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Credit Scoring for Microfinance

Credit Scoring for Microfinance. Peter Hauser Business & Finance Consulting GmbH September 2008. Applications of credit scoring. Application scoring. Scoring applications. Retention. Monitoring. Fraud. Collections. Upselling. Expert and statistical scoring. Expert

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Credit Scoring for Microfinance

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  1. Credit Scoring for Microfinance Peter Hauser Business & Finance Consulting GmbH September 2008

  2. Applications of credit scoring Application scoring Scoring applications Retention Monitoring Fraud Collections Upselling

  3. Expert and statistical scoring • Expert • No database required • Fast development • Less accurate risk assessment • Statistical • Requires large database • Takes longer to develop • Accurate risk assessment • Quantifies relationships between variables and probability of default If you can do statistical, you should

  4. Does scoring work in microfinance? • Criticisms: • Can’t account for subjective factors • Can’t account for new trends • Can’t work if no credit bureau • Can’t work if MFI has weak IT system • “But it didn’t work in…” • Improper segmentation (agro/non-agro, group/individual, consumer/micro) • Poor selection of variables • Tiny proportion of automatic approvals

  5. What are IT system requirements for scoring? • Minimum: • Key variables recorded (about business, owner, credit history, payment behavior, loan received) • Stored in electronic form • Sufficient data quality and completeness • System can calculate credit score and present results • Administrator • Ideal: • Branches networked in real time to centralized database

  6. Do we need scoring? Slow credit approval Poor portfolio quality High rejection rate Problem Automatic decision Accurate risk assessment Accurate risk assessment Function of scoring Faster credit cycle Control credit risk More approved loans Result

  7. How accurate are our credit committees? • Applicants over 55 years old are high risk • Marginalized groups (refugees, IDPs) are high risk • Production is better than trade • Clients with a registered business pay better • Clients who keep sales records pay better All these statements are typically false

  8. How much will profits rise? • Portfolio size • Profitability • Default rate • Speed of credit committee • Approval rate • Proportion of automatic approvals/rejections • Accuracy of scoring system

  9. What can we do with scoring? Eliminate bias, quantify risk relationships Risk assessment Approve or reject with no committee Automatic decisions Interest rate, maturity, amount, payment, collateral Risk-based loan conditions Pre-score Skip site visit Reject risky applicants before site visit Skip site visit for good repeat clients

  10. What type of scoring do we need? • Linear regression • Logistic regression • Neural networks • Decision trees They all work, if volume and quality of data is acceptable

  11. How long does it take? How much does it cost? Stage A: Preparation Strategy, identification of data, preparation of database 2 - 6 weeks Stage B: Data analysis and processing Data audit, cleaning, adding missing data 1 - 2 months Stage C: Development of scoring system 1 - 3 months Stage D: Implementation IT changes, forms, procedures, training, testing 1 - 4 months Stage E: Monitoring

  12. Possible assumptions by consultant • Multiple segments • Find and correct many errors • Add missing data • Calculate days late for each client • Generate rollover rate chart from raw data • Reject inference • Assist with implementation • Training of users • Monitoring • Multiple site visits

  13. Thank You! Michael Kortenbusch Managing Director BFC: 25+ successful projects in Microfinance Research and Consulting BFC-Switzerland: Business & Finance Consulting (BFC) Max-Högger-Strasse 6 CH-8048 Zürich, Switzerland Phone/Fax:(+41 43) 540-81-99 E-mail: info@bfconsulting.org Website: www.bfconsulting.org Germany Russia Switzerland Ukraine Moldova Georgia Armenia BFC-Group More info at www.bfconsulting.org

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