Recent years have seen a significant growth in access to formal credit among consumers at the base of the pyramid. In some markets, this rapid growth has outpaced financial institutions’ ability to monitor the number and amount of loans that potential borrowers have with other institutions. The prevalence of unregulated or unsupervised financial institutions adds to this challenge, as does the growing overlap between the client bases of microfinance and consumer credit in many countries.
Without complete and up-to-date information on borrowers, lenders are less able to evaluate potential borrowers’ capacity to pay, lowering the accuracy of their risk assessments. This can have negative consequences for both the provider—leading to a higher risk loan portfolio, and for borrowers—making it easier to accumulate debt levels beyond their capacity to pay and potentially contributing to overindebtedness. Lack of comprehensive data on base-of-the-pyramid borrowers also denies the borrowers a potentially valuable asset: the “reputation collateral” that a positive credit history represents.
To help address these information gaps, there has been movement in recent years to develop approaches to credit reporting that better incorporate base-of-the-pyramid consumers and the financial institutions that serve them. Credit Reporting at the Base of the Pyramid, a joint CGAP-IFC publication from 2011, explores global experience with implementing credit reporting systems and shows how credit bureaus, credit registries, and even simple MFI-specific databases—or hybrid approaches—can be important tools to prevent or mitigate potential overindebtedness. Although credit reporting alone cannot create credit discipline in a market or compensate for inadequate underwriting standards, it can help microlenders better originate loans, manage credit risk, and create a powerful incentive for repayment among borrowers.
Credit reporting systems are not a cure-all for overheated credit markets. Rather, they are just one tool to monitor consumer debt levels. Furthermore, developing effective credit reporting systems involves a number of challenges, including:
- Ensuring coverage of all types of base-of-the-pyramid lenders in a given market
- Overcoming regulatory or cost barriers that limit participation
- Comparatively high costs of obtaining, processing and protecting high-quality data on base-of-the-pyramid borrowers - given high transaction volume and low loan sizes
- Establishing the identity of base-of-the-pyramid borrowers
The challenges for setting up credit reporting systems will vary greatly by country, depending on factors such as market concentration, the types of providers in the market, and the presence of informal and semi-formal providers.
Broad participation of the financial sector is needed to develop effective credit reporting, and the government can often play a key facilitator role. Recent events in several countries have shown the importance and urgency of expanding credit reporting coverage to include the providers and products serving base-of-the-pyramid consumers.
Topic Contact: Tim Lyman
- General Principles for Credit Reporting (World Bank)