Alternative credit scoring to cut cost of funds for small businesses
Alternative credit scoring (ACS) will ease access to finance for micro and small enterprises as it speeds up loan processing and lowers the cost of evaluation of credit worthiness, bankers and micro-lenders said yesterday.
The ACS goes beyond the traditional parameters to determine the credit-worthiness of a customer on the basis of clients’ other transaction information and tangible factors like digital footprint.
With the ACS, the loan processing will be faster and the cost of loan for entrepreneurs will be reduced, they said.
“The ACS will somehow reduce the cost. So, customers will be benefitted because all the costs are ultimately passed on to customers,” said Feisal Hussain, team leader of the UK-funded Business Finance for the Poor in Bangladesh (BFP-B) project.
He spoke at a roundtable on “Alternative Credit Scoring: Collateralising Data for MSE Financing” at Brac Centre Inn. The event was jointly organised by the BFP-B and The Daily Star.
Speakers said the biggest beneficiaries of the ACS are consumers who are new to the credit and financing ecosystem. For the new consumers, there is no sufficient centralised data, but that doesn’t mean that they can’t avail credit.
“We are trying to establish a new solution to remove the financing problems of micro and small entrepreneurs (MSE) through speeding up the loan disbursement process,” Hussain said.
The BFP-B is running a project with the ACS service providers to improve the credit worthiness of small businesses. The ACS enables financial institutions to cut the cost of risk assessment and improve the risk-adjusted returns of lending and investing in small businesses.
Afeef Zaman, co-founder and chief executive officer of ShopUp, a digital credit startup, said its self-learning algorithm is able to evaluate micro and small entrepreneurs using platform data and non-conventional data points.
An entrepreneur’s sales volume, customer messages, customer calls handling system, business location, psychometric profiling, handset configuration, age of phone number and many other business, social business and social individual data are considered for evaluation, he said.
The startup is collaborating with Brac and Brac Bank to provide the credit.
“Successful execution of this initiative will unlock access to credit for millions of small retailers who currently are financially excluded,” Zaman said.
Khalid Hossin, head of business of the Credit Rating Agency of Bangladesh, said traditional credit scoring model has several challenges, including poor and outdated data and slow process of scoring.
“However, the ACS can be a good solution here,” he said. The method uses credit histories and other characteristics of applicants to automatically approve credit lines.
Shams Azad, chief operating officer at Brac Microfinance, said young entrepreneurs who have no access to finance benefit from the ACS.
“We also can tap into new customers thanks to the initiative,” he said.
Afsana Islam, private sector development adviser of the Department for International Development of the UK, said the ACS would help new customers borrow.
Mahbubur Rahman, deputy challenge fund manager of the BFP-B, said the entire loan disbursement process takes 15 to 40 days now, but it can be brought down to one or two days. “So, it has immense potential.”
Ananya Wahid Kader, senior financial sector specialist of World Bank, Akond Md Rafiqul Islam, senior general manager of Palli Karma-Sahayak Foundation, Arup Haider, head of retail banking of City Bank, Gazi Yar Mohammed, head of mobile financial services and agent banking of One Bank, Rajesh Kumar Barua, head of retail underwriting of Brac Bank, and Munawar Reza Khan, executive director of Manabik Shahajya Sangstha, also spoke at the event.
