A Q&A written with Burak Kilicoglu, Director of Global Markets at Creditinfo
- Why is access to financial services essential, especially in emerging markets?
More than 2 billion people around the world have limited or no access to financial services and a large proportion of these people live or work in emerging markets. Without access to financial services, their purchasing power is significantly reduced and their lack of participation in the economy negatively impacts the overall health of the financial ecosystem. Likewise, professionally, if they cannot obtain business loans, new businesses cannot be created and existing ones are limited in their growth plans, so there are fewer job opportunities and the whole economic system inevitably suffers the consequences.
In economically less developed areas, access to financial services is crucial not only for the growth and maturation of the overall financial ecosystem and the promotion of financial inclusion, but also for the reduction of poverty and inequalities and improving the overall quality of life.
- Why are traditional credit bureaus and financial institutions struggling to provide broader access to financial services?
They are only set up to review data from “traditional” data sources – like utility bills or loan payment information from banks – when reviewing applications. However, if people don’t have a bank account, it usually means they have little or no credit history to their name. It’s a real catch-22 where these people need a credit history to successfully access credit.
- Would a recession disproportionately affect emerging markets?
Even though globalization has linked developed and emerging economies, beyond the short-term turbulence that accompanies a recession, people living and working in emerging markets will most likely feel relatively less impact. For people with very low incomes, low value loans will continue to grow. For example, mobile lending and the digitization of these markets from a cash economy to a digital economy will not be significantly impacted, so people will still be able to access small loans if they need them.
Additionally, digitizing these markets will mean that people will have a digital footprint, so they will have access to credit and this information can be used to increase their credit score. Regardless of a recession, this type of small value loan generally remains unscathed and continues to grow as the process of digitization and transformation is much stronger than a short-term economic trend.
The problem is that those without a credit history will remain economically disadvantaged during a recession. As financial institutions seek to reduce their risk profile and inevitably tighten their purse strings, it will become more difficult than ever for this group to access credit.
- What can be done to ensure that financial services are more accessible to individuals and businesses in emerging markets?
It is about looking beyond “traditional” data to alternative data. Rather than relying solely on ‘traditional’ data to assess an individual’s creditworthiness and risk level, there is an abundance of existing data on potential new customers that banks and financial institutions can leverage to make decisions. lending base and, in doing so, expand the availability of their financial services.
For example, data on people’s payments for cell phone plans, other fintech apps, and even social media usage can be used to develop market-level credit risk scores to offer businesses and individuals who do not have a bank account.
Banks and financial institutions are aware of the existence of this information, but they often lack the resources and skills to collect and understand the data. To overcome this hurdle, they need to invest in the right tools to analyze and interpret data so they can make informed lending decisions and expand financial services to individuals and businesses in emerging markets.
- Are there recent examples of projects where individuals have been helped in this way?
In Pakistan, the traditional housing loan system has not worked as it should to support people looking to buy a house, as well as to increase the amount of capital flowing into the economy and help it mature. There is a huge disparity between the number of housing loans issued and the number of people living in Pakistan. Although 10 million Pakistani citizens have access to formal credit, around 105 million of the adult population do not. Banks and financial institutions have had access to minimal formal credit data to help inform their decision-making and as a result they have not been able to extend more loans.
To help individuals in Pakistan obtain housing loans, a government-backed initiative led by the Pakistan Banking Association (PBA) has been set up. The initiative combines traditional data sources such as internal bank data and credit bureau data with alternative data sources – such as mobile metadata – to increase the number of potential home loan applicants.
The PBA has partnered with Creditinfo Group to bridge the gap between affected organizations and ensure they have access to the right data. As the first project of its kind in Pakistan, it has equipped financial services with relevant data and tools to extend loans to more people, especially those in low-income segments that had not been considered. previously for traditional housing finance.