Risk Pricing in Emerging Economies

Abstract

Iran’s banking industry as a developing country is comparatively very new to risk management practices. An inevitable predictive implication of this rapid growth is the growing concerns with regard to credit risk management which is the motivation of conducting this research. The paper focuses on the credit scoring aspect of credit risk management using both logit and probit regression approaches. Real data on corporate customers are available for conducting this research which is also a contribution to this area for all other developing countries. Our questions focus on how future customers can be classified in terms of credibility, which models and methods are more effective in better capturing risks. Findings suggest that probit approaches are more effective in capturing the significance of variables and goodness-of-fitness tests. Seven variables of the Ohlson O-Score model are used: CL_CA, INTWO, OENEG, TA_TL, SIZE, WCAP_TA, and ROA; two were found to be statistically significant in logit (ROA, TL_TA) and three were statistically significant in probit (ROA, TL_TA, SIZE). Also, CL_CA, ROA, and WCAP_TA were the three variables with an unexpected correlation to the probability of default. The prediction power with the cut-off point is set equal to 26% and 56.91% for defaulted customers in both logit and probit models. However, logit achieved 54.85% correct estimation of defaulted assets, 0.37% more than what probit estimated.

Credit scoring and risk management in islamic banking: the case of Al Etihad Credit Bureau

“…The organization makes available for individuals and companies for their knowledge and use when considering any investments, lending, or borrowing activities. The company is run by its Board of Directors and a team of management, under whom employees operate the functions and processes of the company (Anagnostopoulos & Abedi, 2016).…”

“…However, it was found that Islamic bank managers' information about the AECB credit scoring procedure is inadequate, although they are using its credit scoring as a supplement to assess their customers' creditworthiness, which may hinder acceptance of AECB credit rating services fully. In addition to internalizing AECB techniques, Islamic banks use their own rules and methods, including 6Cs, which are more character-oriented in the lending decision which helps them cover the demerit of objective methods (Anagnostopoulos, & Abedi, 2016;Masood et al, 2012). Although Islamic banks apply the AECB approach to avoid non-performing and defaulted loans, defaults happen as they are behavioral and might be rooted in not providing consolidated accounting figures (Anagnostopoulos & Abedi, 2016).…”

“…In addition to internalizing AECB techniques, Islamic banks use their own rules and methods, including 6Cs, which are more character-oriented in the lending decision which helps them cover the demerit of objective methods (Anagnostopoulos, & Abedi, 2016;Masood et al, 2012). Although Islamic banks apply the AECB approach to avoid non-performing and defaulted loans, defaults happen as they are behavioral and might be rooted in not providing consolidated accounting figures (Anagnostopoulos & Abedi, 2016). Findings indicate that some AECB managers are not sure that Islamic banks can benefit from their services.…”