It is estimated that around three billion people – out of a world population currently estimated at nearly seven billion, do not have access to credit and actively seek it in order to improve their living conditions, having to rely on informal, unregulated and sometimes abusive financial services.
In the seventies, microcredits began to be offered to small businesses without access to traditional bank loans in some depressed areas of Asia and America. Microcredits are loans usually granted to people on low incomes who have difficulty accessing the financial market.
Over time it has become apparent that the impact of microcredits on business performance has been positive, as is well documented in the bibliography.
Also, contrary to what might be expected, the default rates for microcredits has been fairly low (e.g. around 5% in Latin America and the Caribbean), which has shown that for most small businesses the problem is not profitability, but access to credit.
The success of microcredits has given rise to a new financing concept called micro finance, which covers not only microcredits, but a whole set of other financial products such as savings deposits and insurance, among others. There are individual microfinance products for individuals or households; loans to social groups that in turn lend to a group of people who, in order to obtain funding, decide to pool together and act jointly in the event of default, and loans to community banks that lend to a group of people who not only act jointly, but also establish a shared administration that allows them to better manage their businesses as well as debt payments.
The purpose of microfinance is not only economic but also social, since it aids the development of the productive sector and encourages entrepreneurship among the less privileged segments of the population, breaking down the barriers that constrain certain groups: unfavorable social and economic characteristics that hinder their access to funding and prevent their growth while perpetuating the same economic and social conditions. The difference between microfinance and consumer microcredit should be emphasized at this point, as the latter does not have the same productive nature. As a specific example, one of the most favored groups by microfinance providers are women in developing countries, which account for over 80% of their customers.
All this has given rise to different self-sustaining institutions that are beginning to promote and develop microfinance (known as MFI). Microfinance has now spread around the world, is no longer a niche product and is a recognized source of funding. The highest percentage of MFI customers are in Asia (70%), followed by the Americas and Africa (17% and 11%, respectively).
However, microfinance has not yet developed sufficiently and the needs of billions of people who still have no access to credit have to be met. In order to fulfill growth targets sustainably, it is necessary to further examine the issues that limit supply and demand in the industry, some of which are the following:
- Customer profile different from that of traditional banking customers: limited and mostly informal income; non-existent assets, which means most loans have no associated collateral, low level of financial literacy, etc.
- Low efficiency of MFIs: financial training is less than that provided in traditional banking; limited use of technology, basic management models, high funding costs, high interest rate operations, etc.
- Institutional and legislative environment is not developed sufficiently for the microfinance business: in many cases, absence of a specific regulatory framework for MFIs, limited scope and continuity of public programs, lack of tax policies that encourage the creation of micro-enterprises and the provision of microfinance services, inability to capture savings by most MFIs, etc.
Against this backdrop, the analysis aims to assist the development of microfinance, and for this it suggests the use of risk assessment models for microenterprises and their integration into business processes through and model management tools and policies. Specifically, this would address some of the problems discussed above by:
- Providing an objective measure of credit risk for the different MFI clients.
- Improving the efficiency of the decision model.
- Advancing the understanding and transparency of the microfinance segment for the market and regulators.
Also, the analysis measures the potential impact of integrating scoring models in the microcredit origination process based on internal default and portfolio performance metrics.
The document is structured into the following sections:
- Executive summary of the conclusions drawn from the analysis.
- Key features of the scoring model and model management tools and policies.
- Tests carried out and analysis of outcomes from the integration of models in the microcredit origination process.
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