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Summary of the Last lecture • BUILDING THE INFRASTRUCTURE FOR INCLUSIVE FINANCE: BUILDING THE MARKET FOR INVESTING IN MICROFINANCE CREDIT BUREAUS AND CREDIT SCORING • Internet surfers and late night television viewers in the United States are bombarded with offers of free credit reports and advised to know their credit scores (I confess to not knowing mine). CREDIT BUREAUS AND CREDIT SCORING • While the advertisements may be a nuisance, consumers in developed countries understand that their credit histories, as revealed in their credit scores, determine not only whether they will qualify for loans but also how much they will pay for them. Without a credit score, or with a poor one, middle-class American lifestyles are nearly impossible. CREDIT BUREAUS AND CREDIT SCORING • Cut to the owner of a small but fast-growing shop on the outskirts of Dar es Salaam, Tanzania. With no recognized identification card in a country where people often bear the same names, he cannot establish his unique identity. If he has borrowed from a microfinance institution like Pride Tanzania, his good repayment record will do him no good at Standard Chartered Bank, CREDIT BUREAUS AND CREDIT SCORING • since there is no system for sharing information between banks and MFIs. The end result? In all likelihood, Standard Chartered will turn him down, and Pride Tanzania will know that he is a captive client, which reduces its incentives to give him better service at lower cost. CREDIT BUREAUS AND CREDIT SCORING • Today’s web of credit information in the United States originated a century ago in blacklists of bad customers compiled and shared by merchants. Formal credit bureaus grew after World War I, taking on broader geographic ranges due to the increased mobility of the population. CREDIT BUREAUS AND CREDIT SCORING • Banks joined in to support their growing personal, small business, and mortgage lending businesses. Although these systems took more than a generation to evolve, their spread to new countries is proceeding much faster. The Value of Credit Bureaus for the BOP Market • Credit bureaus are widely recognized as contributing to credit growth in the financial system, lower costs for good borrowers, and a wider circle of borrowers reached. An International Finance Company (IFC) survey, based on 5,000 firms in 51 countries, found that in countries with credit bureaus there was a 40 percent probability of small firms obtaining a loan, The Value of Credit Bureaus for the BOP Market • versus a 28 percent probability in countries without credit bureaus. In countries with credit bureaus, 27 percent of small firms reported having credit constraints, versus 49 percent of small firms in countries without credit bureaus. The Value of Credit Bureaus for the BOP Market • Credit bureaus respond to two of the four challenges of BOP finance: reducing costs and managing risk. Since microfinance institutions worked in the absence of credit bureaus, they developed different ways to meet these challenges. Many of the distinguishing innovations of microfinance lending methodologies were created to assess or motivate good repayment behavior by informal-sector clients in places without credit bureaus. The Value of Credit Bureaus for the BOP Market • These features include group guarantees, stepped loans (moving from small to larger loans through good repayment performance), nontraditional collateral, and individual working capital credit assessments. Although these methods are effective, they come with hefty administrative costs that require high interest rates. The Value of Credit Bureaus for the BOP Market • In contrast, credit decisions in the developed countries can be made nearly instantaneously for a small fee through automated consultations with credit bureaus. For this reason, credit bureau development could be a potential boon for microfinance institutions and a facilitator of greater competition in the BOP market. The Value of Credit Bureaus for the BOP Market • The problem of low credit bureau coverage is not confined to developing economies, because even in advanced economies credit bureaus do not include everyone. In the United States, many low-income people, especially youth and recent immigrants, lack credit histories and are closed out of the mainstream system. The Value of Credit Bureaus for the BOP Market • People who have suffered problem periods need to rebuild their credit scores. The most popular product of ACCION’s U.S. arm is its Credit Builder loan, a small stepped loan of $500 to $750 aimed at helping clients develop a positive credit history. The Value of Credit Bureaus for the BOP Market • Another initiative, the alternative credit bureau MicroBilt, is developing credit scores weighted toward the kinds of payments lowincome people do make—like rent and utilities payments— rather than on bank loan experience. BUILDING THE MARKET FOR INVESTING IN MICROFINANCE • Many committed professionals are dedicating themselves to integrating the market for microfinance investment into international capital markets. BUILDING THE MARKET FOR INVESTING IN MICROFINANCE • The hallmarks of a mature microfinance investment market will include ready availability of high-quality information about MFIs, a wide range of investors, and active trading with ease of entry and exit. When this day comes, MFIs will be able to raise funds at favorable costs that accurately reflect their risk and return profiles. Information for Investors:Advisors, Data, and Ratings • The biggest issue in market creation is getting the right information into the hands of prospective investors. Wall Street professionals are accustomed to clicking on Bloomberg.com for an instant flood of data. But there is no microfinance page on Bloomberg. Information for Investors:Advisors, Data, and Ratings • When The Economist took its first serious look at microfinance in 2005, it complained about the lack of data and the obscure metrics that meant something to microfinance mavens but nothing to standard investors. Frustration almost jumped off the page. Information for Investors:Advisors, Data, and Ratings • For their part, MFIs “grew up” responding to donors’ information needs. Only recently are they learning to understand how investors use information to make decisions. At first, MFIs with nonprofit origins may even have greeted investor requests for information as “none of your business” or as signaling lack of trust. Information for Investors:Advisors, Data, and Ratings • The information infrastructure now developing to support microfinance is multifaceted, including a central data source (the Microfinance Information Exchange or MIX), mainstream and specialized investment advisors, investor associations, and rating agencies. Summary Credit Bureaus and Credit Scoring BUILDING THE MARKET FOR INVESTING IN MICROFINANCE