Modeling SME credit ratings using non-homogenous backward semi-Markovian approach
Date
2017
Authors
Magarita, Sara Muya
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Considering the growth in SME lending in Kenya and the obvious risks it posses to the banking sector, we establish a credit risk model that is responsive to the jumps in the economy. This is based on simulation of implied values of credit worthiness over a
period of 12 months for 1000 SMEs, in which case we establish a case for the discrete time non-homogeneous semi-Markov approach as a proxy for internal rating model for a portfolio of SME loans. While viewing credit risk as a reliability issue, the model provides a credit indicator which gives a prospective measure of credit risk for an SME portfolio. Banks seeking to comply with the new IFRS9 guidelines can espouse this model to adequately measure impairment of financial instruments.
Description
A Dissertation submitted in partial fulfillment of the requirements for the Master of Science in Mathematical Finance (MSc.MF) at Strathmore University
Keywords
Credit Risk Modeling, IFRS9, Backward Semi-Markov Models