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Credit scoring for microfinance: is it worth it?

Record type: Article

Due to growing competition, over-indebtedness, and economic crises, microfinance institutions have to pursue their social and financial objectives in an increasingly constrained environment. Developing powerful risk management tools becomes more than ever crucial to survive. Therefore this paper analyzes whether microfinance institutions can benefit from credit scoring, which has been successfully adopted in retail banking. An extensive literature overview is provided, indicating a lack of quantitative evidence, in particular for markets in Eastern Europe-Central Asia and the Middle East-Northern Africa. Two logistic regression-based scoring models are developed using data from a Bosnia–Herzegovinian microlender. The models are assessed in terms of stability, readability, and discriminatory power, indicating that credit scoring is not yet able to fully replace the human-intensive microfinance credit process. However, it is recommendable to introduce credit scoring as a refinement tool in the lending process, in order to combine both statistical and human best practices. Moreover, a microlender staff can learn from credit scoring models to validate or contrast practical intuition.

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Citation

Van Gool, Joris, Verbeke, Wouter, Sercu, Piet and Baesens, Bart (2012) Credit scoring for microfinance: is it worth it? International Journal of Finance & Economics, 17, (2), pp. 103-123. (doi:10.1002/ijfe.444).

More information

e-pub ahead of print date: 24 January 2012
Published date: April 2012
Keywords: microfinance, credit scoring, logistic regression, credit risk, bosnia–herzegovina
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 336473
URI: http://eprints.soton.ac.uk/id/eprint/336473
ISSN: 1076-9307
PURE UUID: 01e6576c-653a-4884-8be3-2316547e08b0

Catalogue record

Date deposited: 27 Mar 2012 12:29
Last modified: 18 Jul 2017 06:07

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Contributors

Author: Joris Van Gool
Author: Wouter Verbeke
Author: Piet Sercu
Author: Bart Baesens

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