Risk is a financial term that can mean life or death for a budding entrepreneur. Many entrepreneurs need to take out loans from banks in order to have enough money to start their businesses. Banks, though, need to be able to reliably determine which of these potential entrepreneurs will repay the loans and which will default. In developed countries this is usually accomplished through credit reports, which contain an individual’s credit history as reported to a credit bureau by lenders. This system, however, can be problematic in developing countries where many people do not have bank accounts, don’t interact frequently with formal institutions, or are paid informally in cash. As a result, banks often lack verifiable information on the probability that a loan applicant will be successful.
Interestingly, one set of data that is available in most countries is mobile phone records. By the end of 2015, there will be more than 7 billion mobile cellular subscriptions, with a penetration rate of 97%, up from 738 million in 2000. Due to the incredible market saturation of mobile phones and the ability of mobile phone operators to keep records of call activity (even with prepaid plans), operator records can provide rich information about individual behavior and social networks. For example, phone records indicate whether or not an individual keeps their balance top-upped so that they can make calls in case of an emergency, how many people they call during the day, how long their calls last, and so on.
Daniel Björkegren, an economist at Brown University and Darrell Grissen of the Entrepreneurial Finance Lab (EFL) wondered whether these phone records could reveal insights into an individual’s behaviors that could be applied elsewhere- specifically whether this information could determine an individual’s creditworthiness.
Despite tremendous progress in poverty reduction over the last two decades, poverty still persists. Along with South Asia, Africa is a region where large numbers of people continue to live in extreme poverty. It is also a region where there is clearly room for higher foreign trade levels (see Chart). Given that trade can generate growth – and thus poverty reduction – focus on trade-related reforms (e.g. lower tariffs, better logistics, and trade facilitation) deserves to be a high priority of the region.
If the global financial crisis -- and the events that led up to it -- have taught us anything, it is,“No complacency with asset price booms”. We know first hand the dire consequences of bubbles, so it is clear monetary policy makers can no longer passively observe the evolution of asset prices. If an economy is to pursue macroeconomic and financial stability, they should coordinate with financial supervisors – in an economic marriage of convenience – to ensure financial regulation and monetary policies are complementary, and implemented in an articulated way.
Bihar, a state in Eastern India has more than 100 million inhabitants and is India’s second poorest state. Ninety percent of the population lives in rural areas and the state has lagged behind in increasing access to finance in these areas. The credit-to deposit ratio of Bihar at 37% (an indicator of availability of credit in peri-urban and rural areas) is one of the lowest in India.
Jeevika, a program jointly supported by the World Bank and Government of Bihar, has demonstrated that investments in community institutions can deliver significant results. Investments in community institutions have helped them mature and become an institutional platform for the poor enabling them to demand better services from the public sector, improve access to finance from commercial banks and enhance their existing livelihoods.
It is increasingly recognized that well-defined property rights are crucial for realizing the benefits of market exchange and that such rights are not exogenously given but evolve over time in response to economic and political forces. The reduction of expropriation risk and the facilitation of market transactions are the two main categories through which property rights systems affect economic outcomes. However, the mechanisms by which these two categories affect outcomes differ in important ways.
The conventional wisdom is that the exchanging of information on an individual or firm will go a long way in determining credit worthiness, thereby improving credit availability. When a bank evaluates a request for credit, it can either collect information on the applicant first-hand, or it can source this information from other lenders that have already transacted with the applicant. Information exchange between lenders can occur voluntarily via “private credit bureaus” or it can be enforced by regulation via “public credit registries.”