It is nothing new that access to credit to small businesses and low-income individuals is limited in many developing countries. One of the many reasons, besides lack of collateral, informal economic activity, and physical distance to credit providers, is the lack of a formal credit history in a local credit bureau.

Credit bureaus, or repositories of borrowers’ credit history, help reduce information asymmetries between lender and borrowers.  Such sharing of credit information can help lending institutions assess risk more efficiently and effectively, leading to improved portfolio quality and reduced interest rates for borrowers. On the financial system level, credit reporting systems increase access to credit and private sector lending, improve the efficiency of credit markets, and provide incentives for borrowers to repay their debt on time.

In 2001, the International Finance Corporation launched its Global Credit Bureau Program to support the development of functioning credit registry systems around the world. Their experience and best practice guidelines are compiled in a Credit Bureau Knowledge Guide which hints at three criteria that determine the success of a credit bureau:
1) Ownership structure (public vs. private), the
2) Type of credit information collected (negative-only vs. full file), and
3) Participation in the system (i.e., number and type of data furnishers)

These lessons have now been taken further:  PERC (Political and Economic Research Council)  recently published important research pieces (“Economic Impacts of Payment Reporting Participation in Latin America” , “Factors to Consider on the Eve of Brazilian Credit Reporting Reform” ) which not only provide a comprehensive literature review, but also an assessment of the impact of the three criteria above on private sector lending:  

“The results suggest that privately owned, full-file credit bureaus with 100% participation lead to significantly greater lending to the private sector (at least 47.5% greater) than no participation.”

But this still does not completely solve the problem of the person described in the first paragraph (just to remind you: no collateral, informally employed, in a remote location, and without existing credit history). CGAP’s Technology Program is preparing a study to learn more about the potential of alternative or non-traditional data (i.e., payment obligations such as phone, gas, electric, etc.) in developing countries to integrate these clients in the credit registry systems, but also how such data can be used by lending institutions to assess client repayment capacity and creditworthiness. A study by PERC regarding the impact of alternative data on the US market already goes into this direction.