Credit Services & Registry | |
Credit Services & Registry | |
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Wednesday,
May 20, 2020 / 10:14 PM / By Oladimeji Peters / Header Image Credit: Firstcentral
Credit Bureau
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.
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:
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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