68097 Credit Reporting at the Base of the Pyramid Key issues and success Factors Access to FinAnce Forum RepoRts by CGAp And Its pARtneRs no. 1, septembeR 2011 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors A “An essential element in the prevention of multiple-lending and over-borrowing is the availability of information to the MFI of the existing outstanding loan of a potential borrower. This is not possible unless a Credit Information Bureau is established expeditiously.� —Malegam Committee Report, Reserve Bank of India, January 2011 “Don’t wait until the problems are there before putting a credit bureau in place.� —An MFI leader in Nicaragua, autumn 2009 “[Our] Central Registry of Credits is a comprehensive one: along with commercial banks, [microcredit organizations and] all other types of credit institutions are included. And it is detailed, too, containing all relevant data on all kinds of borrowing, for both individuals and legal entities. As such—and since it prevents multiple, excessive indebtedness—consulting it is indispensable for making sound lending decisions. With the establishment of Central Registry of Credits, we have reached a higher level of financial discipline and … the level of nonperforming loans [has] significantly decreased.� —Kemal Kozarić, Governor, Central Bank of Bosnia and Herzegovina, April 2011 © 2011, cGAP and iFc. All rights reserved cGAP 1818 H street, n.W., Msn P3-300 Washington, Dc 20433 UsA telephone: +1 202.473.9594 email: cgap@worldbank.org www.cgap.org Introduction over the past five years, the microcredit sector has in some microfinance markets, the entrance of banks experienced unprecedented growth. the number of and consumer lenders hastened unhealthy competition borrowers served by microfinance institutions (MFis) has among different base-of-the-pyramid lenders. the risk increased threefold to reach 120 million clients, accord- of over-indebtedness among borrowers rose markedly ing to MiX estimates as of December 2009—and by in several countries, such as Peru and Morocco.1 other estimates the number may be as high 190 million (Microcredit summit campaign 2011). in large markets, Hardly an article or blog has appeared in recent months such as Mexico and south Africa, commercial banks on the microcredit delinquency crisis without mention and consumer lending companies have expanded of the critical role of effective credit reporting in avert- their activities to include microfinance for low-income ing, or at least reducing, the risk of over-indebtedness households. and borrower defaults. Although credit reporting alone cannot create credit discipline in a market or compen- Unfortunately, the growth of microcredit is not always sate for inadequate underwriting standards, it can help sustainable. some iconic markets, such as india and microlenders better originate loans, manage credit risk, Bosnia–Herzegovina, are experiencing large-scale credit and create a powerful incentive for repayment among crises, and they are not alone. the portfolio at risk (PAR) borrowers. over the past 10 years, credit reporting of MFis worldwide has increased steadily over the past has rapidly expanded in emerging markets, but many three years, according to the symbiotics sYM50 index. of these initiatives have emerged in the mainstream this is an alarming trend for an industry that has been banking and consumer lending sectors, often leaving heralded for its outstanding asset quality. microlenders and the low-income consumers they serve outside of this information infrastructure. today, only a the deterioration in the quality of MFi loan portfo- handful of countries have well functioning and inclusive lios can be attributed to several factors. some fast credit reporting systems that include the range of bank growing MFis have outgrown their risk management and nonbank lenders that serve the poor. systems and controls. these weaknesses have often been exacerbated by high staff turnover, leading to a this report takes a fresh look at the state of credit further erosion of credit discipline. Rapid growth has reporting at the base of the pyramid. the data and also been focused in narrow geographies, which in turn analysis for this paper are drawn from iFc and cGAP affected borrower repayment incentives and behaviors. market intelligence on credit reporting systems. in Part 1. over-indebtedness refers to the risk faced by credit customers of taking on levels of debt that may be greater than they can manage, or that cause undue sacrifices to repay. this can result from a range of causes, including personal errors in estimating levels of manageable debt (by consumers and/ or lenders), changes in household income, or unforeseen events that have significant economic impact, such as medical emergencies or natural disasters. over-indebtedness is a growing risk in many microfinance markets, but remains challenging to define, as it includes the subjective, and highly personalized, question of “how much credit is too much?� However, schicks and Rosenberg (2011) identify six concepts being used as definitions, or proxies, for over-in- debtedness: negative impact, default and arrears (late payments), debt ratios, multiple borrowing, borrower struggle and sacrifice, and composite indicators. 1 i, we present the microlending market, the diversity of the lessons learned for effective credit reporting at the players, and their evolving demand for credit informa- base of the pyramid and identifies key success factors as tion. in Part ii, we describe three main approaches well as common challenges. Part iV presents a summary for credit reporting at the base of the pyramid: credit of recommendations for policy makers, microlenders, bureaus, credit registries, and MFi-specific systems for donors, and others interested in encouraging credit exchanging client information. each of these approach- reporting at the base of the pyramid. es is illustrated by country examples. Part iii examines Box 1. Key Messages on Credit Reporting at the Base of the Pyramid • MFIs still dominate the base-of-the-pyramid (iii) comparatively high costs of obtaining lending landscape in many markets. However, in and processing high-quality data on base-of- increasing numbers, other types of lenders— the-pyramid borrowers; (iv) establishing the including commercial banks, consumer lenders, identity of base-of-the-pyramid borrowers; and retailers and other nonfinancial firms—are and (v) protection of data privacy and accuracy also now targeting these market segments. at a reasonable cost given high transaction For credit reporting to be effective as a tool in volume and low loan sizes. But growing global averting over-indebtedness at the base of the experience also shows likely success factors in pyramid, all relevant lenders in a given market addressing the challenges. need to participate. • Policy makers, donors, and lenders serving • Country-level factors determine which ap- those at the base of the pyramid all have roles proaches to credit reporting at the base of the to play in developing credit reporting systems pyramid will have the best prospects for suc- that gather reasonably thorough and accurate cess—credit bureaus, credit registries, MFi- data on base-of-the-pyramid borrowers and specific client databases, or some hybrid of cover the full range of formal lenders from which these. the various approaches to credit report- these clients are borrowing. Policy makers can ing are not mutually exclusive: two or even remove regulatory barriers to participation several approaches can very well coexist and and fashion incentives—or even mandates, overlap in the same country. if removing the barriers proves insufficient to • Credit reporting systems, like credit markets, are get reasonable market coverage. Donors have dynamic, and they can be expected to evolve the means to support policy makers, credit over time in response to market and regulatory reporting service providers, and base-of-the- changes and to better respond to lender and pyramid lenders to understand the benefits of consumer demands for improved services. comprehensive credit reporting systems and to • No one approach carries a guarantee of success overcome obstacles—and they have the means in any market, and each has its predictable or to inform base-of-the-pyramid borrowers why likely limitations, especially those influencing this is in their best interest. Base-of-the-pyramid which types of lenders can, and have the incen- lenders have the most important role to play: tive to, participate. by supplying data and purchasing credit reports • There are challenges to effective base-of-the- they provide the building blocks of credit pyramid credit reporting, some of the most reporting systems with the potential to foster important being (i) establishment of credit responsible lending at the base of the pyramid reporting systems that cover all types of base- and avert irresponsible lending that leads to of-the-pyramid lenders in a given market; (ii) over-indebtedness. regulatory or cost barriers that limit participation; 2 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors Part I. Lending at the Base of the Pyramid and Demand for Credit Reporting credible estimates of the number of microborrowers from decisions. As lending expands to the massive market for MFis range between 120 million and 190 million world- financial services at the base of the pyramid, the need for wide.2 But, an estimated 2.7 billion adults worldwide do reliable, accurate information on existing and potential not have a savings or credit account in their name with a low-income borrowers is also growing. bank or other formal institution (cGAP and World Bank 2010). Most of these “unbanked� people are poor, many are informally employed, and their incomes tend to be irregular. For these consumers, credit is needed to smooth Understanding the Data needs consumption and may be used to purchase consumer of Different Financial services goods or longer term assets, such as land, animals, hous- ing, or tools needed for work. these individuals also tend Providers to the Base of the to lack physical collateral to pledge when seeking a loan. Pyramid For consumers at the base of the pyramid, developing their “reputation collateral� in a credit reporting system can be a highly valuable asset, one that facilitates credit with Microlenders can be broadly classified into four types: their existing lender(s) and that enables them to seek other informal lenders; specialized financial services providers, sources of finance rather than being tied to one provider. such as MFis; commercial banks and consumer lenders; and suppliers of goods and services, such as retailers Policy makers increasingly recognize the need for finan- (pharmacies, grocery stores, etc.) or, in rural areas, firms cial services at the base of the pyramid and the relation- providing agricultural inputs. Within each of these provid- ship that access to finance has with other development er types, different lending methodologies may be used. goals in livelihoods, health, education, and gender equal- nonetheless, these microlenders tend to share some ity, among others. the private sector has also awakened similar operational elements, including the extent of their to the market potential that these 2.7 billion consumers demand for, and use of, credit reporting information. represent. new players to this market segment, includ- ing commercial banks, credit card companies, consumer Informal lenders. informal financial services providers, finance companies, and retailers, are offering credit such as moneylenders, as well as semi-formal lenders, products and other financial services to consumers with such as village banks in Africa or self-help groups in ever lower income levels. these new providers do not india, are an important source of microcredit for low- employ high-touch lending methodologies, but rather income families in many markets. this is especially the they need data to drive their lending models and credit case in sub-saharan Africa.3 informal lenders are part of 2. see Microcredit summit campaign (2011) and symbiotics sYM50 index. cf. Wyman (2008), which estimates 180 million borrowers worldwide from all types of lenders, specifically for microenterprise purposes. 3. A recent Finscope survey in tanzania shows that 16.5 percent of the adult population in tanzania borrows from informal lenders compared to only 1.5 percent from formal financial institutions. informal microlenders are characterized by relatively high interest rates and lack of reliability (Armendariz de Aghion and Morduch 2005). Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 3 the community and, generally, have a good knowledge Banks and consumer lenders. Banks and consumer of their clients. they do not use formal credit reporting lenders are moving down market with new offerings for information, but rather, they gather intelligence on their low-income families. these include institutions such as clients’ credit history through their social networks and Banque centrale Populaire in Morocco, which is providing personal relationships with borrowers. Because data on consumer loans as well as other financial products (sav- these informal lenders can never be captured adequate- ings and insurance) to poor families. these formal sec- ly, market coverage of any base-of-the-pyramid credit tor lenders prefer to lend to low-income borrowers with reporting service provider never provides the full picture regular incomes, such as salaries or government benefits. of lending activity in a particular country. they tend to rely on credit scoring methods and are keen to incorporate credit information into their underwriting Microfinance institutions. MFis are financial providers processes when such data exist. But the experience of that specialize in serving low-income market segments. consumer lenders in microlending has not always been they can be regulated financial institutions (such as successful. in the 1990s, in Bolivia, consumer lenders of- banks or regulated finance companies), although the fered loans about the same size as microenterprise loans, largest numbers of MFis in most markets take other quickly and flexibly, to salaried workers. While, in theory, legal forms, such as financial cooperatives and nongov- the market for consumer lending is distinct from the ernmental organizations (nGos). MFis have become microcredit market—salaried employees versus informal a major source of microcredit for the poor. the 1,929 enterprises—in practice, consumer lenders often compete MFis reporting to MiX are active in 111 countries and directly with other microlenders, including MFis. When serve 91.7 million microcredit borrowers. over time, the Bolivian microlending market expanded unsustainably many MFis have developed original and robust lending with the entrance of consumer lenders, one of the main methods, which often involve strong loan officer–client policy responses of the government was to enhance credit relationships, a good knowledge of customers’ reputa- reporting at the base of the pyramid. tion and business that is supported by frequent visits to the business, and nontraditional guarantee forms, such Retailers and other nonfinancial credit providers. as mutual group guarantees. Retailers and other types of firms that provide credit or services in advance of payment (such as utilities, Until the past few years, many MFis demonstrated schools, or sellers of agricultural inputs) may also use excellent asset quality, with the sector average for arms-length lending methodologies that require access nonperforming loans, defined as portfolio at risk (PAR) to credit data. While smaller retailers are likely to base over 30 days, being consistently below 4 percent.4 decisions on informal relationships with their borrow- in this context, most MFi managers feel they can do ers—more akin to the informal sector lenders discussed business without solid credit reporting and only in a earlier—larger retailers require credit data for their risk few, more advanced and competitive markets, such as management and lending technology. since many low- Peru, Bolivia, and ecuador, have MFis been incorporat- income consumers first have access to retail credit or to ing credit reports into their underwriting processes. post-paid utilities before they have access to loans from However, credit risk is now seen as one of the major formal financial institutions, including these providers in risks facing the MFi industry, according to Lascelles and credit reporting systems can be helpful in establishing Mendelson (2011). in this context, many policy advisers credit histories for the unbanked. it is also useful to note and industry experts, as well as MFi managers, have that, in some markets, including several in Latin America been calling for existing or new credit reporting systems (such as Peru, Uruguay, and chile), retailers have a long to be integrated into the microfinance sector. history of collecting and sharing payment data on both individuals and firms. 4. see MiX, 2006–08 MFi trend Lines Benchmarks covering 1,019 MFis worldwide. 4 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors Part II. Some Different Approaches to Credit Reporting at the Base of the Pyramid Around the world, three broad approaches to cover- political economy also play a role in determining which ing base-of-the-pyramid borrowers in credit reporting approaches are tried, what challenges they face, and systems have been tried, often in combination (and with which have the best chances of success. almost as many country-specific variations as there are countries attempting this). (see Box 2.) Credit bureaus it is also important to understand that the three ap- have sought to expand their database to include pay- proaches to credit reporting described are not mutually ment data on low-income individuals (and to expand exclusive: two or even all three approaches can very their customer base to include lenders such as MFis well coexist and overlap in the same country; hybrid targeting these individuals as borrowers). Less com- approaches may also exist. And, as credit reporting monly, credit registries have incorporated nonbank systems, like credit markets, are dynamic, they can be microlenders (most typically in countries where they expected to evolve over time in response to market and have been brought under the regulatory jurisdiction of regulatory changes and to better respond to client de- the banking authority).5 Finally, MFI-specific client da- mands for improved services. Finally, none of the three tabases have been created, often because of obstacles models carries a guarantee of success in any market, to expanding existing credit bureaus or credit registries and each has its predictable or likely limitations.7 to include either or both low-income customers and nonbank lenders targeting them.6 Credit bureaus. credit bureaus collect information on a borrower’s credit history from various sources, including However, these three basic approaches do not make up financial institutions, nonbank lenders, telecommunica- a simple menu from which policy makers or industry tions companies, courts, and other available sources. participants choose. Many factors influence the way in the information is then merged and analyzed to form a which credit reporting develops in a country, including comprehensive credit history record for each borrower the structure of its retail credit markets (and in particu- and is sold to lenders in the form of credit reports. Most lar, the concentration of assets in a few institutions and credit bureaus are privately operated, for-profit entities the degree of overlap in different categories of lenders and can be found in more than 100 countries worldwide. that target or might target base-of-the-pyramid bor- credit bureaus generally hold a broad range of data rowers) and the financial system regulatory framework that often includes both positive (on time) and negative (especially the extent to which nonbank lenders are (delinquent) payment information. of course, the qual- clearly regulated). Donor agency policy and domestic ity and scope of credit bureaus varies, within countries 5. credit bureaus and credit registries are different types of credit reporting service providers. service providers can be either private entities or public sector entities. Credit bureaus represent a model of credit information exchange the primary objective of which is to improve the quality and availability of data for creditors to make better informed decisions. Credit registries represent a model of credit information exchange the main objectives of which are to assist bank supervision and enable data access to regulated financial institutions to improve the quality of their credit portfolios. For more information, see World Bank (2011). 6. in this report, we use the term “credit reporting service providers,� “credit reporting mechanisms,� or simply “credit reporting� when referring generically to credit bureaus, credit registries, or MFi-specific databases to avoid repeating the three general approaches described in this section. 7. the numerous challenges to building well-functioning credit reporting systems at the base of the pyramid are discussed in Part iii. Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 5 Box 2. Ecuador Box 3. Bosnia–Herzegovina the ecuadoran rural finance network, RFR, looked in Bosnia–Herzegovina, the privately owned and at alternative approaches to credit reporting and operated credit bureau LRc was established in settled on a partnership with one of the privately 2000, but this did not protect the credit market operated credit bureaus in the country, credit Re- from an over-indebtedness crisis in 2009. the port. it selected the firm because of the strength crisis may have stemmed in part from the fact of its technology platform, financial soundness, that participating in LRc is voluntary, resulting in ownership by the international credit report- incomplete credit reporting coverage. to ad- ing firm equifax (representing experience), and dress the issue of over-indebtedness, the central the price per report that the bureau guaranteed Bank Governing Board expanded the scope of for RFR members. At the time the deal with RFR its central Registry of credits (abbreviated in the was struck, there were six privately owned credit local language as “cRK�). Regulated financial insti- bureaus operating in ecuador. in 2011, after years tutions—all formal lenders, including banks and of intense competition and bare bones pricing— MFis—are required to join cRK. While LRc offers reports cost less than $ 0.10 each—only credit a broader range of services, it is also more expen- Report is left. the unique access it had to data sive to use and still does not have comprehensive on borrowers at the base of the pyramid through market coverage. cRK services, on the other hand, RFR’s members was one of the key factors that are more affordable, and most importantly cRK contributed to its success, as it had superior mar- covers the whole lending market. ket coverage compared with its competitors. For RFR and the MFis it serves, working with a privately owned credit bureau provided access to data from institutions, which may exclude many, if not all, micro- other parts of the credit market; access to related lending institutions (unless they are licensed as banks). tools, such as credit scoring; and access to quality However, in an increasing number of countries, a range data—all at a very attractive price. of MFis is coming under formal oversight by banking authorities (even if nondepository lenders are, appropri- ately, exempted from full-blown prudential regulation), and across nations. However, it is generally true that with the result that MFis have the option—or more typi- credit bureaus contain data from the widest range of cally are compelled—to report to a credit registry (see sources, including nonbank and nonfinancial sources, Box 4). the primary objective of most credit registries is such as utility payments, that are more likely to cover to support banking supervision and to provide data to poor people who have not previously borrowed from regulated financial institutions to enable them to bet- a formal lender (see Box 3). in addition to providing ter manage credit risk and improve the quality of their credit reports, credit bureaus differentiate themselves credit portfolios. from other types of credit reporting service providers by providing a wide range of value-added services. these MFI-specific client databases. A third approach to typically include credit scores that provide a rank-order credit reporting for microlenders typically grows out of number or “score� to indicate the relative creditworthi- the self-identified microfinance sector (see Box 5). in ness (or alternatively, risk) of customers, as well as other countries around the world, MFis, regardless of their services, such as identity verification, debt collection, legal type, have begun sharing credit history data about fraud monitoring, and so forth. there are numerous customers on their own—initially often very informally, examples of credit bureaus affirmatively reaching out to such as sharing excel spreadsheets of “blacklists� of MFis and other lenders to base-of-the-pyramid borrow- delinquent customers. these schemes have serious limi- ers, both as suppliers of data and purchasers of credit tations (including, typically, on the legal side), but they reports and scores. However, there are also examples can be established relatively quickly and offer valuable of credit bureaus owned and dominated by banks and information on MFis’ shared customers and delinquent other mainstream financial institutions that are essen- clients. some donors, conscious of the barriers these tially closed to participation by MFis and similar lenders. types of lenders may face in participating meaning- fully in either credit bureaus or credit registries, have Credit registries. credit registries are typically owned promoted MFi-specific client databases. over time, in a and operated by a central bank or other financial number of important markets, such MFi-specific client supervisors. in most countries, credit registries collect databases have evolved into privately owned and oper- credit information from prudentially regulated financial ated credit bureaus (or a hybrid thereof). 6 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors Box 4. Nicaragua in nicaragua, in 2002, MFis began sharing infor- and a credit bureau with foreign investment by a mation through sin Riesgos, a credit bureau pro- major international credit bureau had entered the moted by the nicaraguan microfinance association, market. today, the microlending market in nicaragua AsoMiF. At the time it was created, sin Riesgos is served by both sin Riesgos and by the interna- was the only privately held credit bureau operating tional bureau transUnion. over time sin Riesgos in the country. commercial banks were unable to has reached out to lenders beyond the MFi sector, share credit data except via the public credit reg- including retailers and commercial banks. similarly, istry due to the legal framework in place regarding transUnion has made in-roads into the microfinance bank secrecy. By 2004, the law on bank secrecy had sector, especially after the recent crisis and “no pay� been changed to allow credit information sharing, movement. Box 5. Credit Reporting Worldwide the World Bank’s annual survey, Doing Business, measures business regulations for local firms in 183 economies and selected cities at the subnational level. the Getting credit indicator from Doing Business covers the following:a • Depth of credit information index. Measures rules and practices affecting the coverage, scope, and acces- sibility of credit information available through either a public credit registry or a private credit bureau. • Public registry coverage. Reports the number of individuals and firms listed in a public credit registry with information on their borrowing history from the past five years. • Private bureau coverage. Reports the number of individuals and firms listed by a private credit bureau with information on their borrowing history from the past five years. Comparative Regional Presence of Credit Reporting, 2010 Depth of credit Public registry Private bureau information index coverage coverage (0–6, 6 = Best score) (% of adults) (% of adults) east Asia and Pacific 2.1 8.2 17.3 eastern europe and central Asia 4.0 13.1 21.3 Latin America and the caribbean 3.3 10.1 31.5 Middle east and north Africa 3.3 5.3 7.0 oecD 4.7 8.0 61.0 south Asia 2.1 0.8 3.8 sub-saharan Africa 1.7 2.7 4.9 a. Available at www.doingbusiness.org. the Getting credit indicator also measures the legal rights of borrowers and lenders with respect to secured transactions. Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 7 Part III. Challenges and Success Factors in Credit Reporting at the Base of the Pyramid the challenges to effective credit reporting at the base of Market coverage. one of the key drivers of the effec- the pyramid—and the factors that influence the success tiveness of credit reporting at the base of the pyramid is of credit reporting systems as a means of averting or miti- microlender market coverage. Because data on informal gating over-indebtedness among base-of-the-pyramid lenders can never be captured, the market coverage borrowers—can be roughly grouped into four categories: of any base-of-the-pyramid credit reporting service provider can never provide the full picture of lending ac- 1. Market-level issues, which affect all lenders targeting tivity in a particular country. But even leaving aside this this market regardless of their type. challenge, developing credit reporting databases that 2. Lender-level issues, which vary according to the capture accurate and comprehensive data from all types characteristics of the type of lender in question, of formal lenders that are lending to base-of-the- particularly its regulatory status. pyramid borrowers—MFis (and other microcredit pro- 3. Credit reporting service provider-level issues, which viders, such as financial cooperatives), banks, consumer relate to providing quality and sustainable credit lenders, and retailers and other nonfinancial credit reporting services to microlenders. providers—is a formidable goal that few, if any, credit 4. Borrower-level issues, which relate most directly reporting service providers have fully achieved and sus- to the base-of-the-pyramid borrowers who are the tained. While maximum market coverage is the ideal, in subjects of credit reporting. reality, this is not always possible. Moreover, in the short run, pursuing this ideal could slow down and frustrate these groupings of challenges and possible success efforts to start any form of credit reporting that reaches factors are closely interrelated and often overlap. A the base of the pyramid. Quite frequently, credit report- challenge or success factor at one level is likely to have ing service providers have started to work with micro- corollaries at the other levels as well. lenders that command a majority of the market share, before reaching out to the smaller market participants. Market-Level issues the reasons for less-than-total market coverage are many, and they vary from region to region and country to country. Among the market-level issues affecting base-of-the- the most important factors are often lender-level issues, pyramid credit reporting, three concerns tend to figure such as having (or not having) a particular regulatory status as the most important: (i) the extent to which available to participate in a particular credit reporting system, or credit reporting systems cover all significant lenders cost and benefit considerations specific to a particular targeting low-income borrowers; (ii) the feasibility of type of base-of-the-pyramid lender (as discussed later uniquely identifying base-of-the-pyramid borrowers; in this report). in some cases, the way data are collected and (iii) the quality of the data on such borrowers that and stored by a lender can be a factor. For example, if a can be assembled. credit bureau is seeking data on payments that are late by seven or 14 days and a given lender identifies loans as 8 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors past due at 30 or 60 days, the lender may have to change comprehensive and reliable national identification systems, its internal record keeping and concepts on delinquency and the approaches used in credit reporting in wealthier to participate in the bureau. Agreeing on standard formats countries without national identification systems—such for collecting and storing payment credit data can facilitate as gathering data on multiple fields (a borrower’s name, credit reporting in a market. date of birth, and address)—may not work as effectively at the base of the pyramid. this is because the names and there can also be instances where competitive pres- contact information of low-income borrowers may be cap- sures discourage credit information sharing and com- tured differently each time they apply for a loan or service. prehensive market coverage. in particular, if there are this may be because of inconsistent spelling of a name (a one or two dominant base-of-the-pyramid lenders, they special problem for illiterate borrowers who have others fill may see little or no benefit from sharing information in their forms), no fixed address, and no birth certificate or with a credit reporting service provider since they have even knowledge of one’s date of birth. in some instances, information on a significant share of the population identification information may be used for verification but who are their clients. Dominant lenders can also view is not captured electronically. information sharing as detrimental to their competitive position, if sharing data enables others to enter the in countries that do have a national identification sys- market more easily or gain market share. of course, tem, improving the effectiveness of base-of-the-pyramid this problem is not unique to lending at the base of the credit reporting may be as straightforward as mandat- pyramid; this same dynamic is sometimes at work in ing the use of borrowers’ identification as a condition mainstream, commercial banking markets, where one or of participating in the credit reporting system. this two dominant lenders may delay or impede the devel- was the case in Pakistan’s MFi-specific client database opment of credit reporting systems. launched by Datacheck, an existing private credit bureau in the country, with the Pakistan Microfinance success factors in overcoming the base-of-the-pyramid network. note that the absence of a national identifica- market coverage challenge are as various as the rea- tion system need not prevent or stall the development sons giving rise to it. Broadly speaking, credit reporting of credit reporting. in several markets, credit bureaus systems should encourage comprehensive information have developed sophisticated matching algorithms sharing, which implies the collection of accurate, timely, and programs to derive the identity of a person based and relevant data from all relevant and available sources. on various pieces of data. in countries without national in some markets, the financial regulatory authority may identification systems, the success of base-of-the- mandate regulated financial entities to provide data to pyramid credit reporting depends initially on making the existing credit reporting service provider, as a means the best of imperfect alternative customer identification of reducing risk in the system through greater transparen- approaches. Frequently, public records agencies hold cy. However, some relevant data sources may fall outside identification information that can enhance the ability of the purview of the financial regulatory authority (e.g., a credit reporting service provider to accurately identify telecommunications companies, utilities, and unregu- borrowers. However, the databases held by these agen- lated microlenders) and may not be easily incentivized cies are not always available to credit reporting service to participate in credit information sharing. coordination providers or, if available, access comes at an additional across regulatory authorities and market awareness of the cost. therefore, a success factor in alleviating borrower importance of credit reporting are important to ensur- identification challenges may be to compel these public ing the comprehensiveness of data collected by credit records agencies to make their data available to credit reporting service providers. some competition among reporting service providers. credit reporting service providers can also encourage the development of comprehensive databases and foster in- Data quality. Just as all types of base-of-the-pyramid novation in related products and services. lenders are affected by the feasibility of uniquely identifying borrowers for credit reporting purposes, so Customer identification. the challenge of uniquely iden- are they all affected by the quality and reliability of the tifying base-of-the-pyramid customers for credit report- data captured by any credit reporting service provider, ing purposes is significant in many countries. Yet, without regardless of approach. a reliable means of uniquely identifying borrowers, credit reporting mechanisms are more costly to implement, the capacity of different types of lenders to deliver high- and the quality of data is reduced—in some cases to the quality, reliable data is likely to vary, and in this respect, it point of rendering the data of little or no value. constitutes a lender-level issue. similarly, the success fac- tors leading to the inclusion of high-quality, reliable data the factors contributing to this challenge are famil- in base-of-the-pyramid credit reporting tend to depend iar: many countries, particularly poorer ones, lack on characteristics of participating lenders. Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 9 lenders tend to vary significantly among different types Box 6. Limits of Credit of lenders. Banks and consumer lenders, because they are likely to rely on credit scoring in their loan underwrit- Reporting Data in Identifying ing, are also likely to see the benefits of participating in Over-Indebtedness credit reporting systems clearly. However, even these types of lenders may not see a benefit, depending on their market position. As previously observed, dominant credit reporting can be a useful tool to monitor lenders of any type in a particular market may prefer the level and depth of use of credit products at not to share their data with other lenders who might the base of the pyramid, which can help inform encroach on their market share. a range of public and private sector policies, from consumer protection to borrower screen- For MFis and other microcredit providers, such as ing and lending criteria. However, there are financial cooperatives, the benefits of participating limits to what credit reporting systems can tell in credit reporting mechanisms often don’t appear us about the financial lives of the individuals clearly until market saturation and cross-borrowing captured within the reporting system. Borrow- among their customers become evident. Low competi- ers’ credit histories must, therefore, be com- tion among formal lenders is common at the outset in bined with other information on their financial many markets, particularly in rural areas. And even in lives to develop a more complete picture of more mature markets, MFis have succeeded in fending the state of financial inclusion and any potential off competition by informally agreeing to divide the market risks from overextension of credit. the market (as occurred, e.g., in egypt for many years). But following are some of the most important limits as markets become more competitive, the high-touch of credit reporting: lending methodologies based on close knowledge of customers commonly used by MFis are not sufficient to • Data will not provide information on debt- prevent the risk of over-indebtedness, and the benefits to-income ratios, which is an important of credit information sharing in such markets often factor in assessing the affordability of credit become clearer only as evidence of cross-borrowing for borrowers and their risk of over-indebt- among MFis increases. edness. • Similarly, the most common use of credit However, not all MFi managers see multiple lending information for market monitoring at the as a bad thing, and they tend to look on it, at least base of the pyramid—number of concurrent initially, as a means to better distribute risks among loans outstanding—has not proven to be a microlenders. Moreover, many MFi managers weigh the universally applicable measure of the risk of benefits of participating in credit reporting against the over-indebtedness for individuals or within a risk that other MFis will poach their best clients to gain market. market share. Finally, MFis’ often legitimate concern • The economic unit captured by credit bu- that existing credit reporting service providers won’t reaus is an individual, whereas at the base of adequately cover their clients dampens appreciation of the pyramid—and particularly for informal the possible benefits of participation. sector workers—the more important eco- nomic unit is generally the household. A key success factor in persuading MFis and other microlenders of the benefits of participating in credit reporting involves simply demonstrating that cross- borrowing is occurring. this was done in Bolivia, ecuador, nicaragua, and more recently in egypt, to Lender-Level issues name a few markets where MFi credit reporting has been or is being established. For a further discussion on Lender-level issues are about the business case for credit how credit reporting affects the poor, see Box 7. reporting services. What are the perceived benefits? And what are the costs associated with the credit reporting Costs of the credit reporting services. Paying the cost services? What lender capacity or lender-related regula- of purchasing a credit report may be a challenge for all tory issues affect the practical and economic feasibility of types of base-of-the-pyramid lenders, because loan sizes participating in base-of-the-pyramid credit reporting? are small relative to conventional retail lending (including consumer lending in higher loan amounts). Moreover, loan Benefits of participation. the benefits of participat- tenures are shorter, and repayments are more frequent, ing in credit reporting systems for base-of-the-pyramid driving up report costs as a percentage of the amount lent. 10 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors For MFis and other microcredit providers, the price of Box 7. The Impact of Credit reports and analysis from credit bureaus is likely to seem high relative to the impact of the information on their Reporting on the Poor: lending. this is not just a factor of the absolute costs of Empirical Evidence from obtaining reports, but also of concern that data on base- Guatemala of-the-pyramid borrowers will be deficient. For some time in Mexico, for example, Buro de credito, which primarily served the commercial banking segment of the market, the use of credit reporting can have important charged MFis and other microcredit providers relatively implications for both providers and borrowers. high rates (due to their low numbers of inquiries and lim- to measure these impacts, Mcintosh, sadoulet, ited market power) and offered little data on low-income and de Janvry (2006) tracked client and loan borrowers. circulo de credito, a privately operated credit data from a Guatemalan MFi before and after it bureau, then entered the Mexican market to focus spe- began to use credit history data. their findings cifically on low-income consumers. in other markets, MFis make a case for the potential business and de- use a simple MFi-specific client database (rather than velopment impacts of credit reporting systems credit bureaus) because of the high cost of purchasing a and the data they provide on borrower histories. credit report relative to its perceived value. in the Guatemalan MFi used for this research, Mc- Capacity to participate. it is generally assumed that intosh, sadoulet, and de Janvry found that after banks and consumer lenders have both the requisite the MFi began using the credit reporting data- management information system (Mis) and appropriately base, “the average percentage of individual loans skilled personnel to participate in either credit bureaus with at least one late payment decreased from or credit registries. typically, the same can be said only of 67.2 percent for pre-credit reporting loans, to 52.8 those MFis and other microcredit providers that are large percent for post-credit reporting loans.� (Group and sophisticated enough to run core banking platforms loans showed little change in payment patterns.) (which tend to be those regulated by the banking author- separating these data by clients with asset values ity or a similar nonbank regulatory agency). above or below 1,000 quetzales (approximately $125), the study found that the impact was great- For the rest, both technological and human capacity est on poorer clients, as the number of loans for issues can vary widely in their significance. At one end clients with asset values less than 1,000 quetzales of the spectrum are microcredit providers with highly with at least one late payment dropped from 63 developed Mis and staff to operate it. For these institu- percent to 48 percent (compared to a reduction tions, participating in an MFi-specific client database of 54 percent to 48 percent for clients with asset may require little more than some modest retrofitting. values greater than 1,000 quetzales.) note that, However, a more substantial overhaul of their existing initially, the credit information gathered from the systems and upgrades to backend processing mecha- credit reporting database reduced total lend- nisms, hardware, and software will likely be needed to ing to poorer clients, although much of this shift enable the capacity and processing speeds required to to clients with higher asset values eventually participate in credit bureaus or credit registries. these disappeared, as the MFi began to use the credit MFis tend to be market leaders and account for the information more effectively when assessing the larger number of customers. credit-worthiness of its poorer clients. At the other end of the spectrum are the many MFis and other microcredit providers around the world that are only semi-automated, or are still using manual systems. Perceived benefits in relation to costs may depend on For these institutions, the additional investment needed the type of lender involved. Because credit scoring is in an Mis and the personnel to operate it may very likely likely to be integrated into the underwriting of loans tip the balance against their participation in any form of from banks and consumer lenders, the cost of supplying credit reporting. (While some credit reporting service data, purchasing reports, and analyzing the reports rela- providers accept data supplied on paper, the costs of tive to the amount lent may seem justifiable. Moreover, processing this information and the attending data because these lenders typically make larger loans, quality and timeliness issues make this impractical.) their overall volume of inquiries—and sometimes their ownership participation in credit bureaus—may allow For MFis and other microcredit providers that fall some- them to cut advantageous deals for all the reports and where between these polar extremes, the opportunity value-added analytics they purchase. to participate in a credit reporting mechanism may lead Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 11 them to invest in an Mis to improve their capacity. this, in cases where it is possible to identify the credit history in turn, would result in collateral improvement in their at the group-member level, social solidarity mechanisms operations overall in terms of efficiency, productivity, may affect actual individual behavior. However, the infor- cost effectiveness, risk analysis, and client outreach. mation on clients’ exposure is valuable even if the repay- ment history at the individual level is difficult to assess. the group lending methodologies used by some MFis and other microcredit providers can add to the challeng- improvements in MFis’ Mis and human capacity greatly es to participating in credit reporting. some MFis track facilitate MFis’ integration into credit reporting mecha- credit information only at the group level, and few data nisms. Factors that play key roles in enabling MFis and are available on individual group member behavior. even other microcredit providers to participate in credit Box 8. Lender-Level Regulatory Issues in Credit Reporting at the Base of the Pyramid Although some regulatory issues in credit reporting they are highly likely to be subject to the same at the base of the pyramid, such as licensing, su- consumer data privacy regulation (and to have pervision, and rules of operation, vary based on the available the same workarounds) as nonbank nature of the credit reporting mechanism in ques- consumer lenders. the same rules are likely to tion (credit registries, credit bureaus, or MFi-specific apply for participating in both credit bureaus and client databases), the type of lender (banks, nonbank MFi-specific client databases (though less formal consumer lenders, MFis or other microcredit provid- information sharing among MFis may well pass ers, or retailers and other nonfinancial credit provid- under the regulatory radar screen, even if it is not ers, such as utilities) also typically triggers specific clear that it is permitted by regulation). regulatory issues. the following are among the most • Retailers and other nonfinancial credit providers commonly encountered issues: are likely to face the same regulatory treatment as • Bank secrecy provisions in a country’s banking consumer lenders and MFis that are not regu- law often limit participation in privately operated lated by the banking authority or similar nonbank credit bureaus (unless the provisions are modified regulatory agency, and they can generally use the or over-ridden), but typically do not prohibit in- same workarounds to participate in credit bureaus formation sharing with credit registries operated (provided they have the impetus to do so). by a public sector body. As with consumer data privacy protection, bank secrecy limitations on Regulation is not always a barrier to relevant lenders data sharing typically can be worked around by participating in credit reporting at the base of the obtaining borrowers’ consent in the loan docu- pyramid. indeed, in a number of countries, regula- ments (presuming the bank in question has the tion has been used effectively, not only to enable impetus to do so). broad participation in credit reporting systems, but • Nonbank consumer lenders may be barred from also to encourage or even to compel participa- participating in credit registries unless they are tion. in both south Africa and Bolivia, for example, regulated by the banking authority or similar non- consumer loan contracts are not legally enforceable bank regulatory agency. consumer data privacy if they are not supported by a credit report or other regulation also often limits data sharing without individualized analysis of borrower’s capacity to re- customers’ consent, although in many instances, pay. As more countries cope with or attempt to avert such limitations may be easily worked around with market saturation and over-indebtedness problems boilerplate consent provisions in lending docu- at the base of the pyramid, the number adopting ments (as with bank secrecy provisions). reforms to enable, encourage, or compel relevant • MFIs and other microcredit providers are likewise lenders’ participation in credit reporting systems will often barred from participating in credit registries likely increase. unless they are regulated by the banking author- ity or similar nonbank regulatory agency, and 12 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors reporting include donor (and sometimes investor) inter- particularities of lenders operating in this space and est in subsidizing these capacity improvements, active the complexities involved. in Latin American markets, support by MFi network associations (as in the case of service providers spend considerable effort working Pakistan’s PMn and ecuador’s RFR), and policy-level sup- with microlenders to develop awareness and apprecia- port in making this type of capacity building a priority. tion of the benefits of credit reporting (e.g., offering trial periods at lower costs, free portfolio analysis, and even microlender training). Another success factor is the provision of customized services, such as credit reports credit Reporting service or even credit scoring tailored to low-income markets. Provider-Level issues Delivery method can also be an important and differ- entiating quality-of-service issue with respect to credit reporting service providers. A system that can be easily credit reporting service providers—whether they are accessed by relevant microlender staff helps reduce credit bureaus, credit registries, or MFi-specific client transaction costs and facilitates the integration of credit databases—constantly struggle to find sustainable information into the loan underwriting process. business models that offer good quality credit reporting services for base-of-the-pyramid lenders. they need to develop automated processes to reduce costs, while Borrower-Level issues they provide value-added services to microlenders’ high-volume business. Many issues in credit reporting at the base of the pyramid that are triggered by the characteristics of low- Credit report pricing. the quality of the data lenders income borrowers affect lenders and credit reporting contribute to credit bureaus (which, with MFis, in many service providers at least as profoundly as they affect cases, is linked to their capacity, as discussed earlier) can customers themselves. two sets of issues, however, also influence the prices they pay for reports and analy- are of direct importance to borrowers: protection of sis. if the credit bureau faces high costs in cleaning and the privacy and accuracy of the data about borrowers processing data supplied by microlenders, this will be contained within the credit reporting system (and in the reflected in the price of the credit report. conversely, the reports and other analytics it provides) and the borrow- prices that can be charged by a credit reporting service ers’ own awareness regarding credit reporting. provider are related to the quality and comprehensive- ness of its database. credit reporting service providers Consumer data privacy and accuracy. For borrowers, that offer better quality and more comprehensive infor- perhaps the most critical issues in credit reporting are mation on base-of-the-pyramid borrowers are able to protecting consumers’ data privacy and ensuring a demand higher prices than competing service providers. reasonable standard of accuracy for information about them that appears in credit reporting databases. the level of competition in the credit reporting market is another factor that influences costs of credit bureau As observed in Box 9, data privacy protections, whether reports and analysis. Based on information from sev- they are found in bank secrecy rules or in more general eral markets with credit reporting systems geared to regulation on consumer data privacy, typically can be base-of-the-pyramid borrowers, the average cost of a accommodated by obtaining borrowers’ consent to share basic credit report for such customers can be as low as credit information that they provide in their loan applica- $0.08 in highly competitive markets, like ecuador (until tion. Data accuracy concerns generally can be addressed recently), or as high as more than $1 in a less competi- by affording customers convenient opportunities to tive or less mature environment. Many markets report review and correct information about themselves that fees of $0.25 to $0.40 per report. is contained in the database. With base-of-the-pyramid customers, both data privacy and data accuracy protec- Quality of service. some credit reporting service provid- tions may not be effective without attention to specially ers that have developed a niche in the microlending designed disclosure and recourse mechanisms that market have gone the extra mile in understanding the recognize the particularities of their situation. Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 13 note that data privacy protection regulations will not Box 9. Consumer Outreach be effective unless there is systematic enforcement. Without this, base-of-the-pyramid clients may be even and Credit Reporting more vulnerable than more affluent clients to data theft or inappropriate disclosure to third parties. Authorities, policy makers, service providers, and lenders alike play an important role in ensuring Consumer awareness. An equally important challenge that consumers’ rights are protected with respect at the borrower level is building awareness of credit re- to their personal data and their awareness of the porting among consumers whose data are to be shared. importance of such protections. this may entail Awareness of the benefits of building a favorable credit a variety of education and awareness-raising history potentially positions good customers to take campaigns through popular media (television, advantage of the best deal on offer, which can help fo- radio, press) and education efforts made by both ment healthy competition among base-of-the-pyramid credit reporting service providers and lenders. lenders. Awareness of the negative consequences of an Authorities also can play an important role in unfavorable credit history can have a deterrent effect ensuring or enforcing consumer privacy rights and reinforce responsible borrowing. by taking a hard line with both credit reporting service providers and credit data providers that fail to respect consumer rights and take corrective measures in a timely fashion. new technologies offer a variety of scalable approaches to raising consumer awareness of credit reporting, including at the base of the pyramid. For example, clients of microlenders could receive sMs reminders when a payment is due, with a corresponding message that failing to pay will be reflected in the relevant credit report- ing mechanism—or indicating positive data were sent to the credit reporting service provider when a payment is made on time. comic books and street theater are other ways to keep the interest of low-income borrowers with limited literacy so that messages on their rights and responsibilities in credit reporting get through. in some markets, such as colombia, soap operas have been used to communicate basic information about how credit reporting works to a mass audience. While credit reporting service providers have a poten- tially critical role to play in educating consumers (and have access to the borrower at “teachable moments,� such as when a loan has been denied due to adverse data in the credit report), market incentives may not adequately compensate for the level of investment in this kind of education that is socially desirable. Lenders who want their borrowers to repay and policy makers who seek to promote a strong credit (and repayment) cul- ture should also contribute to consumer outreach and financial literacy and capability efforts around credit reporting. 14 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors Part IV. Recommendations for the Development of Credit Reporting at the Base of the Pyramid there is strong evidence that multiple borrowings and reaches the base of the pyramid. the approaches to credit the risk of over-indebtedness are already causing stress reporting—credit bureaus, credit registries, MFi-specific in such high-profile microcredit markets as Bosnia– client databases, or some hybrid—that have the best Herzegovina and Morocco. this trend will undoubtedly chances of success in covering these market segments continue to spread to more countries as the number of vary from country to country. in all cases, policy makers institutions serving borrowers at the base of the pyra- should focus on policy and regulatory constraints that mid grows. credit reporting systems that include data impede development of credit reporting systems that on low-income borrowers have a potentially important maximize coverage of the base-of-the-pyramid market, role to play in helping manage the rapid expansion of regardless of the legal form or regulatory status of the credit to these market segments. lender. in some cases, for example, policy makers can take steps to improve market coverage of credit registries, But developing credit reporting systems that gather such as by allowing nonbank lenders to participate in the reasonably thorough and accurate data on base-of-the- credit registry or by revising downward—or even eliminat- pyramid borrowers and cover the full range of formal ing—the minimum loan size required to be included in the lenders from which these clients are borrowing face nu- credit registry where such rules exist. Policy makers also merous challenges, as discussed in Part iii. these chal- play a key role in overcoming the challenges of uniquely lenges cannot be overcome without the engagement of identifying base-of-the-pyramid borrowers for credit policy makers, donors, and lenders serving those at the reporting purposes, such as facilitating or mandating data base-of-the-pyramid. sharing among relevant government agencies and credit reporting systems, or programs to establish or extend Policy makers should provide appropriate support, secure national unique customer identification systems. encouragement, and urgency to existing initiatives to develop or enhance credit information sharing among At the base-of-the-pyramid lender level, establishing microcredit providers and should consider what con- a conducive regulatory environment for credit informa- straints stand in the way if there are no such initiatives. tion sharing is the primary task facing policy makers. As observed in Part iii, policy makers have a role at Here, too, the specific regulatory provisions that will each level of challenge—at the market level, at the level be most successful vary from country to country, but of base-of-the-pyramid lenders, at the level of credit in every country, policy makers need to focus not only reporting service providers, and at the level of base-of- on removing obstacles to broad participation by all the-pyramid borrowers themselves. relevant lenders, but also on providing incentives—and, where necessary, even mandates—for their participa- At the market level, policy makers may mandate micro- tion. Policy makers must also balance individual needs credit provider participation in information sharing where for protection of data privacy and accuracy against the viable credit reporting mechanisms exist. Where informa- needs of the broader economy for transparency and tion sharing has not yet developed, authorities can set workable tools reinforcing repayment discipline and out a timetable for developing information sharing that averting over-indebtedness. Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors 15 At the credit reporting service provider level, policy mak- on low-income borrowers in every country. Unless these ers should assess regulatory requirements that add unnec- lenders see the value in credit reporting in relation to essarily to the cost of obtaining meaningful credit reports costs of participation and the price of credit reports, on base-of-the-pyramid borrowers. in addition, regulations they are unlikely to make the upfront investments re- to protect data accuracy can contribute to improved data quired for successful participation. Beyond possible in- quality, such as by requiring credit reporting service provid- vestments in hardware and software, there may be costs ers to disclose the numbers of complaints they receive and for telecommunications for secure connections with the propose remedial action; undergo audits to evaluate data database, costs for modifying the format or definition quality; and establish clear and practical procedures for of payment data (and possible modification of lending base-of-the-pyramid borrower complaints. methodology) so they conform to the credit reporting service provider’s requirements, regulatory compliance At the borrower level, in addition to data privacy regula- costs related to data privacy and responding to custom- tion, policy makers play a role in developing awareness er complaints, and capacity building expenses related of credit reporting among the low-income population. to staff development so they can both supply and use this need not be a direct role (though, in some countries, the data effectively. in some markets, lenders may make this is both appropriate and feasible), but could be done these investments in response to a crisis or in response through partnerships with other stakeholders. Policy to encouragement, pressure, or even mandates from makers need to specifically focus on determining which policy makers. Where these incentives or requirements approaches to base-of-the-pyramid borrower awareness are lacking, donor support can help reduce the costs building on credit reporting is appropriate for the needs of participation and increase the likelihood of credit and skill levels of the low-income population in their reporting starting before a delinquency crisis is at hand. country. in many countries, the most effective approaches include alternative communication tools, such as comic Effective credit reporting systems that cover both books or even sMs messages delivered via cell phones. the relevant base-of-the-pyramid lenders and their low-income borrowers is a critical investment for the Donors, too, have potentially important roles in support- global microcredit industry to ensure sustainable growth ing the development of effective base-of-the-pyramid and avoid client over-indebtedness. Global experience credit reporting at each of these different levels. these shows there is no single package of interventions that roles could include, for example, the following: is optimal in every market, and that overcoming all the challenges to building effective base-of-the-pyramid • Encouraging participation in credit reporting systems credit reporting systems is a long-term endeavor. across the range of base-of-the-pyramid lending therefore, the immediate focus should be on pragmatic institutions they support (and thus increasing market solutions adapted to current local market conditions coverage). and the capacity and the needs of the microlenders • Funding country-level studies that help to dem- active or becoming active in the base-of-the-pyramid onstrate the benefits of credit reporting (and market. With the engagement of policy makers, donors, incidence of cross-borrowing among base-of-the- credit reporting service providers, base-of-the-pyramid pyramid borrowers that may be a harbinger of lenders—and base-of-the-pyramid borrowers them- over-indebtedness). selves—these solutions have the potential to improve • Supporting capacity-building initiatives in MFIs and evolve over time to increase the breadth of cover- and other base-of-the-pyramid lenders so they can age and the depth of data services provided—and to supply high-quality data to credit reporting service serve as ever more effective tools to reduce the risk of providers and make good use of the reports that delinquency crises and over-indebtedness among base- these providers generate. of-the-pyramid borrowers. • Providing funding to offset the upfront costs related to participating in credit reporting systems, such as the unprecedented growth in microcredit in the past information technology-related investments. five years has brought the sector to maturity in a first set • Supporting consumer awareness raising and financial of countries and regions and resulted in market satura- capability-building programs to increase base-of-the- tion in some. these are early cases, but more and more pyramid borrowers’ understanding of their rights and markets will reach this stage as the success of the sector responsibilities in relation to credit reporting, as well continues. Against this backdrop, early building of ef- as of the benefits of developing a positive credit his- fective credit reporting that covers base-of-the-pyramid tory and potential adverse effects of a negative one. clients and the full range of formal lenders from which they borrow is not only important, it is urgent. there are Base-of-the-pyramid lenders play the most direct role different ways to do this, and there are challenges. But in any move toward increased credit information sharing experience shows it can be done. 16 Credit Reporting at the Base of the Pyramid: Key Issues and Success Factors References Armendariz de Aghion, Beatriz, and Jonathan Morduch. 2005. The Economics of Microfinance. cambridge, Mass.: Mit Press. cGAP and the World Bank. 2010. Financial Access 2010. The State of Financial Inclusion Through the Crisis. Washington, D.c.: cGAP and the World Bank. Lascelles, David, and sam Mendelson. 2011. Microfinance Banana Skins 2011: The CSFI Survey of Microfinance Risk. 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