Credit ratings or scoring are done by credit bureaus or credit rating agencies. A credit bureau has been comprehensively defined by IFC as "an institution that collects information from creditors and available public sources on a borrower's credit history, compiles the information on individuals and/or small firms, such as information on credit repayment records, court judgments, identifiers, contact addresses and bankruptcies and then creates a comprehensive credit report that is sold to creditors."

The United States Fair Credit Reporting Act defines a credit reporting agency as "any person who, for monetary fees, dues, or on a cooperative non - profit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties." These independent organizations have been identified as "specialized libraries" of credit and related information bridging the gap between creditors and borrowers. They provide independent and confident opinions on credit worthiness of corporate and retail user groups within the society with the aim of inducing responsible financial behaviour.

Credit rating system is a mechanism that analyses the credit behaviour of an individual or an entity and predicts the response of such a person by an assignment of rating or a score. This is possible through the aggregation of financial data and the customer's repayment behaviour is predicted through a scientific modeling.

Credit scoring therefore becomes a tool for informed lending decision. By its application, it relies on the fact that past performance indicates what will happen in the future. It provided a platform for lending decisions based on the cumulative experience of the business. It promotes data and information sharing among lenders and enhances access to as many financial information as possible about an individual or business.

It, therefore, advances the cause of data sharing among lenders. It also depersonalise lending decisions and provide the vehicle for fair, objective and consistent analysis of a prospective borrowing customer.

Empirical analysis has shown that the presence of credit bureaus led to reduction in default rates of borrowers as well as enhances access to finance and reduce processing cost of credit applications. It has been observed that the use of credit information allows financial institutions to reduce loan processing time and cost by about 25 percent and lower default rates of borrowers by 40 - 80 percent.

The introduction of credit referencing services, as identified to be the missing link in the financial architecture of Nigeria, has been articulated as the tool needed to reduce the burden currently involved in documenting credits to SMEs. Most importantly however is the fact that the presence of credit bureaus accentuates access to credit for small borrowers.

Firstly, it provides a credible and scientific tool to financial institutions to take informed decisions on credit application. It therefore facilitates credit processing from the perspective of time and cost. Secondly, it also simplifies pricing of credit products as pricing can be done with consideration for level of perceived risk. Furthermore, it is easy to determine the extent and value of security needed on a customer. A corollary to this is that customers with good credit history and pedigree have relatively easier access to finance.

Invariably, it promotes sound repayment culture among small businesses as they work hard to build very positive and credible repayment history, a requirement for access to credit. This goes on to ultimately expand the base of borrowing customers.

For developing economies, improving access to finance is an important aspect of fostering entrepreneurship. In Nigeria, with the rise in retail banking operations, small business lending has assumed an exponential dimension. With credit bureau, MSMEs with good credit repayment history and record will be in a position to access bank loans and funding to the extent of their requirements and at competitive rates.

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That finance is a critical element in the promotion of small businesses is an understatement. However, this critical ingredient of promoting small business is hampered by a number of factors. A major way out of the quagmire is the establishment of credit bureau and registries in the emerging markets. The International Finance Corporation succinctly puts it when it stated that "without credit bureau, lending to a significant share of the population and small businesses is virtually impossible".

While the countries of Asia and Latin America have recognised this, a lot still needs to be done in the Africa continent. Moreover, promoting private credit bureau has been noted to be more impactful and potent than publicly owned bureaus. It is therefore recommended that the establishment of private credit bureaus should be the focus of attention in African countries.

It is noted that credit rating is bound to face series of challenges in the developing economies. The emerging economies are known for series of limitations that hamper the development of a sound financial system, the same challenges that adversely affect the establishment and operations of credit bureaus. The financial architecture is still at its infancy in most emerging economies, hence the required financial depth is lacking. Secondly, there is the challenge of social and economic infrastructure including power and electricity; communications and information technology limited usage and availability, etc. In addition, most of the countries do not have unique identification and this poses serious challenge for the operations of a reliable and efficient credit bureau. Furthermore, the economies of most of the countries still remain largely informal and are therefore difficult to bring into the formal economic sector.

Unless and until most of these serious issues are addressed, it becomes very difficult for credit bureaus to be established and where they are, to provide quality data, accurate scoring and reliable information for decision making by the users.

is an adaptation of the paper: Can Credit Rating System Improve Access To Finance For Small Business In The Emerging Economies, prepared by Ahmed B. Popoola and presented at the 2008 (53rd) World Conference of the International Council for Small Business which recently held in Halifax, Nova Scotia, Canada.

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Ahmed Babatunde Popoola is CEO,

Credit Reference Company.

You can reach him on:

Tel. +234 803 302 4307

Email: abpopoola@,yahoo.com; t.popoola@creditreferencenigeria.com