> Posted by Mr. Provocative
Joe Nocera, a business columnist for the New York Times, recently published a piece about the frequency of unreliable credit scores. His experience should give the microfinance industry pause as it rushes to embrace the creation of credit bureaus.
Some microfinance practitioners want to move away from the traditional, high-touch (very imperfect) loan-officer evaluation of client creditworthiness to the use of information gleaned from credit bureaus as a key to managing portfolio risk. And ultimately it is hoped that more complete credit reports will create greater operational efficiency, allowing interest rates to drop. Furthermore credit bureaus will help protect against the growing plague of undetected multiple borrowings that hurt an MFI’s bottom line and allow clients to fall into over-indebtedness.
As David Roodman of the Center for Global Development argues in a June 1, 2010 interview on NextBillion.net, “Where credit bureaus are practical, they are definitely good things to create. It makes perfect sense that lenders need complete information about how much borrowers really owe.”
Yes, in a world where human beings can be counted on to input accurate, complete and up to date data. But what are the consequences for clients if this is unrealistic, even Pollyannaish thinking?
Mr. Nocera, evaluating the US experience with credit bureaus, emphasizes the unreliability of credit reports,
“There are people with low credit scores who are quite creditworthy. There are people with high scores who aren’t. Treating credit scores as if they were infallible—which is what the banking industry is now doing—is beyond foolish…. You would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. There aren’t. Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.”
On examining his own personal credit reports from the major credit bureaus, Nocera discovered they were rife with inaccuracies. “According to Experian, I was still writing for Fortune magazine. It said I no longer lived in a house that I just bought two months ago. TransUnion, meanwhile, listed The New York Times as my former employer. Currently, TransUnion said, I am an employee of Rite Aid.”
With the credit bureaus in the United States quite prey to error after years of presumably perfecting their methodology, what makes us think that establishing credit bureaus in the developing world will produce superior results?
It behooves all of us in the microfinance industry to make sure that these bureaus in the developing world don’t follow the example of their giant (presumably far more sophisticated) counterparts in the United States. Or the poor clients of MFIs will grievously suffer and their trust in the banking sector will erode. These starts-up operations require rigorous oversight and monitoring from day one.