Forecasting creditworthiness in retail banking: a comparison of cascade correlation neural networks, CART and logistic regression scoring models

Abstract

The preoccupation with modelling credit scoring systems including their relevance to forecasting and decision making in the financial sector has been with developed countries whilst developing countries have been largely neglected. The focus of our investigation is the Cameroonian commercial banking sector with implications for fellow members of the Banque des Etats de L’Afrique Centrale (BEAC) family which apply the same system. We investigate their currently used approaches to assessing personal loans and we construct appropriate scoring models. Three statistical modelling scoring techniques are applied, namely Logistic Regression (LR), Classification and Regression Tree (CART) and Cascade Correlation Neural Network (CCNN). To compare various scoring models’ performances we use Average Correct Classification (ACC) rates, error rates, ROC curve and GINI coefficient as evaluation criteria. The results demonstrate that a reduction in terms of forecasting power from 15.69% default cases under the current system, to 3.34% based on the best scoring model, namely CART can be achieved. The predictive capabilities of all three models are rated as at least very good using GINI coefficient; and rated excellent using the ROC curve for both CART and CCNN. It should be emphasised that in terms of prediction rate, CCNN is superior to the other techniques investigated in this paper. Also, a sensitivity analysis of the variables identifies borrower’s account functioning, previous occupation, guarantees, car ownership, and loan purpose as key variables in the forecasting and decision making process which are at the heart of overall credit policy.