SCUOLADIDOTTORATO UNIVERSITÀ DEGLI STUDI DI MILANO-BICOCCA Dipartimento di / Department of Information Systems and Communications Dottorato di Ricerca in / PhD program Computer Science Ciclo/ Cycle XXIX Curriculum in (se presente / if it is) Borrower Risk Assessment in P2P Microfinance Platforms Cognome / Surname Jamal Uddin Nome / Name Mohammed Matricola / Registration number 787876 Tutore / Tutor: Prof. Dr. Giuseppe Vizzari Cotutore /Co-tutor: (se presente/if there is one) Supervisor: Prof. Dr. Stefania Bandini (se presente / if there is one) Coordinatore / Coordinator: Prof. Dr. Stefania Bandini ANNO ACCADEMICO / ACADEMIC YEAR 2015/2016 i Acknowledgements Firstly, I would like to express my sincere gratitude to my supervisor Prof. Stefania Bandini for the continuous support of my PhD study and related research, for her patience, motivation, and immense knowledge. Her guidance helped me in all the time of research and writing of this thesis. I could not have imagined having a better supervisor and mentor for my PhD study. Besides my supervisor, I would like to thank my tutor Professor Guiseppe Vizzari for his insightful comments and encouragement, but also for the hard question which helped me to widen my research from various perspectives. Moreover, I would like to express my sincere gratitude to Dr. Mahmood Osman Imam, Professor of Finance, Dhaka University, who has been always played a key role in encouraging and coordinating me in this whole project. I am very grateful to him for his invaluable support, time, suggestions and guidance throughout this period of research. Besides, I am indebted to all of my friends and colleagues of the LINTER lab at the Department of Computer Science, Systems and Communication (DISCO) for their support throughout my doctoral study. I thank my fellow lab mates Luca, Andrea and Mizar for the stimulating discussions, for the time we were working together before deadlines, and for all the fun we have had in the last three years. I would like to thank Andrea Sedini for his support during this program. Moreover, I would like to thank Dr. Kazi Ahmed Nabi, Professor of Finance and Banking, University of Chittagong, Professor Dr. M. A. Baqui Khalily, Ex-Executive Director of Institute of Microfinance (InM), University of Dhaka, and Professor Dr. M. Jahangir Alam Chowdhury, Professor of Finance & Executive Director of Center for Microfinance and Development, University of Dhaka for their contributions in defining the risk rating rules, Mr. Md. Fazlul Kader, Deputy Managing Director of Palli Karma-Sahayak Foundation (PKSF) and Mr. Md. Shahid Ullah, Executive Director of Development Initiative for Social Advancement (DISA) in understanding the current practices of borrower‟s risk assessment. My sincere thanks also go to Firoj bhai, Lucky, Salim and many more. Without their precious support it would not be possible to conduct this research. Last but not the least, I would like to thank my family for supporting me spiritually throughout writing this thesis and my life in general. This thesis is dedicated to the memory of my beloved father Abdur Razzak, whom I lost during this PhD period and who will always remain in my thoughts and prayers. ii Table of Contents Contents Acknowledgements ................................................................................................................................. ii List of Tables ......................................................................................................................................... vi List of Figures ........................................................................................................................................ vii Chapter 1 ................................................................................................................................................. 1 Introduction ............................................................................................................................................ 1 1.1 Motivation ..................................................................................................................................... 1 1.2 Statement of Problem ................................................................................................................... 2 1.3 Research Objectives ...................................................................................................................... 4 1.4 Research Contributions ................................................................................................................. 5 1.5 Methodological Approach ............................................................................................................ 5 1.6 Thesis Organization ....................................................................................................................... 7 Chapter 2 ................................................................................................................................................. 8 State of the Art: Borrower Risk Rating in P2P Microcredit Lending Model ............................................ 8 2.1 Paper Selection Approach ............................................................................................................. 9 2.2 P2P Microcredit Lending Market ................................................................................................ 11 2.2.1 Direct P2P Lending Models ................................................................................................. 11 2.2.2 Indirect P2P Lending Models .............................................................................................. 12 2.2.3 Lending Operations and Stakeholders ................................................................................. 12 2.2.4 Leading Local and Global Models ....................................................................................... 12 2.3 Borrower Selection in online P2P Platforms and Lender’s Decision Making .............................. 15 2.4 Borrower Indebtedness, Delinquency Rate and Credit Information System ............................. 17 2.4.1 Borrower Indebtedness and Delinquency Rate .................................................................... 17 2.4.2 Credit Information System ................................................................................................... 18 2.5 Credit Risk Management Practices and Credit Scoring ............................................................... 19 2.5.1 Traditional Risk Management Practices .............................................................................. 19 2.5.2 Credit Scoring ...................................................................................................................... 20 2.6 Conclusion ................................................................................................................................... 24 Chapter 3 ............................................................................................................................................... 25 The Methodological Approach on Risk Rating for Microfinance ........................................................ 25 3.1 Research Design .......................................................................................................................... 25 3.2 Data Collection ............................................................................................................................ 27 iii 3.3 CBR System ................................................................................................................................. 29 3.4 Database ..................................................................................................................................... 29 3.5 Borrower Risk Scoring ................................................................................................................. 30 3.6 Summary ..................................................................................................................................... 31 Chapter 4 ............................................................................................................................................... 32 Case-Based Reasoning System in Microfinance................................................................................... 32 4.1 CBR in Microfinance .................................................................................................................... 33 4.2 CBR Process ................................................................................................................................. 34 4.3 How CBR Methodology Can be Applied to Solve Problem in Microcredit ................................. 36 4.4 Summary ..................................................................................................................................... 37 Chapter 5 ............................................................................................................................................... 38 Case-Based Reasoning to Support Microcredit Systems: The Prototypical Solution ........................... 38 5.1 Trend of Microcredit System towards Web-based Peer-to-Peer Lending Platforms and Scope of Data Access ....................................................................................................................................... 38 5.1.1 Microcredit ..........................................................................................................................