Leveraging Machine Learning and Big Data in emerging economies for financial inclusion in credit risk assessment

Abstract

Financial institutions predict the probability of default when making lending decisions using conventional credit risk scoring models. However, in emerging economies, the underbanked, widows, small and medium enterprises owners and youth are not able to access traditional forms of collateral or identification required by financial institutions due to lack of data for them to get access to loans. Financial institutions cannot obtain much of the information required about an applicant and they use alternative data sources such as public data or social media to deal with the problems of information asymmetry, adverse selection and moral hazard. To eliminate such problems, credit risk assessment models must be built on the foundation of artificial intelligence and machine learning approaches in an effort to perform an accurate credit risk analysis, to properly assess the behaviour of the customers and subsequently perform a thorough verification of the potential of the applicant to repay the loan thereby allowing less privileged people to access credit. However, big data sourced from the internet and public data sources is characterized by huge volume, variety, veracity, the curse of dimensionality, class imbalance, concept drift and non-linearity among others. These challenges affect the generalization performance of credit risk assessment models used by most financial institutions. This paper proposes an efficient and effective credit risk assessment model capable of learning incrementally based on machine learning algorithm called Adaptive Heterogeneous Dynamic Ensemble Selection (AHDES) that uses big data from alternative sources for financial for the underbanked. The algorithm is agile and adaptive to unexpected world events, changes in customer behaviour and cognitively counter bias likely to be introduced by information asymmetry. Experimental results on four large credit datasets and five evaluation metrics show that our proposed algorithm performs better than other selected benchmark models allowing the underbanked and less privileged to access loans to stimulate economic growth.