Discriminant analysis in granting Loans: a case study of KCB-Kisumu branch

Abstract

ABSTRACT This research study summarizes the loan evaluation method known as credit scoring using Discriminant Analysis. Credit scoring is a technique that helps banks decide whether to grant credit to applicants who apply to them or not. Credit department is faced with higher risk in making decisions. There is no general study that had been conducted in leading them toward making correct decisions. The main objective of this project was to determine the factors that can affect the bank's decision to grant a loan. The study estimated a discriminant function to determine the expected financial health of the consumer credit of customers of KCB Kisumu Branch by using eight demographic, socio-economic, and loan characteristics of the sampled borrowers. The data was analyzed using SPSS. The estimated function was found to be significant at one per cent level of significance and the model estimated a group membership with more than seventy-five per cent accuracy. This may decrease bad debts, and help to set risk based credit pricing for the clients and may also make the credit granting faster and more accurate.