Credit scoring is a method of allocating scores to specific facts about a customer in other to decide whether to lend. It is based on the principle that statistics about past borrowers and bad debts can be used as a guide to the future. The quality of credit scoring in Nigeria varies widely depending on the lender.
Personal customers who want to borrow money are usually asked to fill in a loan application form. The questions cover a variety of facts, each of which in the past has been considered as a way of differentiating between good borrowers and bad borrowers. For example house owners are generally considered more likely to repay loans than tenants, so customers stating in their loan application that they own their own home get a better score than tenants.
What is a credit score?
A credit score, also known as a credit rating, is a number that reflects the likelihood of you paying credit back. Lenders like banks and credit card companies will look at your credit history when they calculate your credit score, which will show them the level of risk in lending to you. The higher your credit rating, the better your chances of being accepted for credit, at the best rates.
Credit Scoring in Nigeria
The decision to establish a Credit Bureau in Nigeria featured in the Presidential Budget Speech of 1990. Thereafter, it was given a legal backing by the CBN Act No.24 of 1991 [sections 28 and 52] as amended. The enabling legislation empowered the CBN to obtain from all banks, returns on all credits with a minimum outstanding balance of N100,000.00 (now N1.m and above of principal and interest), for compilation and dissemination by way of status report to any interested party (i.e. operators or regulators). The Act made it mandatory for all financial institutions to render returns to the CRMS in respect of all their customers with aggregate outstanding debit balance of N=1,000,000.00 (One million naira) and above. It also required banks to update these credits on monthly basis as well as make status enquiry on any intending borrower to determine their eligibility or otherwise. Banks are penalized for non-compliance with the provisions of the Act.