Digitalization of the new wave of micro credit
In terms of Microfinance, the government of Bangladesh has considered stimulus incentives several times in the last decade. However, most of these initiatives involved government subsidized loans to be disbursed by commercial banks. This becomes a potential concern, especially for the cottage, micro, small and medium enterprises (CMSME) as it is more complex to create their credit profiles. Despite the impressive progress to financially include them, 40% of Bangladesh’s adult population have no access to basic financial products and services, who do not save money in a savings account or access personal loans. This is where credit through Micro Finance Institutes (MFIs) can play an important role and bridge the gap by allowing microcredits to be underwritten, processed, and delivered digitally to this part of the unbanked population.
Since the late 1970s, the microfinance sector of Bangladesh has had a significant positive impact on the low-income segment of the population. According to a study of UNCDF, by the end of 2017, MFIs in Bangladesh operating as non-governmental organizations (NGOs) such as Grameen Bank, BRAC, ASA had a reach of 39 million. On the contrary, MFIs at present are facing both internal and external challenges. Competitions are rising with the establishment of mobile financial services (MFS) like bKash, Rocket, Nagad, who are also targeting the same segment digitally. However, to stay alive and competitive in the market, this is a prime time for the MFIs to start operating digitally.
Digitisation is constantly taking place in almost every aspect of our lives, ensuring convenience and efficiency. Similarly, the scope for potential digitisation lies in various aspects of operations of MFIs which can eventually increase their reach while also fulfilling the nation’s goals of financial inclusion.
Credit Risk Assessment
When a loan application is made to any financial institute, the credit risks are assessed through the applicant’s past transactions, available assets, and collaterals. However, when it comes to micro-credit through MFIs, these applicants lack assets collaterals or even transaction histories due to not being included in the financial sector. As a result, it becomes quite difficult for MFIs to accurately assess their credit risks. For instance, sometimes due to lack of information, groups are formed between applicants to whom loans are issued under conditions that will eventually impact the entire group when one group member fails to make repayments.
However, such hassles can be avoided, and credit risk assessment could be simplified by introducing digital methods. Alternate Credit Scoring (ACS) methods are becoming popular in many countries where credit scores are obtained by assessing external data such as an individual’s behavioral, demographic, telco, and non-banking data. At present, alongside Telco, the establishment of tech-based start-ups like Sheba, Pathao, ShopUp, who are working with micro-entrepreneurs, are also generating data with potential value for obtaining ACS. Under the present circumstances of MFIs in Bangladesh, in some cases, individual credit risks are also assessed by asking the applicant to deposit payments of certain amounts for a certain period, before the issue of the loan as proof of their ability to make repayments.