Gambling, bank account balances and personal investments could carry more weight when calculating credit scores in future compared with traditional benchmarks, as banks struggle to cut loan default rates, experts warn.
“We relied a lot on formal borrower information in the past instead of lifestyle-related information and lost out on the benefits of critical client details such as informal borrowing habits and cases of people spending above their means.
“Other lifestyle factors that could be considered include integrity of the prospective borrower based on past criminal record," said Samuel Mwogeza, the chief finance officer at Stanbic Bank Uganda.
Mr Mwogeza added that the bank is considering credit scoring for small to medium enterprise clients since collateral requirements are not always sufficient to determine one’s credit worthiness.
“Some SMEs do not have collateral but hold useful information that can be filtered to enable a lender to make a wise credit allocation decision,” he said.
Credit scoring refers to the process of determining a borrower's ability to repay a loan based on various indicators such as age, degree of job security, health status, payment patterns for utility bills including water and electricity and repayment history obtained from banks and other lenders.
Stronger credit assessment tools usually lead to lower credit risk, reduced loan default costs and higher profits for lenders.
But poor documentation systems evident in many African economies pose a challenge in determining a persons financial history, medical records, employment background and physical address.
The borrower’s age is one of the leading benchmarks in credit scoring.
For example, a 24-year-old employed university graduate who receives a regular monthly salary will receive a higher credit rating compared with Uganda’s oldest banking customer aged over 100, experts say.
The client opened an account with Barclays Bank Uganda during the pre-Independence years and has stayed with the lender since then, according to industry sources.
Many Ugandans above 55 struggle to obtain loans from banks due to worries about their ability to pay their debts in old age.
However, an individual’s gambling habits could attract more scrutiny and curiosity from lenders in coming years.
Frequent gambling backed by limited income tends to deplete one’s pocket and weaken their capacity to meet daily living expenses such as food and transport and, of course servicing of debts.
As the region’s gambling sector grows, driven largely by sports betting, an increasing number of people are betting at the expense of their health and financial wellbeing.
The sector contributed Ush41 billion ($10.8 million) in taxes to the Uganda economy in the 2017/18 financial.
The country has more than 40 licensed betting companies and over five licensed casinos. The majority of clients are drawn from the low-income class — a segment deeply attracted to football betting. A small pool of high-end clients prefer casino gambling services.
“A customer who engages in gambling poses a higher credit risk to a bank. Customers who experience spikes in account balances usually suffer from high attrition rates in bank records.
“But customers with high credit scores tend to accumulate large bank balances and also receive huge investment-related incomes,” said Pieter Heredern, a South African credit scoring expert while on a recent working visit to Kampala.
Fluctuations in bank balances are partly attributable to high, occasional expenditure incurred on building construction works, commodity trading ventures and healthcare emergencies among others.
Faced with small bank balances, customers engaged in huge expenditure cycles often fail to repay loans, leading to credit default problems in lending institutions.
Customers who hold significant personal investments are likely to receive higher credit scores.
Certain individual savings held by Saccos and unit trusts have mounted up hundreds of millions of shillings over time, while some personal monies held by investment clubs have registered similar growth and boosted individual wealth within the working class, thereby improving their credit risk profile.
Rental incomes have also widened income streams held by Ugandans in the formal sector.
“We are looking at expanding the scope of information available in the credit reference bureaus by adding borrower data from non-bank institutions,” said the director for commercial banking at Bank of Uganda, Hannington Wasswa.
“Many people borrow from both banks and Saccos, but the client information held by Saccos is not available to banks.”
He added: “Some gamblers belong to the schoolgoing category and lack income sources. This means their gambling habits do not affect their income base. But an employed adult gambler is risky to lend to due to the impact of gambling addiction on their disposable income.”
Mr Wasswa however said that gambling habits will not stop banks from lending to risky borrowers because they can ask for extra collateral or third party guarantees to reduce their exposure.
He also said that customers whose account balances fluctuate but also run cash-heavy, profitable businesses may enjoy higher credit scores than those who experience wide fluctuations driven by consumption habits.