What is Credit Risk Scoring?
Credit risk scoring is the process of assigning a numerical score to a customer or counterparty based on the probability that they will fail to meet their financial obligations. It is used to set credit limits, payment terms, and provisioning.
How It Works
- Collect customer data — financial statements, payment history, industry, ownership.
- Choose a scoring model: judgemental, statistical (logistic regression), or machine learning.
- Weight each input variable based on its predictive power.
- Output a score on a defined scale (e.g., 300-850 or A-D).
- Map the score to a credit limit, payment terms, and provisioning percentage.
Saudi Context
Saudi banks supervised by SAMA follow internal-ratings-based approaches under Basel III for corporate exposures. For non-bank businesses, credit scoring informs the expected credit loss model required under IFRS 9 as adopted by SOCPA.
Example
A wholesaler scores a new customer at 720/850 — investment grade. The customer is granted a SAR 250,000 credit limit and net-45 payment terms. The expected credit loss percentage applied to their receivables is 0.4%.