Contingent Fuzzy Approach for the Development of Banks’ Credit-Granting Evaluation Model: The Case of Taiwan

In the past Taiwanese banks that evaluated customers’ credit emphasized collaterals and guarantors, adopting such methods as the rule of thumb, a credit rating system, and numeric credit scoring system that are primarily based upon subjective judgements. However, Taiwanese banks nowadays no longer possess a superior competitive position, owing to the internationalization and liberalization of Taiwan’s financial market. Therefore, it is necessary to develop a credit evaluation model to lower banks’ credit-granting risk. This study proposes a contingent fuzzy approach to reduce the type I error or type II error in banks’ credit-granting. This approach combines cost-volume-profit analysis with Morkovian dynamic programming and uses fuzzy theory to estimate the break-even point interval for the linguistic variable. In other words, the model addresses an objective credit-granting indicator by cost-volume-profit analysis and assures the safety-first decisions through Markovian dynamic programming. This can provide loan officers a measure of whether a loan applicant would enhance his business performance after being granted a loan. JEL: C61, G21, G30, M20