Socio Economic Determinants of Customer's Default Risk Assessing the Islamic Consumer Portfolio's Credit Factors in the Public Sector Bank: A Case Study

Abstract

Purpose: This study investigates the effects of borrower-specific characteristics such as education, occupation, employment duration, and socioeconomic status on default risk in a public sector bank in Pakistan. The study also assesses the effectiveness of the Consumer Risk Rating (CRR) system in predicting customer defaults.Design/Methodology/Approach: The research is quantitative in nature and is applied to a case study of 100 cases drawn from 2,076 consumer financing accounts in a public-sector bank. Descriptive

statistics, correlation analysis, linear regression, and probit models were used for data analysis.

Findings: The study found that borrower education, occupation, and job tenure significantly influenced CRR ratings and default risk. However, other factors such as gender, marital status, and income did not significantly affect the default probability. The CRR system appeared to be a useful predictor of customer default; higher scores corresponded to lower risk.

Originality: This research contributes to the literature on Islamic banking by incorporating socio-economic characteristics in credit risk models, which has not been considered by previous studies. The results of this study provide empirical evidence from an Islamic banking perspective, which provides practical insights for enhancing risk management in consumer finance.

Implications: These findings suggest that Islamic banks need to improve their credit risk model by including socioeconomic factors for their borrowers to improve credit risk management and predict borrower default more accurately. This study offers practical implications for Islamic bank regulators and managers to enhance their risk assessment processes.