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Scoring
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Abstract
Abstract
Abstract
Abstract
The aim of this research lies in the development of a credit-scoring model using logistic regression and multivariate discriminant
The aim of
Abstract
analysis this research
applied to 1500lies in the development
individual loans from of a credit-scoring
MFIs. model using combines
logistic regression and multivariate discriminant
Abstract
The aim of
analysis this research
applied to 1500(age, lies in the development
individual loans from ofMoroccan
a credit-scoring
Moroccan
This model
MFIs.ofmodel
This using combines
model
both behavioral
logistic regression
both
and descriptive
and multivariate
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descriptive
Abstract
related
Abstract
analysis to
The aim of the
appliedborrowers
this research
to 1500 lies activity, level
in the development
individual loans of
fromeducation,
ofMoroccan number
a credit-scoring
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model
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using combines
model of loans,
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related
aimtoof
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institutionofthe borrowers
this research
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Keywords:
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(https://creativecommons.org/licenses/by-nc-nd/4.0/)
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Keywords:
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behavioral
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Keywords: related to the
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Credit scoring; client's
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microfinance; activity and its performance to better predict the default.
Keywords: Credit scoring; microfinance; Morocco; credit risk; logistic regression; multivariate discriminant analysis; probability of default;
behavioral model; Morocco; credit risk; logistic regression; multivariate discriminant analysis; probability of default;
Keywords:
behavioral Credit scoring; microfinance; Morocco; credit risk; logistic regression; multivariate discriminant analysis; probability of default;
behavioral model;
Keywords: model; descriptive
descriptive
Credit scoring;
model.
model.
microfinance; Morocco; credit risk; logistic regression; multivariate discriminant analysis; probability of default;
behavioral
Keywords: model; descriptive
Credit scoring; model.
microfinance; Morocco; credit risk; logistic regression; multivariate discriminant analysis; probability of default;
1. Introduction
behavioral model; descriptive model.
1. Introduction
behavioral model; descriptive model.
1. Introduction
1. Introduction
Microfinance aims to provide financial services to low-income people who are excluded from the banking
1. Microfinance aims to provide financial services to low-income people who are excluded from the banking
1. Introduction
Introduction
system. This is part
Microfinance aims of to the strategy
provide of financial
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1.
1.
Introduction
system.
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Introduction
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open access article under the CC BY-NC-ND license (https://creativecommons.org/licenses/by-nc-nd/4.0/)
E-mail address: bennouna.ghita@gmail.com
Peer-review under responsibility of the scientific committee of the Second International Conference on Intelligent Computing in
Data Sciences (ICDS 2018).
10.1016/j.procs.2019.01.025
 Ghita Bennouna/ Procedia Computer Science 00 (2018) 000–000
Ghita Bennouna et al. / Procedia Computer Science 148 (2019) 522–531 523

The aim of this research lies in the development of a credit-scoring model using logistic regression and
multivariate discriminant analysis applied to 1500 individual loans from Moroccan MFIs. This model combines both
behavioral and descriptive data related to the borrowers (age, activity, level of education, number of unpaid debts,
number of loan…) and others related to the institution (amount of credit, duration of credit, number of concluded
loans per portfolio manager).
This paper includes two parts, which respectively presents the credit scoring model, its methodology and its
implementation in the case of Morocco and provides recommendations and empirical results of this research.

2. The credit scoring : methodology and implementation-case of Morocco-

In Morocco, the decision to grant loans is delegated to the field agents (portfolio managers, supervisors, heads of
agencies, controllers...) who evaluate the solvency of clients and distinguish between good and bad payers; this
evaluation is based on their knowledge of clients, their activities and their standards of living. The decision thus
taken although it has a good predictive power, it risks to be subjective and cannot resolve the problems of
information asymmetry from which this sector suffers [2].
To deal with these failures, the statistical methods are the best solutions to the personal selection bias, and it is in
this perspective that "credit scoring" is increasingly used in the context of microfinance [3].

2.1. Methodology

The model, which we are going to construct, is a combination of two notations based on two data sources, one
related to the descriptive information of the customer and the other based on its historical behavior with the
institution. This approach is adopted to improve the prediction threshold of the model and to analyze the demand of
granting for new and old customers.
Two statistical techniques were used to develop the model: Discriminant analysis and logistic regression. We
used the software SPSS (Statistical Package for Social Science) to implement the statistical techniques mentioned
above.
The figure1 below illustrates this model

If it is a new
customer

If it is an old
customer

Fig.1. : The Credit Scoring model

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Ghita Bennouna / Procedia Computer Science 00 (2018) 000–000

2.1.1. Definition of "good" and "bad" borrowers

Taking into account the functioning of the microfinance sector in Morocco [4], the determination of the customer
profile (distinction between good and bad customer) is based on a key factor measuring the client's ability to repay
the loan, which is the number of days of loan repayment delays. In this context, a client is considered bad if he
accumulates more than 30 days of delays in the loan cycle. A good customer by the way is the one never having a
delay of repayment exceeding 30 days or more.
This definition is applied by all MFIs in Morocco. It should be noted that the variable used generally for the
credit risk assessment of the sector is the PAR (Portfolio at Risk) rate exceeding 30 days delay [5], hence this
generalization of the concept.

2.1.2. Construction of the score function

For that purpose, it is necessary to select the descriptive and behavioral variables the most discriminating, which
constitute the explanatory variables. The explained variable is binary: the customer is either good or bad. As
explained previously, a customer is considered bad when he can no longer meet his financial obligations. The
variable is 1 for bad customers and 0 for good ones.
The model of logistic regression allows to obtain a number between 0 and 1, corresponding to the probability of
default of the customer.
In this context, it will be assumed that the variable Y in which we are interested concerns the solvability or not of
a client which will be denoted S + and S-.

Then the LOGIT model with several explanatory variables (descriptive or behavioral) X= ,…, (multiple
regression) is written as follows (1) and (2):

exp(  0  1  1  ...   i  i )

P (Y  S  / X )   ( x )  (1)
1  exp(  0   1  1  ...   i  i )
With : Regression coefficients
Represents the distribution function of the logistic law and its LOGIT is defined as follows:

P (Y  S  / X )  (x)
ln( )  ln( )   0
  1  1  ...   ii (2)
P (Y  S  / X ) 1   (x)

 ( x)
With: is an « odds » which is defined as the ratio of the probability of success and the probability of failure
1   ( x)

We thus distinguish three cases where the variable Y is equal to S +, especially when:

 ( x)
1  (x)  0,5 or the LOGIT  0   1 1  ...   i i  0 (Assignment rule)
1   ( x)

The figure 2 below illustrates this.

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Fig.2. : Logistic regression

2.1.3. Data sources and sampling

The data used for the realization of this model are data collected from Moroccan MFIs. It is descriptive
information on the clients as well as on their history of behavior towards these institutions with regard to the various
loans they have contracted: microenterprise loans (individual or group loans) or housing loans.
The sample is selected by the quotas method (1500 clients) on the basis of the customer’s information as a
classification criterion to ensure both the representativeness of the mother population and also to have a good
prediction of the model.
The distribution of the sample between good and bad customer is illustrated in the table 1 as follows:

Table 1. Distribution of the sample between good and bad customer

Number Percentage
Bad 76 5%
Good 800 53%
Bad customer but recent 2 0%
Good customer but recent (less than 6 months of observation) 622 41%
Sample 1 500 100%

To realize our modeling, we will opt for a weighting of the bad and good customers to balance our database.
Also, the sample will be split into a learning sample and a test sample, the development of the model is done on
the basis of the learning sample, while the test sample will be our basis for adjustment and testing of the model.

2.1.4. Selection and definition of variables

Based on the theoretical framework developed and the availability of the data, we have identified and collected
information on several descriptive and behavioral variables as specified in the aforementioned approach. Table 2
below presents the most discriminating descriptive variables in the model and Table 3 lists the behavioral variables
most used in the context of microfinance in Morocco.

Table 2. The descriptive variables related to clients

Variables Definition
AGE Age of the borrower
SEX Sex of the borrower
MAT Marital status
ACTIV The activity sector of the borrower
EDU level of education of the borrower
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DEP Number of dependants

Type of product contracted by the borrower:
-Individuel loan
TYPEPROD
-Group loan
-Housing loan
HOUSMEMB Number of household members
HOUSROOM Number of rooms within the household
INSUR Insured customer : yes/no
RESD Place of residence: urban / rural area
PURP Purpose of the loan: creation / development of the activity
RATE Interest rate
AMOUNT Loan amount
PERIOD Loan period
CUSTYPE Type of customer: old /new client

Table 3. The descriptive variables related to clients

Variables Definition
NBLOAN Number of customer loans
CRINDEB Cross indebtedness : yes/no
UNPAMO Unpaid amount
NBOVERDAYS The number of overdue days
NBINST Number of installments
NBPAINST Number of paid installments
SENIO Client's seniority within the institution

To construct a score with a strong prediction of the default, the choice of the explanatory variables is an
important step which determines the effectiveness of the function score. For this reason, we use a backward analysis
of the most relevant variables to discriminate between the bad and the good customers by the respective values of
the default rate indicator (more than 30 days of delays in the loan cycle).
In this case, the initial model includes all the variables presented above. Then, progressively the variables with
the lowest contribution to the model will be removed if the variation of the R² is not significant by eliminating it.
The procedure will be repeated until all conserved variables contribute significantly to the improvement of R².
The variables chosen from this selection and which will be used in the rest of this work are the following:
The descriptive variables related to clients: SEX, MAT, ACTIV, EDU, TYPEPROD, INSUR, RESD, PURP,
RATE, and CUSTYPE.
Variables of customer behaviour: NBLOAN, CRINDEB, UNPAMO, NBPAINST, NBINST.

2.2. Results

2.2.1. Descriptive model

From the logistic regression, we obtain the coefficients of the different variables of the descriptive model
illustrates in table 4 below.
The estimation of the coefficients is carried out by an iterative algorithm computing the maximum likelihood (3).
To estimate the parameters of the logistic regression by the maximum likelihood method, the determination of the
law of distribution of P (Y / X) is necessary.
This probability is modelled using the binomial distribution B (1, π( )), with: For an observation i:

1 with a probability :  ( xi )  (Y  1 / X  xi )

 i  0 with a probability : 1   ( xi )

The liklihood is thus calculated :

L  (Y 1  y1 , Y 2  y 2 ,.......... Y n  y n)
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 y1 Y 2  y 2 ......  Y n  y n)   P( Y i  yi)

n
L  ( Y 1 
i 1
The observations being regarded as independent of one another:
n n
L   P(Y i  yi )   P ( Y i  yi )
i 1 i 1


P (Y i  y i )   ( x i ) y i 1   ( x i ) 1 y i

L   P ( Y i  yi )    ( x i) y 1 ( x i ) y
n n 1
Then, i i (3)
i 1 i 1
Finding the regression coefficients is equivalent to maximizing the likelihood L or for more simplicity maximizing
the LOG (L).

Table 4. Coefficient of the variables in the Equation (Descriptive model)

B S.E. Wald df Sig. Exp(B)

SEX: MAN -0,7378 0,1719 18,4093 1 0,0000 0,4782
MAT: MARRIED 0,9900 0,1759 31,6818 1 0,0000 2,6913
ACTIV 8,2058 4 0,0843
ACTIV: INDUSTRY -22,4410 6695,8239 0,0000 1 0,9973 0,0000
ACTIV:TRADE -21,3385 6695,8239 0,0000 1 0,9975 0,0000
ACTIV: AGRICULTRE & TEXTILE -21,5181 6695,8239 0,0000 1 0,9974 0,0000
ACTIV:OTHER ACTIVITIES -21,2168 6695,8239 0,0000 1 0,9975 0,0000
EDU 12,4961 2 0,0019
EDU:BAC+2/BAC+4 -0,5742 0,5472 1,1011 1 0,2940 0,5632
EDU:Illiterate / primary or secondary level -1,2321 0,3684 11,1861 1 0,0008 0,2917
INSUR: YES 2,0202 0,2071 95,1152 1 0,0000 7,5395
RESD: URBAN -0,3027 0,1756 2,9695 1 0,0848 0,7389
PURP: CREATION -0,5741 0,1634 12,3408 1 0,0004 0,5632
RATE: 34% -0,9984 0,2268 19,3757 1 0,0000 0,3685
CUSTYPE: NEW CUSTOMER -0,6063 0,1734 12,2274 1 0,0005 0,5454
Constant 22,3116 6695,8239 0,0000 1 0,9973 4895754570,3145

From this table 4, we can deduce from the statistic of Wald = ( B2/Var(B)) the contribution of each variable in the
improvement of the model: value different from 0.
We noted that the two variables INSUR and MAT have a significant contribution on the improvement of the
model (Wald = 95 & 31 Resp). It should be noted that the possession of an insurance product by the client reduces
the risk of default (constituting a guarantee of coverage for both the institution and the client). Also, married people
are the least risky.
Moreover, the direction of the coefficients B and Exp (B) indicate the direction of the relation between variables
and customer failures. We thus find that the relation is positive for the variables MAT & INSUR, which means that
married persons and also those insured, are considered as good customers not defaulting. On the other hand, the
relation is negative for the other variables. That is to say that the customers with these characteristics are the most
exposed to the risk of non-reimbursement.
From the above, the score of the descriptive model is expressed as:

SCORE_DESC=-0.7378*SEX (man) + 0.9900*MAT (married) + 22.4410*ACTIV (industry) +

21.3385*ACTIV (trade) + 21.5181*ACTIV (agriculture/textile) + 21.2168*ACTIV (other activities) +
0 .5742*EDU (BAC +2/BAC+4) + -1.2320*EDU (illiterate/primary or secondary level) +
2.0202*INSUR (yes) + -0.3027*RESD (urban) + 0.5741*PURP (creation) + -0.9984*RATE (34%) +
-0.6063*CUSTYPE (new customer) + 22.3116.

The probability of default follows according to the formula mentioned in the previous section.
For the model fitting to the data, the table 5 below, which is a summary of the model, yields an estimate of the
variability explained from the Cox and Snell and Nalgelkerke values. As the of the multiple regression, the
higher the value, the better the model is adjusted to the data. So, we observe that the final model is the best adjusted.
528 Ghita Bennouna et al. / Procedia Computer Science 148 (2019) 522–531
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Table 5. Coefficient of the variables in the Equation (Descriptive model)

Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square

1 951,215 ,287 ,383
2 954,565 ,284 ,379

To evaluate the performance of the prediction model, we choose the ROC curve (Receiver Operating
Characteristic) which will allow us afterward to compare the models between them.
In the ROC curve, sensitivity represents the proportion of well classified positive events as for specificity; it
corresponds to the proportion of well classified negative events. Usually, the probability is compared with a
threshold s = 0.5 to perform a prediction.

The figure 3 below illustrates the ROC curve of the descriptive model.

Area Under the Curve(a) Area Under the Curve(a)

Test Result Variable(s) Area Test Result Variable(s) Area

PB_DESC ,161 PB_DESC ,254
a Sample = Learning a Sample = Test

Fig.3. : The ROC curve of the descriptive model

From these two curves, we deduce the index of GINI (= 1-2 * Area) which allows us to have a visibility on the
validity of the model. The Gini index varies in [0,1]. The more the index tends to 1, the more the relation between
the probability of default and the customer profile (Good / Bad) is strong, and conversely the more the index tends
towards 0 the more the relation is weak or non-existent. For the learning sample, the index of GINI =0.68 & for the
test sample this index is equal to 0.49, hence the existence of a strong relation between the variables and therefore
the good predictive power of this model.
To further improve the predictive power of this model, the introduction of a behavior score based on the history
of customer behavior with the institution is important. This score as already presented concerns only old clients with
a history of at least 6 months. The results of this model will be discussed in the next section.

2.2.2. Behavioral model

From the logistic regression, we obtain the coefficients of the different variables of the behavioral model
illustrates in table 6:
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Table 6. Coefficient of the variables in the Equation (Behavioral model)

B S.E. Wald df Sig. Exp(B)

NBLOAN 54,8502 2 0,0000
NBLOAN (<=2) -2,4672 0,3687 44,7800 1 0,0000 0,0848
NBLOAN (=3) -0,0878 0,2683 0,1070 1 0,7436 0,9160
CRINDEB (YES) -1,1488 0,2253 26,0101 1 0,0000 0,3170
UNPAMO (>0) -1,3470 0,5116 6,9333 1 0,0085 0,2600
NBPAINST ([11,36[) -0,1379 0,0216 40,8734 1 0,0000 0,8712
NBINST 43,8053 2 0,0000
NBINST (<11) -2,3722 0,3594 43,5652 1 0,0000 0,0933
NBINST ([11,15[) -0,9229 0,2299 16,1068 1 0,0001 0,3974
Constant 4,4852 0,6010 55,6954 1 0,0000 88,6950

As mentioned earlier, the Wald statistic is high for the following variables: NBLOAN, NBPAINST & NBINST,
which is explained by the impact of the number and duration of the loan on the client's ability to repay the loan. In
addition, we find that the relation is negative for all variables that is to say that the customers with these
characteristics are the most exposed to the risk of non-reimbursement.
From the above, the score of the behavioral model is expressed as:

Score_BEHAV = 2.4672*NBLOAN (<=2) +-0.0878*NBLOAN (=3) + -1.1488*CRINDEB (YES) +

-1.3470*UNPAMO (>0) +-0.1379*NBPAINST ([11 36[) + -2.3722*NBINST (<11) +-0.9229*NBINST ([1115[)
+4.4852.

Similarly, to evaluate the performance of the prediction model, we choose the ROC curve presented in the figure
4 below.

Area Under the Curve(a) Area Under the Curve(a)

Test Result Variable(s) Area Test Result Variable(s) Area

PB_BEHAV ,308 PB_BEHAV ,370
a Sample = Learning a Sample = Test

Fig.4. : The ROC curve of the behavioral model

It is thus clear that the regression model below allows predicting the relation between the variables. The GINI
index for the learning sample is close to 0.38 and for the test sample, this index is equal to 0.26.
The final scoring model, which constitutes a combination of the behavioral & descriptive models for old
customers, will be presented in the following.
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Ghita Bennouna / Procedia Computer Science 00 (2018) 000–000

2.2.3. Credit scoring model: combination of both descriptive and behavioral models

The final score of the old customers is a combination through a discriminant analysis of the two descriptive and
behavioral scores.
The non-standardized coefficients b jh of each discriminating function of rank h are the estimates b jh  ̂ of
jh
the coefficients of the equation:

yh   0h   1h X 1   2h X 2  ....   qh X q . The constant b0 h associated to the h

e
discriminant function is equal to:
q
b0h    b jh X . j
j 1

The discriminant function obtained from Table 7 below is as follows:

Table 7. Unstandardized coefficients of canonical discriminant functions

Function
1
PB_BEHAV 2,411
PB_DESC 4,151
(Constante) -3,953

PB =2.411*PB_BEHAV+4.151*PB_DESC+-3.953.
To validate this model and compare its predictive power with previous models, we use the ROC curve whose
results are hereafter (figure 5);

Area Under the Curve(a)

Area Under the Curve(a)

Area
Area
,226
,148
a Sample = Test
a Sample = Learning

Fig.5. : The ROC curve of the Credit Scoring model

From these results, the GINI index thus obtained is 0.7 for the learning sample and 0.55 for the test sample. This
index is significantly higher than that of other models (Descriptive and behavioral models). The model thus
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Ghita Bennouna/ Procedia Computer Science 00 (2018) 000–000

constituted allows to have a strong prediction on the failure of the customers.

2.3. Recommendation

From the results presented above, it is certain to say that the failure of the customers within the MFIs in Morocco
is related not only to the characteristics of the borrowers (marital status, gender, level of education, type of
customers), but also in factors related to the institution (purpose of the loan, Interest rate, micro-insurance product
leaned in the loan), and in client behavior within the institution (number of loans granted, number of maturities paid,
amount of unpaid debts, crossed debts). This finding was also presented by Boubacar in his published article dealing
with the case of a microfinance institution in Mali [6].
It is therefore essential to pay particular attention to the examination of the credit report taking into account the
elements contained in the model. The offers of credits should be oriented towards the least deficient people as an
illustration: an old customer insured & married. It is also essential to set up a scoring model within the different
institutions, in order to streamline and reinforce the current granting process, which is based mainly, as schematized
above, on a qualitative and subjective assessment carried out in the field by credit officers and agency managers.
This assessment is based essentially on a morality survey made with the client and his entourage.
It should be noted that in Morocco and for the largest MFIs, measures have been taken to complement this
approach and to deal with the crisis of 2008, namely the consultation of the Credit Bureau and the central risk MFIs,
which contains the history of all clients to all MFIs and thus helps to guard against the problem of cross-
indebtedness and also the over-indebtedness of the clients.
In addition, strengthening the information system is necessary to support the strategic development of the
institution [7], to strengthen the granting process and to ensure the proper implementation of the scoring systems.

3. Conclusion

The aim of this research was to develop a Credit Scoring model to predict the default probability of new credit
applicants (renewing or new clients). To this end, two statistical tools (discriminant analysis and logistic regression)
were used and a sample of 1500 borrowers served as basis of the analysis.
Through this analysis, the results obtained show that the characteristics linked to the borrower, to the institution
and to the behavior of the client in relation to its loan history determine the default rate of the customers.
In order to ensure the sustainability of this sector in Morocco, a number of recommendations were made in the
previous section.
It should be noted that despite the various adjustments brought to the model by combining both a descriptive
score and a behavioral score, which improved the prediction level of the model. This research could have achieved
more interesting results if we could have a larger sample and if we had more information about variables related to
the client's activity and its performance.

References

[1] JAIDA (2009), Sectorial study: MicroFinance one year after the announcement of turbulences. Working paper.
[2] J.Stiglitz and A.Weiss (1981), Credit rationing in markets with imperfect information. American Economic Review, 71, (3), 393-410.

[3] D.Caire and R.Kossmann (2003),Credit Scoring: Is It Right for Your Bank? Bannock Consulting, 47 Marylebone Lane, London,
W1M 6LD.
[4] G.Bennouna and & M.Tkiouat (2016), Studies and research on microfinance sector in Morocco: Overview, Asian Journal of Applied
Sciences . Vol4 N° 3
[5] CGAP (2009), Development, crisis and recovery of the microfinance sector in Morocco.
www.cgap.org or http://www.microfinancegateway.org/fr/library/essor-crise-et-redressement-du-secteur-dela-microfinance-au-maroc.
[6] D.Boubacar (2006) ,Un modèle de “credit scoring” pour une institution de micro-finance africaine: le cas de nyesigiso au mali.
Séminaire de recherche (discutant Magloire Lanha).
[7] M.Schreiner (2004), «Scoring Arrears at a Microlender in Bolivia», Journal of Microfinance, Vol. 6, No. 2