Journal of
Economics and International Finance

  • Abbreviation: J. Econ. Int. Finance
  • Language: English
  • ISSN: 2006-9812
  • DOI: 10.5897/JEIF
  • Start Year: 2009
  • Published Articles: 298

Full Length Research Paper

Semi-Markovian credit risk modeling for consumer loans: Evidence from Kenya

Wagacha Anthony
  • Wagacha Anthony
  • School of Finance and Applied Economics, Strathmore University, P. O. Box 59857, 00200-Nairobi, Kenya.
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Ferdinand Othieno
  • Ferdinand Othieno
  • School of Finance and Applied Economics, Strathmore University, P. O. Box 59857, 00200-Nairobi, Kenya.
  • Google Scholar


  •  Received: 06 June 2015
  •  Accepted: 22 January 2016
  •  Published: 31 August 2016

Abstract

Based on simulations of implied values for credit worthiness over a period of 5 years for 1000 consumers, the study shows robustness of the Semi-Markovian models in forecasting Probabilities of Default and Loss Given Default for a portfolio of consumer loans. The study models credit risk as a reliability problem on the basis of which we generate credit risk indicators and quantify prospective capital holding based on forecast delinquencies. Consumer ratings are based on Monte-Carlo simulation techniques and the initial probability transition matrix on the Merton model. Banks could espouse the study results to fulfill regulatory credit risk capital requirements for consumer loans.

 

Key words: Semi-Markov models, credit risk, Central Bank of Kenya.