Assessment of credit scoring effectiveness on credit risk management in commercial Banks in Tanzania : the case of Advans Bank Tanzania Limited.

The objective of this study was to assess the usage of credit scoring in the process of credit risk management in commercial banks in Tanzania. The study was based on the dimensions of how credit scoring facilitates the evaluation of borrowers in making lending decisions at the time of loan application to ensure the asymmetrical information problem is avoided hence a means to an effective credit risk management for commercial banks in Tanzania. The study was assessed on the three areas namely; the process of capturing borrowers’ information, how the credit scoring system generates the scorecard reports and usefulness of the scorecards generated in credit risk management. A case study design was deployed in conducting the study while the approaches used in the study were simple random and purposive sampling. The Population was composed of bank staff from credit section at Advans who are the main users of the credit scoring reports on a daily basis. Data collection was done using questionnaires and documentary instruments while the analysis was done using SPSS. Findings suggests that, the information gap between lenders and borrowers intensifies the credit risk in the lending business, hence more than one factor need to be considered to ensure the proper evaluation of borrowers is performed to make good lending decisions. Moreover, credit-scoring gives a good insight on the borrowers as a starting point hence the credit analysts need to go further on their evaluations before the final lending decisions. The study concludes that, the use of credit scoring to evaluate borrowers helps in building the asymmetrical information gap which acts as a major catalyst for credit risk and hence, credit analysts are encouraged to consider the tool before making the lending decisions for the commercial banks in order to manage the risk.