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Design and Development of Credit Scoring Model for the Commercial banks of Pakistan: Forecasting Creditworthiness of Individual Borrowers

This research paper summarizes the development of a credit scoring model known as Credit Scoring Model for Corporations (CSMC), which can be used to evaluate the creditworthiness of corporate borrowers before granting loan. Altman Z-Score model was part of the CSMC. The dataset consists of 30 corporate borrowers of rejected and accepted corporations from the textile and chemical industry of Pakistan. The developed credit scoring model can be used by credit analysts, lending institutions, shareholders, financial institutions and auditors to predictcredit worthiness of the corporations. The credit scoring model was explained along with a detailed look at different credit scoring models. The results of the all developed credit scoring models were compared with the other statistical credit scoring techniques known as logistics regression and discriminant analysis. Type I and type II errors had been calculated for all the credit scoring models used. The results show that the proposed model (CSMC) has more accuracy rate with no errors as compared to LR and DA. The comparison between the creditworthiness of textile & chemical industry was made and it was concluded that there is no difference in their creditworthiness & probability of default. Also, several suggestions for further research were presented.