Wednesday,May 20, 2020 / 10:14 PM / By Oladimeji Peters / Header Image Credit: FirstcentralCredit Bureau

A credit score is astatistical number that evaluates a consumer's creditworthiness and is based onthe individuals credit history. Credit scores steams from a key need - The needto ascertain the associated default risk of the borrowing party usinghistorical credit reference and predict the probability that the borrower willdefault/perform on a new loan obligation.

By some credit scoreuser's standard however, the current credit score model may be limited in anumber of ways:

(1) It leverages on creditparameters and ignore individuals without credit, even though such person may beliquid.

(2) It declares that to anextent individual without a credit history have high default risk.

To these users, the veryidea that a statistically based system could do a better job at assessing riskthan 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 operationalexperience and from a business perspective, any institution that implementsapplication scoring, for the first time, can expect to experience a reductionof bad debt that ranges from 30% to 70%. To put a financial value on the yearlybenefits of credit scoring, one need only to apply those percentages (30% beingconservative and 70% optimistic) to yearly bad-debt provisions passed by the institution.

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

This consideration is evenmore important for Nigeria, because Nigerian economy is still largely a cashand carry economy with a developing credit culture, due to fragmented creditdata/use, lags on actual credit availability, an environment that requires highinterest rates and request for collateral in most instances, coupled with lowrisk appetite amongst others. The table below shows a brief analysis of X-SCoreCoverage in Nigeria:

Oladimeji Peters, the acting managing director of Firstcentral 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.

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