Developed a data-driven risk management system
iWork developed a statistical Credit Scoring Tool and early-warning systems based on 20 years of historical loan data.
Harar Microfinance Institution S.C (HMFI) is a financial services company with a strong presence in the Hararghe region.
With a goal to modernize their credit appraisal practice, HMFI reached out to iWork Consulting for a strategic development of a risk-based credit scoring system.
iWork conducted a thorough audit of HMFI’s 20-year loan data. This enabled us to look at the underlying issue that was preventing the institution from growing.
Our research found some interesting insights:
- Over 80% of the disbursed loans were concentrated in two loan types.
- Most appraisals were typically backed by experience-led judgement rather than quantifiable facts.
- Although there was a Core Banking System (CBS), data was scattered which made it hard to assess portfolio health.
Output: An Exploratory Data Analysis (EDA) document showcasing our findings.
With a clear understanding of the root cause, our team set out to come up with the ultimate solution: a spreadsheet-based credit scorecard with an early warning system.
A couple of stand-out features are:
- Permission-based access to loan officers located at different branches.
- Introduced ‘Risk Bands’ (Very Low Risk, Low Risk, Moderate Risk, High Risk, Very High Risk).
- Incorporated on-site assessment survey on the scorecard.
- Explainable outcome with flags such as ‘Business has very low monthly income to cover debt obligation’.
- Output credit score (a numeric value from 1–99).
- A settings sheet for HMFI to set their own risk appetite.
The overall product has created more transparency and significantly reduced bias in the appraisal process.
The team ran a pilot phase where historical borrower data was used to calibrate the scoring system. It also gave us the opportunity to ask the question If our scoring system was around, would these loans have been approved or not?
The pilot showcased that the early warning signs were effective in flagging potential defaults, thus reaffirming the accuracy of our model.
Once approved by management, iWork set out to make an organization-wide deployment, starting from the HQ office then gradually giving access to the appraisal team on three branches.
With an inclination on business loans, HMFI’s most obvious segment of growth, our scoring system is now the official risk assessment tool prior to disbursement.
HMFI’s credit appraisal workflow has been completely redesigned. For the first time, the institution has accurate data to extrapolate credit risk in different categories.
iWork’s contribution was recognized by the board with calls to develop an AI-based system that will yield an automatic decision for the borrower, reducing friction, speeding up the appraisal process while adding more flexibility to the borrower.
HMFI’s digital workflow in full display:
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