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.