Pakistan Microfinance Network (PMN) recently announced it will setup a credit bureau for microfinance providers so information about the credit histories of borrowers can be used to cautiously expand loan portfolios. The need was felt as a result of rising delinquency levels faced by microfinance banks (MFBs) that followed aggressive expansion strategies in recent years. Greater competition fueled this dilemma because if a client defaults, he can simply visit the next MFI and borrow more money.

Several countries, such as India, Peru, and Tajikistan have already setup microfinance credit bureaus and offer benchmarks for organizations such as PMN.

Purpose of a Microfinance Credit Bureau

A microfinance credit bureau helps distinguish between good (low risk) and bad (high risk) borrowers by looking at their professions, skills, loan and repayment histories. The effort will encourage microfinance providers to join hands instead of compete so the industry as a whole can limit default rates, check multiple borrowing and meet its social and financial objectives while ensuring  institutional sustainability.

A strategic advantage deliverable by a microfinance credit bureau is the discovery of trends, as well as best practices that will enable MFIs to own healthy microfinance (microcredit, micro-insurance) portfolios.

Operational Elements of a Microfinance Credit Bureau (Examples from Pakistan and Other Countries)

• Identifying all borrowers – Each borrower’s credit history can be linked to his/her unique identity number (e.g. in Pakistan, it can be tied to the National Identity Card or Voter ID, or in USA, it can be tied to the Social Security Number).
• Gathering data – A credit bureau builds credit histories by seeking data from the computerized financial and operating software used by microfinance banks, which is required by the central bank in Pakistan and most other countries. MFIs will need to overcome a fear of relinquishing internal, competitive data about borrowers and trust an independent entity to handle and secure it. Utility companies that are involved in mobile banking services (e.g. Easy Paisa in Pakistan, or M-Pesa in Kenya) can also be approached to get records of prompt or delayed bill payments.
• The perfect software – Technology plays a central role in assimilating, processing and distributing accurate data to MFIs in a timely manner. Data about loan payments can be stored on a smart card that is unique for each borrower, or the ‘Mobile Wallet’ accounts (a feature of Easy Paisa in Pakistan) and link these to a central database.
• Access to the database – MFIs will only have indirect access to a central database; full control will belong to credit bureau officers.

If you liked this article, you may be interested in a presentation about credit bureaus in microfinance, and other article about microfinance theory and practice.