Performance-based credit scoring model

The repayment ability of the borrower and, therefore, the loan performance should be contingent on actual performance of the financed business because other sources of income may not be reliable as evidenced by recent economic recession in USA. Accordingly, credit scoring models should basically focus on evaluating the lender's judgements about a borrower's future business performance. Similarly, the validity of these models should be based on the accuracy in predicting borrower's actual business performance in future. This requires a time series data for the same sample borrowers so that the data for the preceding years are used as the estimating sample and the data for the following year are used as the hold-out sample. The estimating and hold-out samples in existing credit scoring studies, however, are constituted of cross section observations on different borrowers. Moreover, these studies make no references to the performances of the businesses.