Constructing a Contextual Framework for Informal Borrower Credit Appraisal in Microenterprise Lending

Abstract

In the present situation, the microfinance organizations in non-formal urban markets continue to seek refinements in credit-worthiness assessment that will mitigate restricted access to dependable information on potential borrower’s credibility and on absence of formal data on credit vital particularly for women entrepreneur. This paper attempts to close a gap in mainstream credit scoring, providing a model for informal borrower assessment, within the context of micro enterprise finance. (The model is not detailed here.) The model is systematically built, translates various indicators and the nontraditional indicators (that is social collateral, community reputation, and microenterprise operational behaviour especially which are derived from the existing classification and the concept mode about informal credit analysis, are included at the macro-index and the model). Procedures are provided to assist lenders in distinguishing among risks and help clarify how publicly available demographic and business information can be utilized to enhance portfolio risk management tools and encourage consistent preferences for advice across the customer base. The study presents a taxonomy of relevant indicators and further evaluates the implementation viability of the proposed system, pointing to its applicability to several types of informal client profile and its potential value in attenuating bias and the predictable coverage gaps in credit quality adjudication. Located in the gender-driven backdrop, risk, financial inclusion and mico, meso and macro arguments and counter-arguments, the study provides MFIs with a methodical and pliable tool for responsible expansion by broadening the client base to encompass more of the informal women enterprises at the BoP.