Brand Manager finance 1

Exploring the use of credit scoring in developing nations

A person’s credit score can have a major impact on their lives, whether it’s getting a mortgage, a credit card or a loan. Recent banking crises in the developed world have brought the importance of financial risk management and ethics to the fore. Research by Professor Hussein Abdou at the University of Huddersfield is exploring how such challenges faced by developed countries can be utilised to prevent such crises occurring in developing countries.

By exploring the potential use of credit risk management, credit scoring and credit rating modelling techniques in developing countries this research has revealed the potential economic benefits for banks, governments and individuals.

Such changes to current banking practices would require a significant investment for developing countries, including extensive training for credit officers.  However, once this initial investment has been made the long term benefits have the potential to far outweigh the initial costs.

Cultural differences

Extensive research was carried out in the Egyptian banking market and data gathered on the credit scoring practices of over 60 Egyptian banks.

This research revealed that for credit scoring to be truly effective, human judgement has to be used in conjunction with credit scoring processes. Whereas banks in developed nations, such as the US, UK and Europe, have moved away from using human judgement and now predominantly use credit scoring techniques when deciding who to lend money to, banking practices in developing nations often differ considerably.

With a strong emphasis on developing customer relationships and building trust between credit officers and customers, the human element is considered to be more important in developing countries.  In some of these countries they also use credit scoring software which has been designed by developed nations.  This software does not always take into account cultural differences, including everything from the use of postal codes which are not used in all countries to the importance placed on personal reputation in Muslim countries such as Egypt. Therefore the use of such software by developing countries is questioned.

Sharing best practice

Professor Abdou’s research into the use of sophisticated non-parametric modelling techniques can be applied in a range of fields including banking, insurance/reinsurance, marketing, medicine, psychology and transportation, to highlight the importance of human contact and customer knowledge based decision-making.

The findings of this research have been utilised by researchers, banks, including Egyptian banks, and other institutions. US software company, ScortoTM, who develop decision making and risk evaluation solutions, has consulted Professor Abdou and used his research to inform the design and development of their credit scoring software.

By developing a broad range of contacts, including colleagues at the University of Huddersfield with experience in banking and students from other developing countries, it has been possible to create a network of international contacts.  This has enabled the research to be extended to other developing countries, including India, Cameroon and Vietnam, with a view to preventing the type of banking crises experienced in more developed countries.


2 thoughts on “Exploring the use of credit scoring in developing nations”

  1. Prof Abdou has ventured with alacrity into complex research on human behaviour which is usually measured with numbers. For several years now many developing countries especially those in French speaking Africa have grappled with trying to find a credit rating system that would work for them. Currently, in the French speaking Central African countries, the World Bank is psonsoring a project through the Central Banks to reach such an outcome. But the crucial problem with most of these countries is “where do people actually live?” There are no home addresses nor post codes as Prof Abdou has pointed out and the interconnection of financial institutions is dysfunctional. This means that one individual can default in several banks and will hardly be caught. So, banks now prefer to rate people based on their employers which also has its own risks owing to worker mobility and inability even for employers to trace workers. I would be excited to know how Prof Abdou’s recommendations are shaping the way credit rating softwares will perform for developing countries.

  2. Many thanks Joseph and I would agree with your argument. It is a challenging task for decision makers to critically evaluate their clients’ creditworthiness. I believe building a strong short- and long-term relation between banks and their clients is crucial, and of course not an easy task to be achieved. The vast majority of the currently used softwares are developed outside those countries and of course cultural and behavioral differences are not considered. I would strongly recommend that these softwares must be developed (either by an external or internal body) involving decision makers and considering all different cultural variables which are intern will impact on their decision making process. However, they may argue that it is extremely expensive and they cannot afford the running cost but this is only valid in the short-term as in the long-term they will be able to cover this cost.

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