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credit bureaus

Credit Reporting: An Essential Building Block of Financial Access at the Base of the Pyramid

Margaret Miller's picture

Credit information and credit reporting systems are critical to a modern financial sector’s infrastructure. Since past behavior is one of the most powerful indicators of future behavior, credit reports which detail payment histories provide lenders with a valuable tool to classify the risk posed by different borrowers. Credit reporting systems reduce the impact of asymmetric information on credit markets, both by helping lenders to more effectively screen borrowers and avoid adverse selection and by providing an incentive for borrowers to repay their loans—thus reducing moral hazard.

These systems are very well developed in North America and parts of Western Europe but are relatively new in most of the world. As data from the World Bank’s Doing Business database shows (see Figure 1 below), only a small fraction of adults are covered even where credit bureaus do operate. Even in Latin America, which has the best coverage of any emerging market region, only about one third of adults are covered. In many other regions, significantly fewer than 10% of adults have a credit report, and those who are in the system are likely to be high-income consumers with bank loans, not customers of microfinance lenders or retail credit providers.