Digital credit scoring paves way to more affordable microloans in East Africa

More than 2.5 billion people around the world – many of them in Africa – lack formal identification that enables them to access to financial and government services, according to the United Nations and the ID2020 project . What’s more, less than 10 percent of adults in low and middle-income countries are on file in public credit registries.
The result is that millions of people in East Africa are paying punitive interest rates for credit or are frozen out of access to financial services. Microfinance institutions (MFIs) in the region charge their borrowers notoriously high interest rates, often up to 30 percent per year . This is partly because these lenders face a higher risk of loan defaults than mainstream banks due to a lack of borrower data to support lending decisions.
MFIs in frontier markets have traditionally needed to make lending decisions without access to the sort of customer data and documentation commercial banks take for granted: credit scores, identification documents such as passports or government ID cards, bank statements, lending history and collateral.
Fintech providers, financial inclusion companies and digital finance applications are filling this information gap with alternative credit data. Credit scoring applications like Tala in East Africa , for example, collect masses of data about phone owners and use these data points to produce accurate credit scores.
This alternative credit data could help the credit officers at microfinance banks (MFBs) and MFIs who make lending decisions to make more accurate predictions about loan performance. This could, in turn, help improve collection rates and profitability for institutions and make credit more affordable for lower-risk customers.