Credit Bureaus and Credit Scores

A credit score is a statistical number that evaluates a consumer’s creditworthiness and is based on the individuals credit history. Credit scores steams from a key need – The need to ascertain the associated default risk of the borrowing party using historical credit reference and predict the probability that the borrower will default/perform on a new loan obligation.

By some credit score user’s standard however, the current credit score model may be limited in a number of ways – (1) It leverages on credit parameters and ignore individuals without credit, even though such person may be liquid. (2) It declares that to an extent individual without a credit history have high default risk.

To these users, the very idea that a statistically based system could do a better job at assessing risk than human judgment was viewed with a mix of disdain and fear by managers, whose main responsibility was in effect to make such decisions.

Though from operational experience and from a business perspective, any institution that implements application scoring, for the first time, can expect to experience a reduction of bad debt that ranges from 30% to 70%. To put a financial value on the yearly benefits of credit scoring, one need only to apply those percentages (30% being conservative and 70% optimistic) to yearly bad-debt provisions passed by the institution.

The task before Credit Bureaus in non-credit intensive environment mixed with disbelief despite the many benefits for scoring (*as shown in Figure 1 Below), may not just be a sensitization campaign but also the development of a more holistic scoring module to cater for unscored customers who were previously ignored, ineligible or invisible; this target approach will create new market realities.

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This consideration is even more important for Nigeria, because Nigerian economy is still largely a cash and carry economy with a developing credit culture, due to fragmented credit data/use, lags on actual credit availability, an environment that requires high interest rates and request for collateral in most instances, coupled with low risk appetite amongst others. The table below shows a brief analysis of X-SCore Coverage in Nigeria:

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Deji Peters the acting managing director of Firscentral Credit Bureau and current Chairman of CBAN (Credit bureau association of Nigeria) maintained that Consumers make most of their purchases on cash and carry basis – whilst credit scores dominant credit intensive economies, countries with less credit use may need to develop an encompassing score that captures other non-credit forms able to provide a statistical probability of default or performance.