The Reserve Bank of Malawi (RBM) has urged commercial banks to adopt automated credit scoring models considered to be more efficient and effective, as the country counts down to Basel II implementation in January 2014.
RBM deputy governor for supervision Grant Kabango said on Tuesday in Blantyre when opening a two-day credit scoring workshop that “automated scoring models are known to produce better, faster and consistent decisions resulting into increased efficiency in the credit delivery processes of the bank”.
Credit score is a numerical expression based on statistical analysis of an individual’s personal information to represent the creditworthiness of that person.
“In many countries today, lenders such as banks and other financial institutions use such credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.
“Lenders also use credit scores to determine who qualifies for a loan, at what interest rate and what credit limits. In some jurisdictions lenders also use credit scores to determine which customers are likely to bring in the most revenue,” said Kabango.
He said the implementation of a credit scoring model in banks will be a major step forward for the financial institutions to migrate to the Basel II advanced approaches of measuring credit risk.
Kabango said at the workshop for bank officials being facilitated by Natascha Botha Pretorius and Bianca Ruddy of KPMG South Africa that the use of credit scoring prior to authorising access or granting credit is, therefore, an implementation of what is considered to be a trusted system.
But Kabango said while credit scoring may not be an entirely new phenomenon in Malawi’s financial system, it is only in a few banks where credit scoring is conducted, while in the rest of the banks, credit scoring does not exist at all.
He said following discussions in the Basel II credit risk subcommittee meetings, it became clear that even in those banks where there is credit scoring, the systems are not working effectively as a risk mitigant.
“As such, one way of strengthening risk management systems in banks, particularly now as we approach the Basel II Implementation date, it was considered important that banks should build and adopt effective credit scoring models in their operational systems,” he said.
While some banks have been conducting credit scoring, they are mostly manual models and therefore considered ineffective.
Basel II are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, with the aim of enhancing risk management structures in the country’s banking system, particularly capital adequacy requirements which will be a reflection of the quantification of all material risks faces by banks.
