Case Studies

Case Study – Do credit bureaus improve credit availability and if so, for whom?

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.”

The process that is used in a given economy is an important determinant of credit market performance. Information sharing may mitigate adverse selection in the credit market and reduce moral hazard by raising borrowers’ efforts to repay loans. It can also reduce excessive lending as borrowers may consult multiple banks. Perhaps for these reasons, collecting cross-country information on credit bureaus and credit registries is now becoming the focus of a number of initiatives such as the World Bank’s Doing Business project.

The Effectiveness of Credit Bureaus

However, one cannot help wondering whether the conventional wisdom outlined above is accurate or not. If it is true then does it apply equally to all types of firms and countries? As important as this questions is, attempts to answer it are still in their infancy. One example is a recent study by Brown et al. (2009) published in the Journal of Financial Intermediation. The study attempts to empirically verify the impact of information sharing on credit availability and how the size of the impact varies across different types of firms and countries.

Read the rest on World Bank PSD Blog

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Abhay N

Author : 

Abhay is the founder and managing editor of India Microfinance. He is passionate about microfinance, financial inclusion and social entrepreneurship in India.

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