3 Credit Agencies

What information do credit bureaus have about me?

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Loan offices in the field of microfinance: One base survey

Loan bureaux are consolidating borrowers' credit history and passing it on to MFIs, dealing with unfavourable selections and morale hazard issues. These changes give secure borrower lower interest levels, but can exclude those with bad or non-existent credit ratings from the markets. Since at least 30 years, the financial micro community has been trying to lend in situations where severe restrictions mean that conventional bank practices are not applicable.

These constraints have eased over the years as the growth of financial micro entities (MFIs), information technologies have become less expensive and customer income has increased. Now it is possible to collect and save customer credit histories and individual data in a credit office available to all MFIs. Thus, the credit history and data of the customers can be collected and stored in a credit office as well. Is the credit agency policy to be adopted and, if so, how should it be used?

It is not clear as the response is dependent on MFI competitiveness and the amount of information concealed, which leads to negative choices and ethical risks. In the absence of a credit agency, the disadvantageous choice applies because creditors cannot identify the type of risks of borrowers, so that they all calculate higher interest charges. Without an exchange of information between MIFIs, an MFI that manages to be reimbursed by certain borrower is practically a sovereign creditor for those customers who have demonstrated their soundness.

However, over the course of arguing, due to the gains they make from high value borrower money, the MFI has an incentive via the provision of small credits and the monitoring of repayments over a period of times to know whether a customer has good prospects. Introducing a credit bureaus is likely to weaken both the beneficial and the adverse effects; the overall impact on well-being depends on the level of information concealed and the level of competitive pressure in the markets.

The dependence of creditworthiness on creditworthiness of developing country governments allows persons with good creditworthiness to switch between creditworthiness institutions, but may make it more difficult for young persons to get on credit ladders. CROs have similar conflicting repercussions by restricting morale in hazards. In this case, morale risks mean that the borrower, after obtaining a credit, can determine how high the risks are and whether they are willing to pay it back.

In the absence of information exchange between microfinance institutions, individual persons can proceed in series by switching between microfinance institutions and concealing their debt. It may enable credit to be expanded, a win-win situation for customers and creditors. However, on the downside, some borrower will fall into arrears through no fault of their own, and an effective credit system would allow some kind of credit rating rebalancing to bring good but unfortunate borrower back into the pen.

It may not be possible with a credit agency if all creditors are applying stringent creditors. Effects on customer well-being are driven by the level of morale hazard and the way companies use information in the office. Recently Pakistan established a credit microcredit office. In cooperation with the Pakistanicrofinance Network, we have developed an experimental tool to assess the effects of the credit bureaus.

These companies have been grouped into different "markets" of rival industries and each one has been allocated to one of two treatment categories at random. All companies will have office space as soon as possible for some countries; for others it will be later. Based on the office's own management information, we will monitor how the rollout changes credit and loan behavior.

It will allow us to judge how the office affects credit availability and the cost of credit. It will also be possible for us to examine how the effects of the Office will change as a result of the different uses made of it.