A Micro Finance Credit Bureau

A Micro Finance Credit Bureau

PhilippinesChevy Chase, United States
Organization type: 
nonprofit/ngo/citizen sector
Project Stage:
Idea
Budget: 
< $1,000
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

We are a micro finance credit bureau that utilizes biometric identification to provide accurate and transparent credit reports and scores.

About Project

Problem: What problem is this project trying to address?

The microfinance industry has become a major destination for global investment. In order to attract funding, achieve scale economies, and boost profitability, many micro finance institutions (MFIs) are lending without adequately assessing a borrower’s riskiness. This practice results in over-indebtedness, a diminished quality of life for the borrower, and liquidity problems for MFIs. A CGAP report showed that between 12% (in Ghana) and 85% (in Bolivia) of borrowers had serious problems repaying their loans at least once. Our micro finance credit bureau will prevent this and allow lenders to better determine lending terms. We will strive to cover every county with an MF industry, which means in some nations we will service thousands of the world’s poorest borrowers and in others, millions.

Solution: What is the proposed solution? Please be specific!

We will be providing credit scores and reports to all micro finance institutions (MFIs). Often in developing nations a formal and effective national identification system is not available. Since a person's fingerprints are unique, using them as the identifier in financial transactions ensures security and consistency. Having a system of identification based on "Who you are" (e.g. fingerprints) is far more secure and reliable than one based on "What you have" (e.g. ID card) or "What you know" (e.g. a Personal ID Number). Using biometric information has never been utilized by MF credit bureaus. Each MFI loan agent will be given a hand held device which will scan and register an individual's fingerprints, and collect all necessary information to include in a credit report. In future meetings, the scanner will be used to identify and ensure that the individual is, in fact, who they say they are. The MFIs will be leased these customized scanners and will be maintained by our organization.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

According to the Microfinance Information Exchange there are roughly 1.7 million micro loan borrowers in the Philippines, which amount to less than 2% of their population. With 42% of their population living on less than USD 2 per day, it is clear that the micro finance industry has room to grow. Our credit bureau (CB) will help their micro finance institutions (MFIs) efficiently and risk-appropriately grow their loan portfolio while simultaneously preventing borrowers from becoming over-indebted. When looking at an example between two borrowers, A and B, the effects of our CB can be clearly seen. Borrower A has good credit history and has always repaid their loans on time, while borrower B has 7 outstanding loans and is delinquent on several. Borrower B has been able to approach and procure loans from other MFIs because he is not part of a credit bureau system. Because there is no CB in place, borrower A and B are charged the same interest rate on loans. Borrower A is being penalized, while borrower B is taking advantage of the system. Our credit bureau would let the MFIs know that borrower A is of low risk and should be charged a significantly lower interest rate, and that borrower B should be charged a much higher interest rate and perhaps be put on a no-lending list. We will work with all MFIs and other relevant institutions to gather and update needed information. As borrowers repay or fail to repay loans, we will include our new risk assessment in reports and credit scores to lenders. Our scores and reports will directly influence the cost of borrowing.
Sustainability

Marketplace: Who else is addressing the problem outlined here? How does the proposed project differ from these approaches?

Our long term plan is to have an operational credit bureau (CB) in every nation that has a micro finance industry. Since we are specifically catering to micro finance institutions (MFIs), our competitors will be other private CBs (PCBs) that support MFIs, or government run CBs. In particular, in the Philippine market, some of the largest MFIs are forming the first PCB. We have, however, noticed that many markets support multiple PCBs, e.g. Costa Rica with five, which leads us to believe that there is value in having more than one. The largest challenges competitors create are client theft or creating market or political barriers to entry. Despite these, using biometric identification is a more effective solution of borrower management, and will be especially attractive in these markets.
Team

Founding Story

Michael Gill had just completed a course in his second year of law school called secured transactions. Secured transactions, which boost economic efficiency by effectively allowing businesses to pledge collateral in return for liquidity, rely on a functioning recording system that allows lenders to establish perfection and priority. When Michael was tasked with learning about the SMART Campaign (a microfinance initiative to prevent over-indebtedness and boost lender's transparency) at his summer internship with OPIC, he saw a market that needed a recording system. He had the idea of collateralizing a borrowers identity in return for liquidity, and he wanted to accomplish that by recording the borrower's biometrics. The idea for a biometric credit bureau was born.
About You
Organization:
Luminos
About You
First Name

Isaac

Last Name

Bickford

About Your Organization
Organization Name

Luminos

Organization Country

, MD, Chevy Chase, Montgomery County

Country where this project is creating social impact
How long has your organization been operating?

Less than a year

Has the organization received awards or honors? Please tell us about them

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Innovation
How long have you been in operation?

Still in idea phase, but looking to launch soon

Which of the following best describes the barrier(s) your innovation addresses? Choose up to two

Cost, Transparency.

Social Impact
Please describe the goal of your initiative; outline what you are trying to achieve

We want to achieve the elimination of asymmetric information in the micro finance (MF) borrowing process. This will result in borrowers getting charged interest rates according to their riskiness and likelihood of repayment, and not a uniform rate that assumes everyone is equally likely to default. For the individual, this will result in better borrowing terms, and for the MF bank, this will result in fewer non-performing loans, more profits, and therefore more capacity to loan. It will also help attract additional financing, which will more quickly expand the reach of these MF institutions, and will support the world's poorest in bringing themselves out of poverty.

Which barrier(s) to financial inclusion does your solution seek to address? (select all applicable)

Physical and other accessibility obstacles that prevent communities from reaching financial services, The lack of affordable financial products tailored to the needs of underserved and excluded communities,, Powerful incentives for financial service providers to move up-market, Other (Please describe below).

If you selected 'other' above, please specify which other barriers to financial inclusion you solution seeks to address:

Information asymmetries between the borrower and the lender which hinder risk mitigation.

For which underserved or excluded communities will your solution create access to valuable, affordable, secure and comprehensive financial services?

The commercial banking sector excludes the poorest in every nation because of their lack of collateral. The micro finance (MF) industry has been proven to be the solution to this exclusion and has allowed millions of people to gain access to form financial products and services. Our solution will directly serve all of these people who are interested in participating in the MF process. Since our private credit bureau with biometric identification is easily adaptable in any country, we will try and have an operational presence in any nation with a micro finance industry.

Could your solution work in other geographies or regions? If so, where?

Our solution will work in any nation that has a micro finance industry and doesn't have regulations preventing the storage of personal physical identifying information. Provided there is room in the credit bureau market, our solution will be in high demand.

If your solution is dramatically successful, how will things be different in 10 years?

In every country that we have an operational presence, we will see borrowing costs for good borrowers decrease dramatically. We will see people with poor credit history and borrowing practices, i.e. those that are over-indebted, receive the education and help they need to become effective borrowers. After transforming their spending and borrowing habits, we will see the interest rates for these people decrease. All people in the micro finance (MF) system will be a part of creating a middle class, which as economic data has shown, is the most important and significant determinant of a nation's economic capacity. The micro finance institutions will have a much easier time getting funding because of the transparency in the lending market, which will in turn allow them to reach many more people than before. Having millions of fewer people struggling in poverty will be the outcome of ten years of operations in many nations around the world.

What will have had to have changed to make this happen?

The most significant thing that needs to change is the amount of asymmetric information in the market. Borrowers know how many loans they have and what they are actually spending them on, while the lenders do not. The lenders are thus forced to charge extremely high interest rates to compensate for this risk. Bringing transparency will support more accurate market determined interest rates and better loans. We will have to create a database of all the people who participate in the micro finance system, and keep their updated information available to the micro lenders. For our organization, making this happen in every nation is a matter of working with the local micro finance institutions, adhering to local regulations for private credit bureaus, and creating a network of lenders and other related parties that would benefit and contribute a borrower's report.

What has been the impact of your solution to date?

We are not yet operational, however, private credit bureaus have been around for a long time and have been creating transparency since their inception. Their benefits and effects have been thoroughly documented in developed, and to a lesser extent developing, nations around the world. Currently, existing credit bureaus under serve global microfinance markets, which we seek to solve. Ultimately, private credit bureaus will support the world’s poorest gaining access to quality financial products.

What is your projected impact over the next five years?

In five years we expect to have an operational presence in at least five countries and reporting on ten million borrowers. We expect to see interest rates for quality borrowers’ decrease dramatically, and lesser quality borrowers get the educational help they need to become quality borrowers. Five years from now we will begin the next phase of expansion, where we aim to be in fifteen to twenty nations over the following five years.

What barriers might hinder the success of your project? How do you plan to overcome them?

Our two primary barriers are language and regulations. The language barrier can be circumvented by hiring a translator in that country to be a mediator between us and our prospective network participants. Regulatory barriers will be dealt with by reading and understanding regulations and accommodating them in our business model. Changes may have to be made, but the idea and intent will remain the same. Another problem we may encounter is a lack or power or internet infrastructure. We have solved the power issue by making our hand held scanners be chargeable via solar power. For the servers, we will have backup generators that will switch on when the power is off. Our scanners and computers will be able to access the internet via satellite connection, in order to transmit the data.

Winning entries present a strong plan for how they will achieve and track growth. Identify your six-month milestone for growing your impact

Internally operational and innovating/creating a product.

Identify three major tasks you will have to complete to reach your six-month milestone
Task 1

Incorporate, appoint officers, establish bylaws, complete administrative tasks, etc.

Task 2

Commence talks with product developers, both hardware and software.

Task 3

Begin talks to form contracts with MFIs in target country.

Now think bigger! Identify your 12-month impact milestone

Operational in at least one country.

Identify three major tasks you will have to complete to reach your 12-month milestone
Task 1

Complete product design, license and invest in product assets.

Task 2

Acquire contracts with one to three MFI's (preferably large ones) in target country

Task 3

Raise all the capital required to be operational in one country.

Sustainability
Tell us about your partnerships

We do not currently have any partnerships. If we get this grant, we will be using that to travel to the Philippines to start building our network of partnerships and customers.

Are you currently targeting other specific populations, locations, or markets for your innovation? If so, where and why?

The Philippines is going to be our first, which we determined by doing an economic analysis looking at poverty rates, micro finance usage, private credit bureau coverage, regulatory strengths and concerns, and depth of financial services, among other less important factors. When the Philippines proves successful, we plan on expanding the following year, in 2014, into Vietnam. Vietnam was also a good fit when we considered the afore mentioned criteria.

What type of operating environment and internal organizational factors make your innovation successful?

Both founders have a very strong, deep, and diverse academic background (one will have an M.B.A. and an M.A. in Economics and the other will have a J.D.) which will allow us to direct operations and respond to challenges and opportunities quickly and effectively. In discussions, we both value each other’s opinion and the notion that the idea with the best support trumps the other. We are both passionate about entrepreneurial ventures and making a difference in the world. We understand the difficulties of creating a successful business and are eager to address any challenges that arise in a confident and informed manner. Using the principles of a lean startup we will build, measure, and learn, through innovation accounting, to track progress and determine development direction.

Please elaborate on any needs or offers you have mentioned above and/or suggest categories of support that aren't specified within the list

As of December 2012 I will have an MBA and a MA in Financial Economic Policy and my business partner will be graduating law school in May 2013. If either of us can help with any background knowledge relating to those three fields of study, we would be happy to help.