Relationship marketing
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Journal of Money, Investment and Banking
ISSN 1450-288X Issue 9 (2009)
© EuroJournals Publishing, Inc. 2009
http://www.eurojournals.com/JMIB.htm
Qualitative Risk Scoring in Relationship Lending: Case of
Karafarin Bank
Roudabeh Gharaee
MS candidate, Marketing and e-commerce program
Department of Industrial Engineering, Tarbiat Modares University, Tehran/ Iran
Department of Industrial Marketing, Lulea University of Technology, Lulea/ Sweden
E-mail: r.gharaee@modares.ac.ir
Amir Albadvi
Associate Professor of IT/IE
Department of Industrial Engineering, Tarbiat Modares University, Tehran / Iran
E-mail: albadvi@modares.ac.ir
Abstract
Unreliability of financial statements in Iran has urged this country’s financial
services industry management to manipulate practices by which they could gain reliable
risk scores for borrowers. The purpose of this paper is to model the qualitative risk of
relationship in relationship lending. This research extracts the most important qualitative
factors that would impact the default of a business relationship borrower. Solicitation of the
factors is done through Delphi methodology. The mean weight of each factor is then
calculated from grades given to each factor by the experts.
As a case study, lending relationships of a private bank, Karafarin Bank (KB), and
hundred of its relationship borrowers (some being creditworthy clients and some having
past dues), are examined and the credit committee of the bank is asked to rate these
companies based on attributes found by this research through Delphi method. The
qualitative risk score of these companies are then derived and analyzed. The hypotheses
testing of the results show that this qualitative scoring model could successfully distinguish
between reliable and risky customers, therefore the model could be used as a credit risk
scoring tool for bank managers of countries in which the financial data of customers is
limited and yet unreliable.
Keywords: Relationship lending, Delphi method, relationship risk factor, Iran
JEL Classification Codes: M31, D81
1. Introduction
It is the age of relationship marketing, an age in which making a sale is just the beginning, rather than
the end, of a company-customer relationship. In the financial services’ industry as well, more than ever
before, managers must understand their best customers’ needs and prevent them from switching to
other companies (Chiu et al., 2005). It is now proposed that closer attention is paid to the long-term
financial benefits, and other benefits, of retained customers the main reason being that competition in
the marketplace has intensified. To achieve growth, it is argued, organizations must change their
Journal of Money, Investment and Banking - Issue 9 (2009) 49
paradigm to that of relationship marketing (Lindgreen and Crawford, 1999). Relationship lending is
then defined as a long-term implicit contract between a bank and its debtor (Elsas, 2005).
Banking industry in Iran is getting more and more competitive by the establishment of private
banks in 2001, so banks are urged to manipulate practices by which they could gain competitive
advantage over competitors. Fundamental means to obtain this goal would be maintaining relationships
that are more profitable in long term for the bank and prerequisite of this practice would then be
identification of risk factors, specifically for Iranian banks where the concept of relationship banking is
a new perception. The financial ratios have been used for the past 6 years by Iranian banks for
estimation of customers’ risk score, but since there is no accredited credit history available for
customers in Iran and financial statements are unreliable, the error of such computations is on average
35% (Sabzevari et al., 2007) and makes these financial scores useless in decision making. Currently a
firm with fake good-standing financial statements could get a low risk score and would take advantage
of being cross-sold or up-sold during its relationship with the bank and the bank might not be able to
prevent losses on time. So there has recently been an urge from the management of some Iranian banks
to have tools by which they could gain reliable risk rating method for their customers to complement
the existing financial scores. So this research basically extracts the most important qualitative factors
that would affect the relationship borrowers’ risk in Iranian banking industry and would then compute
qualitative risk score for them.
Ryals and Knox (2006) in their research have prepared a relationship scorecard for business
customers of an insurance company according to nine main factors they had extracted. Their factors
were
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