Academic journal article International Journal of Business

Corporate Default Analysis in Tunisia Using Credit Scoring Techniques

Academic journal article International Journal of Business

Corporate Default Analysis in Tunisia Using Credit Scoring Techniques

Article excerpt


Over the last twenty years, financial liberalisation represented one major evolution in an important number of developing countries. Besides its positive effects (1), most of the time developing markets liberalisation was accompanied by a significant increase of risks in the banking industry. The number of corporate defaults significantly affected the banking activity in these countries, generating financial crises and contagion over the whole international financial system. Moreover, financial globalisation induced an increased competition between domestic banks and very sophisticated foreign banks along with stringent regulatory attention to risk management practices. The Tunisian economy represents a good example in this matter.

Since the deregulation and liberalization process in the mid 1980s, the Tunisian financial sector has become more market oriented, with huge importance for the economy. The Tunisian banking system is structured around the Central Bank of Tunisia (CBT) and consists of 14 commercial banks that collect deposits of any maturity, provide short and medium-term credit and may engage in long-term credit operations. More specifically, there are 6 development banks that finance investment projects over the medium and long term and participate in the capital of private firms, 8 offshore banks and 2 merchant banks. In spite of recent bank privatizations, government presence remains dominant in the banking sector. The government is the controlling shareholder in 11 of the 20 commercial and development banks. Out of the 14 commercial banks, 9 are under private ownership, and 5 under government majority ownership, following the privatization of two banks in 2002 and 2005. The estimated total assets of the country's five largest banks are about US $10 billion. Foreign participation in their capital has risen significantly and is now well over 20%.

The Tunisian banking system is considered generally sound and is improving as the Central Bank has begun to enforce adherence to international norms for reserves and debt. Recent measures include actions to strengthen the reliability of financial statements, enhance bank credit risk management, and improve creditors' rights. Revisions to banking laws tightened the rules on investments and bank licensing, and increased the minimum capital requirement. The required minimum risk-weighted capital/asset ratio has been raised to 8%, consistent with the Basel Committee capital adequacy recommendations. Thirteen of the country's fourteen banks conform to the ratio, compared with only two in 1993. Despite the strict new requirements, many banks still have substantial amounts of non-performing or delinquent debt in their portfolios. Thus, they are forced to implement and develop different techniques for evaluating and managing credit risk (2).

The ongoing global financial turmoil that threw economies all around the world into severe recessions renews the interest for implementing appropriate credit risk devices. More than never the necessity for banks to correctly predict the possibility of default of their potential counterparties becomes crucial.

The financial literature proposes different approaches for measuring credit risk (3). Lending institutions typically use ratings and credit scoring methods to rank credit applicants based on their expected performance. Despite that they are often confused as they both assess the risk of an individual debtor, ratings and credit scoring employ rather different methodologies. While ratings are essentially based on a fundamental analysis of the debtor's riskiness, the credit scoring approach is illustrated by a discriminant analysis, i.e. statistical methodology to optimally classify a population of debtors into distinguishable groups, namely "good" and "bad". Moreover, whereas ratings are used for big companies issuing large amounts of debt, credit scoring requires large, heterogeneous populations, generally composed by small debtors, for the statistical parameters to be reliable. …

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