Parametric versus nonparametric methods in risk scoring: an application to microcredit

Manuel Hernandez and Maximo Torero

Empirical Economics, 2014, vol. 46, issue 3, 1057-1079

Abstract: The importance of credit access to improve economic opportunities in developing markets is well established in the literature. However, there exists a strong need to mitigate adverse selection problems in microlending. A risk scoring model that more accurately predicts the likelihood of repayment of potential borrowers can help address this market imperfection and to benefit both lenders and borrowers. This paper compares the performance of nonparametric versus semiparametric and traditional parametric risk scoring models based on default probabilities. We show the advantages of relying on less structured, data-driven methods for risk scoring using both simulated data and data from credit loans granted to small and microenterprises in rural Peru. The estimation results indicate that nonparametric methods lead to a better evaluation of credit worthiness and can help prevent including potential “bad” borrowers and excluding “good” borrowers from sensitive microcredit markets. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Risk scoring; Microcredit; Default models; Nonparametric methods; C14; O16; G17 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00181-013-0703-8 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:46:y:2014:i:3:p:1057-1079

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-013-0703-8

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().