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Journal of Money, Investment and Banking

ISSN 1450-288X Issue 9 (2009)

© EuroJournals Publishing, Inc. 2009

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


Amir Albadvi

Associate Professor of IT/IE

Department of Industrial Engineering, Tarbiat Modares University, Tehran / Iran



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



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