos data, which enabled some of the credit providers to extend their loans to the unbanked populations. As much as it is a positive trend, one shall always remember that such data needs to be shared with private credit bureaus so not to create silos in the economy and allow for all lenders to have access to it.
On the credit bureau side, significant steps forward have been made with the support of the IFC and World Bank plus other donors such as KfW, SECO or DFID to mention just a few. Over the last 10 years credit bureaus have been developed in 18 countries in Sub-Saharan Africa. These initiatives are largely driven by central banks and governments licencing private credit bureaus. The involvement of central banks ensures that regulated credit providers (which are all banks, in certain cases some of the MFIs or even other financial institutions), are usually enforced to submit data to credit bureaus as well as use credit reports for their credit risk assessment.
However, this leaves a large tranche of the financial sector that frequently resists the usage of credit reports whether due to reluctance to change, lack of knowledge or frequently fear associated with dealing with new data. This unregulated credit providers sector, whether it be Telcos, insurance companies, retailers, donor funded MFIs or privately funded MFIs it is likely where a surge in liquidity will lead to over-indebtedness and misery, and this is the exact group of people, whom donors are trying to help – the ones at the bottom of the pyramid.
The obvious parties to drive change would seem to be Central Banks and private credit bureaus. In reality Central Banks often have little real interest in an area that will not create systematic risks for the financial sector. When it comes to credit bureaus without other stakeholder’s involvement credit bureaus will face a reaction of “sales people”. That means that they may be perceived, especially by MFI sector, as just another company selling some services and not seeing the overall benefits it brings to the industry. That is why this issue needs a concerted effort from all parties.
The stakeholders in this change process shall look at some key actions:
- Independent education and capacity building programs amongst the management of MFIs about the benefits of credit bureaus.
- Central Banks and Government to take measures to ensure credit bureaus receive data from all financial services providers.
- “Alternative/Big data” credit providers integrating credit bureau data into their decision process.
- Donors and investors working with MFIs or “alternative/Big data lenders” insisting on responsible lending practices being followed.
- Credit bureaus to facilitate the addition of MFIs by minimizing IT and development costs.
With this approach we can avoid the errors of the past and achieve the goals of financial inclusion with responsibility.
For more information about this article, please contact:
Head of Financial Inclusion & CRB Awareness Africa, Creditinfo Group hf
Email: firstname.lastname@example.org • Skype: agatacreditinfo • Mobile: +254 72299758