The Risk of Loan Default: a Case Study of Atwima Kwanwoma Rural Bank Ltd., Pakyi No. 2
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Date
2008
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Abstract
This study was undertaken using methods of Survival Analysis to determine
(i) The risk of loan default
(ii) The age group(s) highly prone to loan default
(iii) Other factors affecting the risk of loan default
With these objectives in focus, the Hazard Function that is a function of survival data in the form of time, in months, to default of loan for two hundred and seventy (270) individuals was modeled. This model is then used to explore the effect of the explanatory variables Age, Sex, Marital Status and Occupation on the survival experience of these individuals in the study.
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The best-fitted model among alternatives was identified and subjected to an adequacy check, to find whether an appropriate set of explanatory variables was included and the correct functional forms used. The system was found to be adequate in terms of the explanatory variables and their functional forms.
The Kaplan-Meier estimates for survival for the different categories of each of the explanatory variables was computed and test of significance performed using the Log rank (Mantel-Cox), Breslow and Tarone-Ware tests. At 10% significant level, Occupation and Marital Status registered significant differences between categories. However, due to the effect of multiple co-linearity, Marital Status was rejected in the presence of Occupation in the final model.
It was observed that Occupation as a factor at three levels is the only variable that has explanatory power on the risk of default of loan. The risk, however, was highest for individuals in category two (Informal Trades Occupation) and least for those in category one (Formal Occupation). Statistically, there was no significant difference between categories two and three (Informal Trades and Informal Commerce) since the confidence interval (0.870 - 2.315) for the hazard ratio included 1.
To minimize risk of default and for that matter maximize recovery of loans, it is recommended that preference be given to individuals in Formal Occupation especially for loans involving huge sums of money.
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A Thesis submitted to the Department of Mathematics, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirement for the degree of Master of Science.