A benchmark based AHP model for credit evaluation

In this work, a credit assessment and decision-making model is developed for financial institutions to evaluate the credibility of potential borrowers. Typically, financial institutions keep records of individuals and enterprises that have been evaluated as credible based on multiple internal criteria and were granted a loan. Among these borrowers, some turn out to be solvent, i.e., they are able to repay their debts on time and others insolvent. The present paper proposes a two-stage procedure for development banks to evaluate and assess credit risk of local communes in Morocco. In the first stage, a benchmark based analytical hierarchy process (AHP) is developed to represent subjective decisions based on knowledge and experience of decision-makers. The benchmark is a small yet representative and diversified set of solvent communes selected by the decision-maker against which a potential borrower can be compared, according to a set of qualitative and quantitative criteria. Once a potential borrower has been evaluated as acceptable, the second stage applies a discriminant analysis (DA) model to classify the borrower as either solvent, in which case the loan is granted or insolvent. The proposed model is applied and validated using a real case study from a Moroccan development bank.