Towards a hybrid risk assessment model for microenterprise finance for the unbanked microenterprises in South Africa

Credit scoring is perceived as an important innovation for microfinance institutions in managing the credit risk of their clients. Increase in defaults has necessitated microfinance institutions to improve their credit analysis by incorporating objective procedures. Various studies have confirmed that credit scoring can increase efficiency and reduce costs for microfinance. However, the take up of credit scoring has been slow and is still in early stages. South Africa has about 5 million SMMEs of which 94% are estimated to be microenterprises. These businesses are informal and often doesn’t have collateral and credit history. These characteristics makes it difficult for financial institutions to assess their reliability, utility and risk. Financial institutions interactions with clients calls for trust and reputation investigation. A credit risk assessment model can help provide means to implement risk assessment suitable to mobile micro-enterprise loans, for the unbanked to be evaluated effectively and for financial institutions to strategically provide good loans and avoid financial loss due to underperforming loans. A hybrid system is proposed to demonstrate how micro-enterprise lending operations with intelligent decision making can deliver faster speed, improved consistency and reliability throughout the entire lending process with scalability. Design science principles will be followed to investigate and classify an algorithm to be embedded in the decision support system.