Towards the adoption of credit scoring to predict the financial failure of private institutions

Abstract

This study aims to find out to what extent the Credit Scoring method predicts the financial failure of private institutions; in this respect, a practical study was held at the Algerian Popular Credit (Guelma Agency). The study was implemented as follows: first, recognizing the different stages of applying the method of Credit Scoring at the agency so as to grant a mortgage to an individual, and then applying (Altman Z'-score model) to three private institutions belonging to different sectors to judge their ability to pay, and to decide whether or not to grant the loan. The results of Z’-score were as follow: 1. The First institution: (2.99 > Z' >1.23) therefore the status of the institution is uncertain, in this case the loan will be accepted provided that there are real guarantees (mortgages) equal to the value of the loan. 2. The Second institution: (2.99 < Z'), so the institution has a good condition; thus, the loan is accepted. 3. The Third institution: The value (Z' <1.23), and therefore the institution is on its way to bankruptcy, so the loan is refused. The results of the study confirmed the importance of the application of the Altman model in predicting financial failure for private institutions. The multiplicity of credit scoring models, depending on the sector or activity of the institution in which it is used, has increased the effectiveness of these models.