Would credit scoring work for Islamic finance? A neural network approach

Hussein A. Abdou, Shaair T. Alam, James Mulkeen

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

Purpose – This paper aims to distinguish whether the decision-making process of the Islamic financial houses in the UK can be improved through the use of credit scoring modeling techniques as opposed to the currently used judgmental approaches. Subsidiary aims are to identify how scoring models can reclassify accepted applicants who later are considered as having bad credit and how many of the rejected applicants are later considered as having good credit, and highlight significant variables that are crucial in terms of accepting and rejecting applicants, which can further aid the decision-making process. Design/methodology/approach – A real data set of 487 applicants is used consisting of 336 accepted credit applications and 151 rejected credit applications made to an Islamic finance house in the UK. To build the proposed scoring models, the data set is divided into training and hold-out subsets. The training subset is used to build the scoring models, and the hold-out subset is used to test the predictive capabilities of the scoring models. Seventy per cent of the overall applicants will be used for the training subset, and 30 per cent will be used for the testing subset. Three statistical modeling techniques, namely, discriminant analysis, logistic regression (LR) and multilayer perceptron (MP) neural network, are used to build the proposed scoring models. Findings – The findings reveal that the LR model has the highest correct classification (CC) rate in the training subset, whereas MP outperforms other techniques and has the highest CC rate in the hold-out subset. MP also outperforms other techniques in terms of predicting the rejected credit applications and has the lowest misclassification cost above other techniques. In addition, results from MP models show that monthly expenses, age and marital status are identified as the key factors affecting the decision-making process. Originality/value – This contribution is the first to apply credit scoring modeling techniques in Islamic finance. Also in building a scoring model, the authors' application applies a different approach by using accepted and rejected credit applications instead of good and bad credit histories. This identifies opportunity costs of misclassifying credit applications as rejected.

LanguageEnglish
Pages112-125
Number of pages14
JournalInternational Journal of Islamic and Middle Eastern Finance and Management
Volume7
Issue number1
DOIs
Publication statusPublished - 14 Apr 2014

Fingerprint

Credit
Credit scoring
Neural networks
Islamic finance
Scoring
Decision-making process
Modeling
Testing
Design methodology
Logistic regression
Discriminant analysis
Costs
Subsidiaries
Opportunity cost
Marital status
Expenses
Factors
Misclassification
Logistic regression model

Cite this

A. Abdou, Hussein ; T. Alam, Shaair ; Mulkeen, James. / Would credit scoring work for Islamic finance? A neural network approach. In: International Journal of Islamic and Middle Eastern Finance and Management. 2014 ; Vol. 7, No. 1. pp. 112-125.
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Would credit scoring work for Islamic finance? A neural network approach. / A. Abdou, Hussein; T. Alam, Shaair; Mulkeen, James.

In: International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7, No. 1, 14.04.2014, p. 112-125.

Research output: Contribution to journalArticle

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