Understanding credit scores could help MSME businesswomen access finance


The growth of the PNG capital market, and ultimately the growth of the PNGX public market, depends on the growth of the MSME sector. It is in PNGX’s interest to assist in the development of MSMEs in the hope that ultimately a small number may succeed in registering on PNGX. Skilled businesswomen in this sector are important.

Access to finance is a starting point for growth.

A good credit score is essential to seek out and obtain loans at reasonable interest rates from a bank or a microfinance institution. But traditional credit scoring models put many businesswomen at a disadvantage. It’s time for lenders to embrace new credit reporting methods. A large segment of micro, small and medium enterprises owned by women and sole traders are not served by banks and microfinance institutions (credit institutions) in PNG.

Having a good credit rating is vitally important to access finance at reasonable interest rates from lending institutions in PNG. Often businesswomen and new entrepreneurs who do not own land or other personal property that can be used as collateral (collateral) cannot obtain a business loan which must be secured by such collateral. This creates a situation where these groups of unsecured borrowers are unable to enter the borrowing system by first borrowing a small amount, repaying the loan on time, and then seeking a larger loan, to constitute credit history essential to the credit rating models used by credit institutions.

Some businesswomen may enlist family support for small loans. Many seek loans from other lenders at very high interest rates. Both systems significantly limit and can even hinder business growth.

A challenge for the emerging MSME sector in PNG is to provide access to credit to these unserved groups at reasonable interest rates.

Credit institutions use credit scoring models to calculate a credit score. These models study the past relationships between the characteristics and behaviors of groups of borrowers and the loan repayment history of that group to predict whether today’s borrowers from a similar background or group will repay a loan. Most of the historical data used in these models was collected in “traditional” credit processes. These processes analyze the financial statements, credit history and collateral of different groups of borrowers. They also make subjective judgments about a borrower’s perceived “character” to “estimate” likely repayment.

Assessing credit using these models helps lending institutions better estimate a customer’s creditworthiness. But the model’s reliance on historical data makes it more likely to disadvantage borrowers from different walks of life who have been excluded in the past, but who have the potential to be good clients. These groups include many businesswomen who have no bank account, let alone a credit history, and who have poor accounting records.

To overcome these challenges, it is imperative that credit institutions identify new and “alternative” data models. These new models could use data sources that provide insight into the financial life and capacity of the unbanked so that credit institutions can offer them access to appropriately designed credit products, without the need credit history and land or other property to use as collateral. . What should credit institutions do? Adopting a gender-sensitive credit scoring model that takes into account women-specific data for algorithms can help better assess the creditworthiness of businesswomen who do not own property or assets or who could not borrow from credit institutions.

Lenders could use new alternative data feeds combined with artificial intelligence as substitutes for traditional payment models and credit histories to assess the creditworthiness of businesswomen borrowers. Such “data-driven” lending models do not need and cannot follow traditional credit reporting systems. Data such as housing data, education data, work and employment history data, community data could all help assess the creditworthiness of a female entrepreneur who does not have the background traditional financial instruments used for credit rating.

Digital transaction data such as the number and size of online sales and purchases, cell phone/wallet transactions, and on-time bill payments are objective records of financial behavior. Sector-specific data such as purchase of agricultural inputs as a share of harvested crop revenue, or buying or selling behavior on e-commerce platforms such as Facebook Marketplace, PayPal and Amazon may also indicate potential repayment capacity and willingness to repay. Credit bureaus typically use these criteria to measure credit history. Businesswomen need to understand this and have this information handy when applying for a loan from a lending institution.

Better business skills and accounting practices, greater use of digital technology, and moving to the formal sector will also promote a more positive credit rating for many women-led businesses.

PNGX, the national stock exchange of PNG, in collaboration with its collaborating partners, the PNG Digital ICT Cluster and Unkapt Capital, organizes training workshops as part of the Business Skills Boost for Women Entrepreneurs program (DEFINE SKILLS 2022 Program). The program provides complementary training to women-led MSEs in Papua New Guinea to strengthen their business and digital skills and accelerate their business development and growth. Developing better business skills can help in understanding how to get better access to credit under the existing credit reporting system or any new system.

Registration is now open for Intermediate and Advanced level workshops on the DEFINE INITIATIVE website https://www.defineinitiative.org/.

The information in this article is general in nature and you should take care to educate yourself about the specific characteristics of a particular investment before making a decision to invest in it.
PNGX recommends discussing your investment objectives and needs with a qualified stockbroker or financial advisor. In PNG, you can either contact JMP Securities Limited ([email protected]) or Kina Securities Limited ([email protected]).

By following these articles and reading the information available on the PNGX website (www.pngx.com.pg) or following PNGX on LinkedIn or Facebook, you can learn more and build your wealth by investing in PNG.

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