Creditworthiness Of Borrowers Research Articles

Decentralized credit scoring: Black box 3.0

AbstractMuch like traditional credit scoring, decentralized credit scoring calculates a borrower's creditworthiness, but the fully automated process is executed on the blockchain by Decentralized Finance (DeFi) platforms. Originally, DeFi emerged as an alternative to the centralized traditional finance (TradFi) system; however, decentralized credit scoring combines DeFi data and traditional data that include a wide range of information sources, from traditional credit reports to social media information. Despite their fairness‐oriented narrative, an examination of the business models of the protocols and entities operating in this space reveals that these hybrid scores are subject to the same algorithmic distortions that have been observed in traditional and alternative credit scoring models. Moreover, decentralized credit scores present their own distinctive set of fairness issues. Particularly, both upgrade to smart contracts and their reliance on external algorithms, known as oracles, which feed outside data, introduce heightened potential for error and bias in the credit scoring process. These “black box 3.0” issues can result in opaque automation of biased processes and perpetuate social injustices, requiring regulatory intervention to strengthen the linkage points between DeFi and TradFi and better protect consumers from the black box 3.0 consequences of decentralized credit scores.

Оцінювання кредитних ризиків у системі ризик-менеджменту банківських структур

The effective lending activity of the bank depends on the qualitative assessment of the creditworthiness of borrowers. This process determines not only the success of an individual banking operation, but also the entire credit policy of the bank. Modern banks use different approaches to creditworthiness analysis, because each loan agreement has its own specifics. The article summarizes and forms the main elements of the bank’s risk management system, substantiates the significant impact of such factors as the use of the latest technologies, stress management, and the culture of risk management. It is determined that the main and additional elements of the risk management system should take into account the features of the organizational and financial structure of each bank. In order to improve the methodologies for assessing the risks of banking activities on the basis of modeling methods and machine learning, the article proposes a conceptual model for assessing the credit risk of a commercial bank, which allows to implement the following stages: to form an information space for such an assessment and to carry out a scoring assessment of the creditworthiness of borrowers. As a result of the implementation of the first stage of the study, a set of observation objects is formed, assessed using a set of indicators; a binary characteristic of the client’s creditworthiness has been determined, which in turn determines the sign of the client’s attractiveness for lending. On the basis of the aggregate of selected factors, a comprehensive scoring model for assessing the borrower’s creditworthiness has been implemented, which allows to determine the rules for categorizing variables. A logistic regression has been constructed by the method of step-by-step exclusion and its significance has been assessed. Each client is assigned a score using a scoring card, on the basis of which a credit rating forecast for new borrowers is also calculated. The results of the research can be used by banks to improve the risk management system, as well as help banks to increase their efficiency and competitiveness.

Problems of determining the borrower's creditworthiness

This article addresses the challenges associated with determining the borrower's creditworthiness. The authors define the borrower's creditworthiness as the ability to timely and fully meet debt obligations to the lender. This determination is based on an evaluation of the borrower's financial condition, forecast of business development, and other factors influencing the ability to repay the loan.
 The authors identify internal and external factors affecting the creditworthiness of borrowers in Ukraine. Internal factors include the economic situation, regulatory policies, credit history, credit rating, and a lack of financial literacy. External factors encompass the global economic situation and the political climate.
 The article also discusses challenges in determining the borrower's creditworthiness during times of war. The authors note that creditworthiness can sharply decrease during such periods due to factors such as reduced income, increased costs, decreased demand for goods and services, and an unstable economic situation.
 To address these challenges during wartime, the authors propose the following recommendations:
 
 Widespread use of artificial intelligence: AI enables the consideration of more factors affecting the borrower's creditworthiness and the adaptation of credit scoring models to changes in the economic situation.
 Expansion of data on the borrower's financial condition: Financial institutions should utilize more data sources, including unstructured data such as social media and behavioral data, to assess the borrower's financial condition.
 Development of new methods for assessing creditworthiness: Financial institutions should create new methods that account for the specific conditions of wartime.
 Establishment of cooperation between financial institutions and government agencies: This collaboration will provide additional data on the financial condition of borrowers, offering financial institutions a more comprehensive view.
 Promotion of financial literacy among the population: Improving financial literacy will empower borrowers to better understand their financial obligations and make more informed lending decisions.
 
 Implementing these recommendations will enable financial institutions to enhance the accuracy of creditworthiness assessments and, consequently, reduce credit risks during times of war.

МЕТОДОЛОГИЧЕСКИЕ ОСНОВЫ БАНКОВСКОГО КРЕДИТОВАНИЯ И КЛАССИФИКАЦИИ ФАКТОРОВ, ВЛИЯЮЩИХ НА ОСОБЕННОСТИ ПОЛУЧЕНИЯ КРЕДИТОВ

The article discusses the methodological foundations of bank lending, the essence of bank lending, as well as the systematization of approaches to classifying factors in the process of crediting enterprises, classified as business entities. The factors influencing the lending process are classified. The organization of the lending process in a bank includes several stages, each of which has its own characteristics and is characterized by some intermediate results. Determining the creditworthiness of borrowers and assessing the level of credit risk of the bank when concluding a credit transaction is carried out in the course of credit analysis. The essence of this stage is a comprehensive and comprehensive analysis of the activities of borrowers in order to ensure the desired profitability of lending operations at an accepted level of credit risk and to prevent irretrievable losses. However, changes in external conditions, negative trends in the borrower's activities and possible mistakes by bank employees may lead to a deterioration in the quality of the loan and the loan portfolio as a whole.

Credit support for the development of the transport complex of the national economy and its sectoral differentiation

It was established that the specific weight of bank loans granted to the transport complex of Ukraine in the overall national economy is insignificant - about 3%. The largest share of bank loans in the sectoral portfolio was issued to warehousing and auxiliary activities. The second place is occupied by ground and pipeline transport, the third place is air transport. The share of water transport is negligible. The intensity of the use of loans in foreign currency is the greatest in warehousing and auxiliary activities, much less in aviation, land and pipeline transport. It was established that the share of non-performing loans in the transport complex is quite high, but smaller than in the national economy, in the national currency it is higher compared to the national economy, and in the foreign currency it is much lower. The specific weight of non-performing loans is the largest in warehousing and auxiliary activities, average - in land and pipeline transport, insignificant - in air transport, negligible - in water transport. Analysis of loans to the transport complex in terms of banking institutions made it possible to establish their exponential distribution and high concentration. TOP-3 state-owned banking institutions account for more than half of the value of loans and almost 90% of non-performing loans. TOP-14 banking institutions present almost the entire credit portfolio of the transport complex. It has been proven that one of the reasons for the high level of non-performing loans in the transport complex is the defects in assessing the creditworthiness of borrowers in the industry. Unlike other sections, a separate discriminant model was not built for section H - Transport, warehousing, postal and courier activities. The use of a single aggregated model for the transport complex and twelve other types of economic activity distorts the assessment of the borrower's creditworthiness, since the sectoral conditions of business in them differ significantly. It is proposed to build an individual model of the integral assessment of the borrower's creditworthiness according to section H with differentiation by sub-sectors.

Criteria for the Effectiveness of Shadow Rating Models in Assessing the Creditworthiness of Low-Default Borrowers

Criteria for the Effectiveness of Shadow Rating Models in Assessing the Creditworthiness of Low-Default Borrowers

Banking competition and the use of shadow credit: Evidence from lending marketplaces

The purpose of this study is to determine whether banking competition can affect the creditworthiness of borrowers relying on shadow credit. Upon analyzing the granular data from a leading online lending marketplace in China, we discover that marketplace borrowers from concentrated banking markets are generally more creditworthy than those from competitive banking markets. This phenomenon is more pronounced when new banks contribute to competition in the banking market and when borrowers are young or new to the marketplace. These findings suggest that borrowers may migrate from banks to lending marketplaces when the banking market is concentrated and that banking competition can improve the financial inclusion of individuals and households through relaxed credit checks.

Impact of corporate social responsibility on cost of debt in Scandinavian public companies

Research background: In recent decades, companies have paid increasing attention to corporate social responsibility (CSR) and its related performance. Scandinavian countries lead the world in CSR and sustainability. The good CSR performance of Scandinavian companies has motivated studies on this phenomenon, particularly on the connection between a company's CSR and its performance. One of the most important performance indicators and value drivers is the cost of debt. Purpose of the article: This study assessed the impact of CSR on the cost of debt in Scandinavian public companies. Methods: The research was divided into two stages. In the first stage, Scandinavian public companies were divided into two groups (with and without ESG (environmental, social, governance) disclosure scores) to reveal differences in the cost of debt. In the second stage, a fixed-effects regression model for balanced panel data sets was applied from 2011 to 2020 to assess the impact of ESG and its pillars on the cost of debt. Findings & value added: The results revealed that the cost of debt of companies in Scandinavian countries with ESG disclosure scores was significantly lower. The ESG disclosure scores of these companies have increased significantly over the past 10 years. We found a positive impact of CSR on the cost of debt in Scandinavian public companies. The increase in ESG disclosure and pillar scores reduced the cost of debt. These findings are valuable from a scientific perspective. Scandinavian public companies with ESG scores have higher financial risk, but lower cost of debt. These results support the importance of investors' behavior, information asymmetry, and signaling. The findings have several implications for shareholders, managers and creditors. They suggest that creditors consider ESG disclosures when determining a borrower's creditworthiness. Additionally, it is a message to regulators that the debt market values ESG disclosures.

Peer-to-Peer (P2P) Lending Risk Management: Assessing Credit Risk on Social Lending Platforms Using Textual Factors

Peer-to-peer (P2P) lending platforms offer Internet users the possibility to borrow money from peers without the intervention of traditional financial institutions. Due to the anonymity on such social lending platforms, determining the creditworthiness of borrowers is of high importance. Beyond the disclosure of traditional financial variables that enable risk assessment, peer-to-peer lending platforms offer the opportunity to reveal additional information on the loan purpose. We investigate whether this self-disclosed information is used to show reliability and to outline creditworthiness of platform participants. We analyze more than 70,000 loans funded at a leading social lending platform. We show that linguistic and content-based factors help to explain a loan's probability of default and that content-based factors are more important than linguistic variables. Surprisingly, not every information provided by borrowers underlines creditworthiness. Instead, certain aspects rather indicate a higher probability of default. Our study provides important insights on information disclosure in the context of peer-to-peer lending, shows how to increase performance in credit scoring and is highly relevant for the stakeholders on social lending platforms.

ТЕОРЕТИКО-МЕТОДОЛОГІЧНІ АСПЕКТИ УПРАВЛІННЯ ДЕБІТОРСЬКОЮ ЗАБОРГОВАНІСТЮ ПІДПРИЄМСТВА

The article summarizes approaches to determining the essence of receivables. It was determined that scientists consider the company's receivables in the following directions: as a part of products sold but not paid for by customers; as a form of lending by the company to its customers; as one of the elements of current assets financed by own or borrowed funds. The compliance of national accounting provisions (standards) with international standards of accounting and financial reporting was analyzed, common features and differences of accounts receivable were identified.
 An assessment of the impact of receivables on the company's financial condition was made, the need to optimize its size and ensure timely collection of the debt was substantiated. Systematized measures to reduce risks in the management of receivables, aimed at ensuring control over the ratio of payables and receivables, which includes control, discounts, diversification of debtors, assessment of debtors and legal analysis of contracts, which includes risk insurance, self-insurance of risks, prepayment and limitation.
 An assessment of the control system of enterprises was carried out, since without it the amount of receivables may exceed an acceptable level, which will lead to a decrease in the amount of cash and the appearance of doubtful debts, which, accordingly, will reduce the revenue from the sale of products and the profit of the enterprise.
 The process of monitoring the company's receivables, which involves determining the maximum allowable amount of receivables, its analysis by types of debt, repayment terms, size and customers, is analyzed. The need to implement a set of measures to eliminate the causes that led to the emergence of overdue and bad receivables is substantiated, which involves assessing the borrower's creditworthiness by analyzing his financial condition, solvency and the probability of being declared bankrupt based on information from open sources.

Corporate Governance Effects on Bank Profits in Gulf Cooperation Council Countries during the Pandemic

During the COVID-19 lockdown, the typical bank in the Middle East lost liquidity due to deposit drains and experienced increases in nonperforming loans. The loss of liquidity was a supply shock, while the increase in nonperforming loans was a demand shock. Corporate governance increases the board’s oversight of top management’s implementation of strategies to reduce these shocks. Two corporate governance measures include a political concentration in the ownership and the presence of independent directors on the board of directors. Politically connected shareholders can ensure the continuous flow of deposits through their access to large depositors, thereby reducing supply shocks. Supply shocks may also be overcome by the large deposit balances from oil wealth. Independent directors are not employees of the banks on whose boards they serve, thereby providing objective evaluations of management’s performance. Managers who are evaluated by independent directors can reduce nonperforming loans by strictly evaluating the creditworthiness of borrowers and providing incentives for timely repayment. Thus, demand shocks may be overcome by the scrutiny of management by independent directors. These conditions prevail in the Gulf Cooperation Council (GCC countries). Using a sample of 326 GCC banks, we perform OLS regressions followed by two-stage least squares and GMM estimator robustness checks of ownership’s political concentration, independent directors, bank size, and bank liquidity on returns on assets and equity. Ownership political concentration, independent directors, bank size, and liquidity ratio significantly explained the return on assets and on equity. We conclude that large shareholders use political connections to cope with crises and that large banks are able to make new loans due to liquidity from large reserves. Independent directors evaluate management performance objectively, thereby requiring that management reduce nonperforming loans. We close research gaps of bank performance in GCC countries, as opposed to the entire MENA region, the latter being the focus of the literature. The significance of this paper is that it demonstrates the ability of banks to employ corporate governance to cope with crises. This is an original approach, as it seeks the outcome of a positive signal on bank performance of the reduction in the supply shock through ownership political concentration and reduction in the demand shock by independent directors. As corporate governance variables mitigate both shocks, corporate governance may assist banks in coping with liquidity crises.

ДОСЛІДЖЕННЯ КЛЮЧОВИХ ЕЛЕМЕНТІВ ПРОЦЕСУ ФОРМУВАННЯ ТА РЕАЛІЗАЦІЇ КРЕДИТОСПРОМОЖНОСТІ ПОЗИЧАЛЬНИКІВ БАНКУ

The article considers issues related to the analysis of approaches to assessing the creditworthiness of bank borrowers. The article analyses various views of scientists and allocates main components of the concept of "creditworthiness", which comprehensively reveal the content of the concept and its main characteristics, both in relation to individuals and legal entities. The article offers a structure of assessment of creditworthiness of clients on the basis of the world and domestic practice, which includes two components: criteria of creditworthiness of a client and methods of assessment of creditworthiness of a client. Based on a comparative analysis of the main 10 foreign models for assessing the creditworthiness of borrowers, it is concluded that the indicators of "borrower's reputation" and "ability to repay the loan" are present in a larger number of models. The article considers foreign and domestic methods of assessing the borrower's creditworthiness and concludes that they have both common and distinctive features, but there is no single ideal method among them that would be suitable for a larger number of banking institutions. It is shown that there is a need to select instruments that will reflect the risks of potential losses. By determining the optimal system for assessing the borrower's creditworthiness, the bank reduces the risks of loan default and, in the future, bankruptcy of the institution. It is determined that the methods used in the practice of domestic banks generally assess financial indicators, but there is a gap in the use of qualitative characteristics in assessing the borrower's activities that do not have a quantitative expression, which are considered in detail in foreign methods for assessing the creditworthiness of a supplier. To make such an assessment, banking institutions need to pay attention to the analysis of the external environment, which will help in determining credit risks. It is the combination of qualitative and quantitative indicators that will help banks conduct a comprehensive multifactorial analysis and minimise credit risk. Therefore, based on the recommendations of the National Bank of Ukraine, each banking institution should choose an acceptable methodology or system for analysing and assessing creditworthiness in order to ensure the correctness of this assessment. It is concluded that there is currently no single methodology for assessing the creditworthiness of borrowers.

Emprical study of analysis and assessment of credit credibility of borrowers of commercial banks

This article identifies typical problems of providing analysis and assessing the creditworthiness of borrowers of commercial banks focused on modernizing and updating their production base. On the example of commercial banks of Uzbekistan, a phased development of a special methodology is considered, the use of which will solve the identified problems. The implementation of this methodology is designed to provide analysis and assessment of the creditworthiness of borrowers of commercial banks and, in general, with a focus on achieving the criteria values of key performance indicators.

Capitalism and Distributive Justice: Musings of a Mormon Economist

Capitalism and Distributive Justice: Musings of a Mormon Economist

Дослідження скорингової моделі для кредитопозичальників банку

In the paper we investigate scoring models as a tool for credit risk management, their importance, types, features and applications. We consider the history of scoring models and the development of the modern concepts of creditworthiness and scoring, examine scoring types and their features, methods (logistic regression, decision trees, linear programming, decision trees, and others), strengths and weaknesses of each considered method and stages of building scoring models; we stress the importance of scoring cards for building scoring models, indicate the main quantitative and qualitative features, their classification used for and describe the procedure of creating scoring cards. In the paper we consider the factors needed to be considered for more effective scoring model building process; we indicate the main formulas used to assess the creditworthiness of borrowers and improve the accuracy of scoring models, including Population Stability Index (PSI), R-Square Coefficient, Kolmogorov-Smirnov Coefficient, GINI Coefficient, and others; the practical application of scoring models in banks of Ukraine and their steps after applying scoring models are described on the example of a typical borrower.

The Evaluation of Creditworthiness of Trade and Enterprises of Service Using the Method Based on Fuzzy Logic

This article considered the problem of determining the creditworthiness of an enterprise operating in the field of trade and services. The assessment of the creditworthiness of borrowers, particularly small businesses, needs to be more careful: the level of development of small enterprises and their specific activities must be considered, as well as the uncertainty in obtaining any financial result. A method for assessing the creditworthiness of enterprises (trade and services) is proposed, based on the use of the mathematical apparatus of the theory of fuzzy sets. This article analyzes the indicators of industry and regional specifics, indicators of the activity of a small enterprise, and financial and economic indicators typical for the service sector and trade. The rules on the basis of which decisions are made are formed in the form of logical formulas containing parameters. In its most general form, one parameter is predicted, called the creditworthiness index, which varies from 0 to 1 and has a natural interpretation. On the basis of the proposed method, examples of calculating the assessment of the creditworthiness of enterprises operating in the field of trade and services are given. The proposed scientific approach can be used as a basis for creating expert decision support systems for lending to small businesses.

Safaricom Limited’s Mobile Money Services and Access to Trade Credit by Microenterprises in Nairobi City County Kenya

The purpose of this study was to determine the impact of mobile money services on access to trade credit by microenterprises in Kamukunji market, Nairobi City County, Kenya. The specific objectives of the study were; to assess whether digital payment-buy goods application (till number), saving and loan product (mshwari), mpesa for business application, pochi la biashara application have influence on access to trade credit by microenterprises in Kamukunji market. The study was guided by; Technology Acceptance theory, Unified Theory of Acceptance and use of technology, Diffusion innovation Theory and Technology, organization and Environment theory. The study employed a descriptive research approach and targeted 4,080 registered microenterprises in Kamukunji Market, Nairobi City County as per the City County Business Register of 2021. The sample size of the study was 351 microenterprises. A self-administered questionnaire was employed for the study's primary data. Data analysis was aided by SPSS using both descriptive statistics and inferential statistics. The results were displayed through tables and charts. The findings demonstrated that, savings and loan service, digital payment service, mpesa for business and pochi la biashara jointly explained 82 percent of the variation in access to trade credit among businesses in Kamukunji market. The study also established positive and significant relationship between all the independent variables and access to trade credit among businesses in Kamukunji market. The study concludes that Safaricom Ltd mobile money services have significant effect on access to trade credit by microenterprises in Kamukunji market, Nairobi City County Kenya. The study thus recommends that businesses in Kamukunji County and other microenterprises in other counties should strive to embrace Safaricom Ltd mobile money services such as savings and loan service, digital payment, mpesa for business, pochi la biashara since they enhance access to trade credit for the businesses. There is need to do further studies in area related to cost of accessing trade credit under the fintech firms and huge data available for assessing creditworthiness of borrowers. Keywords: Mobile Money Services, Savings and loan, Digital payment, Mpesa for business, Pochi la biashara.

The more the better? Information sharing and credit risk

Estimating correctly the borrower credit risks is the task of particular –and growing- importance for the banks all around the globe. Formal information sharing mechanisms are aimed to reduce information asymmetry in the credit markets and to enhance the precision of those estimates. In the academic literature, however, the answer to the question of whether more detailed borrower information accumulated and shared by credit bureaus and credit registries is always associated with higher quality of bank credit portfolios and lower credit risks is not completely unambiguous. More credit information disclosed by information intermediaries tend to result into the weaker disciplinary effect of credit history, which means higher credit risks. At the same time, the accuracy of assessing the creditworthiness of borrowers grows due to an increase in the predictive power of scoring models, which leads to a reduction in credit risk. In this paper we make a first attempt to examine the nonlinearity of this effect. We study the relationship between the depth of the credit information disclosure and the stability of the banking sector in terms of credit risks. Based on data on more than 90 countries for 2004–2020, we show that the relationship between disclosure and credit risk is non-linear: we observe the lowest levels of credit risk at minimum and maximum levels of disclosure depth. We analyze the influence of the country institutional quality and financial development on the nature of the relationship. We show that credit risks decrease with increasing depth of disclosure by credit bureaus and credit registers in in a high-quality institutional environment and in well-developed financial markets.

Buffer Model Determination of Systemic Strategic Risks for Borrowers in Force Majeure Circumstances

This study substantiates the concept of systemic strategic risks for borrowers and buffers systemic strategic risk in force majeure to the analyze the credit risk of banks. The authors studied the existing approaches used to assess the creditworthiness of borrowers and the credit risk of banks. The factors that influence the level of credit risk of borrowers are also identified. Quantitative and qualitative parameters of a borrower's creditworthiness, used in banking risk management, are also determined. An economic and mathematical model is proposed to determine the systemic strategic risk buffer for borrowers in force majeure circumstances. It is proposed that technology should be used to create a systemic strategic risk buffer for borrowers for hedging in force majeure circumstances as a monetary policy tool and include Basel III in the requirements of the banking agreement.

Credible risk: private credit bureaus and the work of loan officers in West Africa

AbstractIn 2015, the Central Bank of West African States selected a private credit bureau to build a digital platform to collect and analyse financial data across the eight-country West African Economic and Monetary Union, including the activities of credit cooperatives and microfinance agencies that serve many West African borrowers. The credit-reporting platform promises to produce new and valuable knowledge about borrowers’ creditworthiness and risk. But valuable in what ways and for whom? Private credit bureaus rely on vast arrays of personal and financial data in order to produce credit reports and consumer credit scores that claim to represent the creditworthiness of individual borrowers. Cooperative loan officers, instead, understand creditworthiness to be highly variable and rely on relational metrics in order to determine risk as well as carefully overseeing existing loans to ensure their timely repayment. Based on ethnographic fieldwork with loan officers at a small-scale credit cooperative in Lomé, Togo, this article examines how the impending arrival of a private credit bureau and new credit-reporting technologies highlights the distinction between the ways in which credit bureaus and loan officers understand the nature of financial risk, as well as the centrality of loan officers and their management of borrower debt in sustaining the field of small-scale lending in Togo.