Given the popularity of my initial posts on microfinance (see here, and here), I continue blogging about the topic this week.
This week, however, I am blogging about microfinance as seen from within the industry. As such, I am blogging the five-point response a friend of my wife’s and mine — whom I refer to by the pseudonym “Chad” — has made to my previous two posts.
Chad works for a microfinance private equity firm and used to work for a leading online microfinance website. More importantly, Chad has traveled extensively to the field to meet with stakeholders along the microfinance supply chain. See here, here, and here for his first three points.
Chad’s fourth point was:
“Governments have to bear some responsibility for what has happened because for decades most countries have ignored this sector by either blatantly refusing to regulate this industry or by trying to impose regulations ill-suited to this market. As many people like to point out, Prof. Yunus did not create the industry — it has been going on for decades, if not centuries before. However, where has there been regulation or attention been paid to this industry and more importantly, to the people which are being serviced by microfinance? With few exceptions (e.g., Mongolia), governments have not supported the creation of credit bureaus for the poor because of a misguided belivef that they were unbankable and thus there was no need for the creation of a credit bureau. Many of the top MFIs I have met with would love for their governments to pass clear microfinance regulations. However, in many countries regulations are still wholly lacking or inadequate.”
This is yet another great point, and one I know next to nothing about. My sense is that while it is true that Muhammad Yunus did not create microfinance — literature from centuries past is replete with examples of (mostly evil) moneylenders — he was probably among the first to offer small loans at low interest rates to the poor.
I know a little bit more about credit bureaus, but not much. When I was in Madagascar collecting data for my dissertation, I decided to go through Pascal Courty’s syllabus for the contract theory course he then taught at the European University Institute, and that was how I read two papers by Pagano and Jappelli on information sharing in credit markets.
Private credit bureaus emerge when lenders manage to overcome the coordination failure between themselves and decide to share information about borrowers. Public credit bureaus emerge when, as Chad points out, governments support or mandate their creation. Private credit bureaus are common in the United States, whereas public credit bureaus are common in Europe.
Credit bureaus can allow lenders to share “black” (i.e., negative) or “white” (i.e., positive information). An example of black information would be a would-be borrower’s default history. An example of white information would be information on a would-be borrower’s assets and liabilities.
The thing with credit bureaus, however, is that it needs to be able to link individual-specific credit information with individuals. While this may be possible in places like Mongolia, it can be very difficult to do in Sub-Saharan Africa, where few people have identification papers of any kind and fewer people have an address.
In other words, it can be very difficult to keep track of people, so the quality of the information shared by lenders might not be the best. Combined with the high cost of acquiring, storing, and sharing information on borrowers, this means that private credit bureaus do not emerge.
Likewise, governments may not believe that the creation of credit bureaus is a priority. This is especially true in places where the little infrastructure (e.g., clean water, roads, electricity) is in an advanced state of decay and where public health concerns ranging from food security to HIV/AIDS make the public provision of credit information a second-order concern.