Application of artificial neural network to loan recovery prediction

Adewusi, A. O., Oyedokun, T. B. and Bello, M. O. (2016) Application of artificial neural network to loan recovery prediction. International Journal of Housing Markets and Analysis, 9(2), pp. 222-238. (doi:10.1108/IJHMA-01-2015-0003)

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Abstract

Purpose: This study assesses the classification accuracy of an artificial neural network (ANN) model. It examines the application of loan recovery probability rather than odds of default as the case with traditional credit evaluation models. Design/methodology/approach: Data on 2,300 loans granted over the period 2001-2012 was obtained from the databases of Nigerian commercial banks and primary mortgage institutions. A multilayer feed-forward ANN model with back-propagation learning algorithm was developed having classified the sample into training (38 per cent), testing (41 per cent) and validation (21 per cent) sub-samples. Findings: The model exhibits a high overall percentage classification accuracy of 92.6 per cent. It also achieves relatively low misclassification Type I and Type II errors at 6.5 per cent and 8.2 per cent, respectively. Macroeconomic variables such as gross domestic product, inflation and interest rates have the strongest influence on the ANN model classification power. The result of the analysis shows that adopting odds of recovery in ANN classification models can lead to improved loan evaluation. Originality/value: The paper is distinct from extant studies in that it presents a new dimension to loan evaluation in Nigerian lending market. To the best knowledge of the authors, the paper is among the first to explore probability of loan recovery as the basis for credit evaluation in the country.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Oyedokun, Dr Tunbosun
Authors: Adewusi, A. O., Oyedokun, T. B., and Bello, M. O.
College/School:College of Social Sciences > School of Social and Political Sciences > Urban Studies
Journal Name:International Journal of Housing Markets and Analysis
Publisher:Emerald
ISSN:1753-8270

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