Building Strong Credit History in Nigeria Without a Credit Score System: Strategies for Credibility in the Cash Economy

Introduction:

The credit system with scoring models applied in developed economies is still in its formative stages in Nigeria. The cash economy, weird data availability, and lack of infrastructure have worked in synergy to deny the wide applicability of traditional credit scoring. However, the need for credit cannot be denied, as it contributes to the inability of individuals and businesses to access loans, secure investments, and operate in various finances. The perspective, therefore, is related to how strong credit history can be built and financial credibility established by Nigerians without necessarily having a fully developed credit scoring system, while the emphasis rests on strategies based on the use of existing financial practices with the application of new technologies.

1. The Constraints to a Formal Credit Score System in Nigeria:

It is necessary to understand the limitations of a formal credit score system in Nigeria to develop alternative strategies:

Limited Data Availability: A proper credit scoring system should have massive data on the financial behavior of individuals and businesses alike. An important part of Nigeria’s population operates outside the formal financial system, making it all the more difficult to arrive at reliable data.

Cash-Driven Economy: Most cash transactions do not leave a digital trail that would aid in building credit score factories.

Infrastructure Problems: Irregular power supplies and internet connections can obstruct the creation and success of good data collection and processing systems.

Absence of Standardized Data Collection: There are no standardized practices of data collection and reporting among financial institutions that support the realization of a common credit scoring system.

Low Levels of Financial Inclusion: A considerable percentage of the population still remains unbanked or underbanked, further restricting credit scoring data.

Cultural Impediments: Cultural preference for cash transactions and general distrust of formal financial institutions only complicate matters for the adoption of credit-based systems.

2. Establishing Financial Credibility in a Cash Economy:

Given these limitations, many options can nevertheless be employed by Nigerians in creating financial credibility and building a positive track record.

Maintaining a Credible Saving Record:

Savings Account: Putting money regularly into savings accounts shows financial discipline and stability.

Esusu/Ajo: Participation in indigenous rotating savings strengthens the sense of financial responsibility and builds confidence within the community.

Fixed Deposit Accounts: Investing in these accounts shows intention for long-term savings and provides a record of financial responsibility.

Create a Transaction History with Financial Institutions:

Banks: Use and Open Accounts: Opening an account and using it actively, even with minor deposits, helps form a transactional history.

Make Deposits and Withdrawals: The active movement of money in and out of the account, including both deposits and withdrawals, indicates financial engagement.

Make Timely Bill Payments: Payment of bills on time through any payment method, including bank transfers or mobile banking, creates a history of responsibility in financial behavior.

Build a Close Relationship with the Bank:

Keep in Touch: Keeping in regular contact with the bank fosters goodwill and engenders trust.

Use the Bank’s Products and Services: Active usage of different products and services offered by the bank, for example, debit cards, internet banking, and bills payment platform, shows the engagement and responsibility of the clients.

Ask for Financial Advice: Asking for bank representatives’ financial advice is an active way to manage one’s finances.

Mobile Money and Digital Payment Platforms are Useful:

Consistent Use of Mobile Wallets: When mobile wallets are used consistently for payment transactions, they create a digital imprint of financial activity.

Pay Bills Using the Mobile’s Timely Payment: Paying bills is a true sign of responsible digital financial behavior through any mobile payment platform.

Use Digital Lending Platforms: Taking small loans through reputable digital loaning platforms and timely repayment thereof creates a digital credit history.

Build Strong Business Reputation (for Firms):

Financial Records Must Be Kept: Maintain well-kept and accurate financial records to demonstrate any semblance of financial stability.

Pay Suppliers on Time: This will put suppliers in the habit of trusting and believing in you.

Keep Good Customer Relationships: Good customer service and honoring contract obligations lead to a good business reputation.

Register the Business: This lends legitimacy and credence to the business.

Strengthening Community Networks:

Build Trust within Community Groups: Participation in community organizations and showing financial responsibility in such organizations builds a strong reputation.

Look for Recommendations from Trusted Individuals: Getting recommendations from trusted community members or business leaders can improve credibility.

Support Community Development Activities: Support for community development activities can attest to a social responsibility culture and subsequently create goodwill.

3. Five Ways to formalize credit history:

Some programs and practices, although a formal credit scoring system is still under development, may contribute in formalizing credit history:

Take Advantage of Existing Credit Bureaus:

Register with the Credit Bureaus: An individual as well as a business can register with any peer accredited credit bureau creating the individual or business credit file in the process.

Give Accurate Financial Information: The value of the credit file as a document would be enhanced by providing accurate as well as current financial information to the baggage credit bureaus.

Request and Review Credit Reports: Regular requests and review of the credit report allow people and companies to detect and rectify errors.

Leverage Bank Verification Number (BVN):

Ensure Correct information about the BVN: A lot of importance is attached to providing accurate and consistent information during the registration of an applicant for a Bank Verification Number in ensuring that there is a ground for building a reliable financial portrait.

Utilize BVN-linked services: An individual undertaking the use of BVN-linked financial-services, for instance, digital lending platforms, will help them create a digital credit record.

Use National Identity Number (NIN):

Accurate NIN Information: Accurate information provision and consistency in details during the registration process for NIN are vital for establishing a reliable identification profile.

Link NIN to Bank Accounts: For the smooth and easy traceability of financial transactions, the linking of NIN to bank accounts can assist.

Engage Emerging Fintech Solutions:

Use of Fintech Lending Platforms: Engaging with fintech lending platforms that source their data from alternative sources, like app behaviors, social media activity, and the like, will help in building your digital credit history.

Research Blockchain based Credit Systems: Research into Blockchain based credit systems that offer transparent and immutable records of any financial transactions. Technology plays a major role in developing credit history as far as Nigeria is concerned.

Mobile Banking and Digital Payment Platforms:

Generation of transaction data: Valuable Transaction data can all be collected via platforms, like mobile banking and digital payments for assessing people’s creditworthiness.

Platforms for Digital Lending: Digital schemes provide loans to populations underserved in the lending system even while assessing credit risk by way of mobile phone use and other digital information.

Consistent use of mobile wallets or digital payment platforms helps to produce verifiable payment history.

Fintech Solutions:

Alternative Data Scoring: Creative models of credit scoring are being developed by fintech companies based on alternative data sources, such as on social media activity, mobile phone usage, and e-commerce transaction

Blockchain Technology: This helps in making transparent and unchangeable records of all financial transactions thus it acts to enhance building a credit history.

AI Affront Credit Assessment: Artificial intelligence (AI) is used in a manner to understand and analyze big datasets and try to find patterns that indicate creditworthiness.

Data Analytics:

Customer Behavior Analysis: Data analytics can help in analyzing customer behavior patterns that show whether they are financially responsible.

Risk Assessment: Certainly, credit risk can be assessed through data analytics for the formation of tailor-made loan products.

5. Importance of Financial Literacy:

Financial literacy is the groundwork that enables one to build a sound credit history and gain some financial credibility.

Awareness of Credit Principles: To educate individuals and enterprises on credit principles and the significance of building a good credit history.

Responsible Debt Management: Helping for-profit and non-profit organizations manage debt responsibly, avoiding excessive debt.

Budgeting and Financial Planning: Training individuals and businesses on budgeting and financial planning would help them manage their money well.

Using Financial Tools: A major area in financial literacy would include teaching individuals and enterprises about existing financial tools and resources from mobile banking apps to digital lending platforms.

6. Government Initiatives and the Regulatory Framework:

It is the government initiatives and regulatory framework that provide a conducive environment for the building of credit history.

National Identification Management System (NIMS):

National Identification Number (NIN): The NIN serves as a unique identifier for individuals in the effort to foster the establishment of a unified credit profile.

Data-Sharing Frameworks: The establishment of data-sharing frameworks that would allow financial institutions to access NIN-linked data for credit-related assessments.

Central Bank of Nigeria (CBN) Initiatives:

Financial Inclusion Policies: Policy implementations that are made to foster financial inclusion and expand growth in access to formal financial services.

Regulatory Sandboxes: The establishment of regulatory sandboxes that will allow FinTechs to test their innovative credit scoring models more extensively.

Consumer Protection Framework: Building a robust consumer protection framework to promote the rights of borrowers.

Credit Reporting Act:

Strengthening Credit Reporting Regulations: Strengthening the Credit Reporting Act for the efficient functioning of credit bureaus.

Encouraging Data Sharing: Fostering data sharing across financial institutions and credit bureaus.

7. The Future of Credit History Building in Nigeria:

Some of the variables likely to affect the future building of credit histories in Nigeria include:

Increased Digitalization: The higher digital advancement concerning financial services will generate more data for credit assessment.

Fintech Innovation: Fintechs will continuously innovate credit scoring models and lending platforms.

Data Analytics and AI: Data analytics and AI will greatly enhance credit assessments and the offer of personalized financial products.

Regulatory Reforms: CBN shall keep on fine-tuning its regulatory framework to promote responsible lending and safeguard consumers.

Increased Financial Literacy: Increased financial literacy will empower individuals and businesses to make sound financial decisions.

More collaborative firms : More collaborative firms are banks, fintech firms, and credit bureaus.

Conclusion:

Despite the formal credit score system still developing in Nigeria, individuals and businesses can use various strategies to establish a solid credit history and credibility. By saving consistently, transacting with a bank or financial institution, leveraging mobile money platforms, and building strong community networks, Nigerians can demonstrate themselves as financially responsible citizens. The technology adoption momentum, together with government initiatives and regulatory reforms, would further facilitate building credit history in the country. As financial literacy improves and digital financial services become widespread among the populace, more Nigerians will find it easier to access credit and participate in the formal financial system driving economic growth and development.