Using scorecards for managing the credit risk within BPR ltd Period: 2009-2014

Abstract

This study is related to the use of credit scorecards (also known as credit scoring models) in managing the credit risk in BPR Ltd. Indeed, this tool was introduced in early 2012 in order to help in analysing and assessing the credit risk for small loans less than Rwf 5 Million. This study is about evaluating the contribution of loans analysed within this tool (referred to in this study as scored loans) in BPR credit risk management. The period of the study is from 2009 to 2014, which corresponds to three years before the use of scorecards and three years after their introduction in BPR. In short, it is to examine whether or not these scored loans have contributed in reducing the NPL rate which is the principal measure of the performance of a bank and any other lending institution. The methodology followed is the comparative analysis of loans analysed using scorecards and other loans as well as the analysis of the correlation and regression between scored loans and the performance of BPR expressed in terms of the NPL rate. The study has revealed that BPR scorecards is a good tool for managing the credit risk. Indeed, the regression analysis has shown that there is a significant impact of scored loans on BPR NPL rate. The correlation analysis done using the data from the last two years of the period of the study showed that there is a negative correlation between scored loans and NPL rate. This means that these scored loans help in reducing the credit risk (expressed by the degree of NPL rate) and that they contribute in the performance of BPR loan portfolio. As the scoring models are still new in Rwanda and that BPR is the sole Rwandan bank using them, literature and researches on this tool are still few (or even inexistent in Rwanda). That’s why we have suggested some areas of further research. Especially it would be better to make a comparative study of the performance of loans analysed within scorecards and similar loans not scored (of any other bank or any lending institution). Moreover, it would also be interesting to compare the performance of BPR scoring models with other scoring models of any other bank on the international scene, for example any other bank in Africa. Finally, we have suggested the use of these scoring models in other banks and lending institutions in Rwanda, especially in MFIs where small loans are found in large proportions.