Credit scoring for P2P lending

Daniel Felix Ahelegbey, Paolo Giudici^(a)

^(a) Department of Economics and Management Sciences, University of Pavia, Italy.

Published

April 25, 2023

Title

Credit scoring for P2P lending

Authors

Daniel Felix Ahelegbey, Paolo Giudici

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Abstract

This paper shows how to improve the measurement of credit scoring by means of factor clustering. The improved measurement applies, in particular, to small and medium enterprises (SMEs) involved in P2P lending. The approach explore the concept of familiarity which relies on the notion that, the more familiar/similar things are, the more close they are in terms of functionality or hidden characteristics (latent factors that drive the observed data). The approach uses singular value decomposition to extract the factors underlying the observed financial performance ratios of the SMEs. We then cluster the factors using the standard k-mean algorithm. This allows us to segment the heterogeneous population into clusters with more homogeneous characteristics. The result shows that clusters with relatively fewer number of SMEs produce a more parsimonious and interpretable credit scoring model with better default predictive performance.