Neural Comput & Applic
DOI 10.1007/s00521-016-2592-1
ORIGINAL ARTICLE
A fuzzy decision support system for credit scoring
Joshua Ignatius1 • Adel Hatami-Marbini2 • Amirah Rahman1
Lalitha Dhamotharan3 • Pegah Khoshnevis4
Received: 5 April 2016 / Accepted: 6 September 2016
 The Natural Computing Applications Forum 2016
Abstract Credit score is a creditworthiness index, which
enables the lender (bank and credit card companies) to
evaluate its own risk exposure toward a particular potential
customer. There are several credit scoring methods avail-
able in the literature, but one that is widely used is the
FICO method. This method provides a score ranging from
300 to 850 as a fast filter for high-volume complex credit
decisions. However, it falls short in the aspect of a decision
support system where revised scoring can be achieved to
reflect the borrower’s strength and weakness in each
scoring dimension, as well as the possible trade-offs made
to maintain one’s lending risk. Hence, this study discusses
and develops a decision support tool for credit score model
& Adel Hatami-Marbini
adel.hatamimarbini@dmu.ac.uk
Joshua Ignatius
josh@usm.my
Amirah Rahman
amirahr@usm.my
Lalitha Dhamotharan
lalitha.usm@gmail.com
Pegah Khoshnevis
pegah.hajimirzakhoshnevis@kuleuven.be
1
School of Mathematical Sciences, Universiti Sains Malaysia,
11800 Minden, Penang, Malaysia
2
Department of Strategic Management and Marketing,
Leicester Business School, De Montfort University, Hugh
Aston Building, The Gateway, Leicester LE1 9BH, UK
3 customer having multiple (and perhaps undeclared) income
School of Mathematical Sciences, and School of
Mathematical Sciences, Universiti Sains Malaysia,
11800 Minden, Penang, Malaysia
4
Faculty of Economics and Business, KU Leuven,
Warmoesberg 26, 1000 Brussels, Belgium
•
based on multi-criteria decision-making principles. In the
proposed methodology, criteria weights are generated by
fuzzy AHP. Fuzzy linguistic theory is applied in AHP to
describe the uncertainties and vagueness arising from
human subjectivity in decision making. Finally, drawing
from the risk distance function, TOPSIS is used to rank the
alternatives based on the least risk exposure. A sensitivity
analysis is also demonstrated by the proposed fuzzy AHP-
TOPSIS method.
Keywords Credit scoring  FICO  Fuzzy AHP  TOPSIS
1 Introduction
Lending institutions evaluate a customer’s risk exposure
based on their credit score. Of late, lax lending guidelines and
optimistic real-estate valuations have led to the subprime
mortgage crisis in the USA, as securities backed by these
mortgages remain unsustainable due to increasing interest
rates and faltering valuation. Financial institutions are
increasingly worried about systemic risks and their spillover
effects [21]. The first line of defense would be to provide a
proper credit screening that can translate into sustained pay-
ments based on the affordability of the customers.
Credit evaluation poses a classical problem of decision
making under uncertainty, where an individual’s worth is
based on the estimates of potential future incomes [19].
Determining the creditworthiness of a customer may not be
a straightforward venture due to the possibility of the
streams, and the fact that risk exposure is dependent on the
customer’s type of occupation and lifestyle. In addition, the
potential borrower may not be a first-time borrower; for
instance, an application for a mortgage loan may be for
123

investment purposes. Depending on the current risk profile
and exposure, a lending institution may evaluate the
repayment of the borrower over duration that is commen-
surate with his or her sustained ability, and its own analysis
on the growth of the property sector. In such situations, the
lending institution may not follow the same guidelines used
on the first-time borrower who purchases a home for per-
sonal use.
As such, the tightness of a credit screening depends on
the lending institution’s flexibility in interpreting customer
and market information toward future forecasted growth,
which may be seen as different ways to measure the credit
worthiness of a customer. Confusions tend to arise, and
allegations that a certain financial institution might be
practicing double standards in granting loans would surface
whenever loans are obtained or rejected by that lending
institution. As an effort to promote uniformity in credit
evaluation, the United States Federal Reserve had adopted
the FICO scoring model developed by the Fair Isaac Cor-
poration. In this regard, Bernanke [6] stated ‘‘The low-cost
summary measures of credit history that have gained
widespread market acceptance today did not emerge until
1989, when Fair Isaac and Company developed the FICO
score.’’
The FICO scoring model calculates the credit worthi-
ness of a customer from the risk of default standpoint. This
can be done by analyzing their financial history, such that a
higher FICO score translates into a better chance of
approval.
There are five criteria to be judged based on the FICO
scoring model.1 They consist of the borrower’s payment
history, balances in various financial accounts, length of
credit history and creation of new credit as well as types of
credit used previously. Although the evaluation of criteria
for the FICO score remains a good indicator of a bor-
rower’s risk on a broad basis, it lacks a decision support
initiative and an expert system mechanism for handling
high-volume data/big data where the preference function of
evaluators and measures hardly exhibit linearity and uni-
formity. This is made more complex when the measures
and evaluators may not be equally weighted.
Many studies are focused on showing classification
performance of artificial intelligence (AI) classifiers in
credit scoring. What is neglected is the step-by-step process
of how decisions are weighted, leading to whether an
individual is successful in the loan application or other-
wise. This research can be integrated as part of a decision
chain in AI classifiers, and even in ensemble models
regardless of whether it is homogenous or heterogeneous
classifiers. In addition, neural computing research in credit
scoring usually covers the performances of the techniques
1
http://www.myfico.com/crediteducation/whatsinyourscore.aspx.
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Neural Comput & Applic
but do not elaborate on how the credit decision is made. In
this paper, we show how decisions are weighted, normal-
ized and evaluated based on a set of variables and opera-
tional definitions. This takes a micro-level approach to the
credit decision process, where rules are outlined to produce
the final decision based on fuzzy rating.
Multi-Criteria Decision Making (MCDM) is an estab-
lished domain within the Decision Science and Operations
Research areas, which involves solving problems related to
conflicting criteria and alternatives. Although numerous
MCDM models have been developed and applied such
as—Analytic Hierarchy Process (AHP) [26], Technique for
Order Preference by Similarity to Ideal Solution (TOPSIS)
[5], and Preference Ranking Organization Method for
Enrichment Evaluations (PROMETHEE) [3, 4]—the need
to precisely define the ratings and criteria weights might
prevent these techniques from being used in reality. Hence,
it will be more useful for MCDM techniques to allow
decision makers to express their judgments in linguistic
terms. As such, fuzzy sets theory first proposed by Zadeh
[46] can be used to deal with the ambiguity and vagueness
inherent in decision makers judgments. It is no surprise
therefore that fuzzy MCDM has received a great deal of
attention among researchers and practitioners lately (see,
e.g., [23, 24, 38]).
In this paper, we enhance the FICO scoring model by
integrating an automated credit rating assessment system
for lending institutions. We present an algorithmic process,
adapted from the existing MCDM/MADM techniques
involving AHP and TOPSIS. We utilize fuzzy sets theory
to address the human subjectivity involved in modeling and
the assessment of credit worthiness of a customer. The
contributions of this paper are threefold: The first contri-
bution is to design a procedure as to ensure consistency for
credit approvals despite the human subjectivity element. In
this aspect, we explore two fuzzy AHP models (i.e.,
Chang’s extent analysis method and Mikhailov’s prioriti-
zation method) with the aid of TOPSIS to rank the final
scoring. The second contribution is more novel as it
addresses more than just the integration of the two MCDM
methods (i.e., fuzzy AHP and TOPSIS); it entails estab-
lishing a ‘‘low risk’’ and a ‘‘high risk’’ alternative, where
each individual can be evaluated against the respective
baselines of past non-performing loans. For confidentiality
reasons, we will not specify the details of how the baselines
were being established, but they are nonetheless achieved
through decision makers input and remain as the prepro-
cessing procedure that does not affect the understanding of
this study. Given that credit card data of a full-service retail
bank is considered, the proposed method has demonstrated
applicability in a real environment. The third contribution
is the proposed model’s ability to explore the variation
between criteria weights and the individual’s loan
Neural Comput & Applic
application status (being classified as either a low- or high-
risk status). This is similar to a gamble between a certainty
condition and two lotteries in preference structures. The
certainty condition is that the lending facility rejects the
loan outright which means zero risk on the part of the
lending facility. The lotteries would be the gamble whether
the individual is classified as a low- or high-risk category.
The results of our sensitivity tests prove that the proposed
model is robust and flexible to adapt its decision support to
changes in criteria.
The outline of this paper is as follows: Sect. 2 gives a
structured background of the existing literature on credit
scoring models. A number of definitions for fuzzy sets
theory and a brief introduction of the MCDM/MADM
models used as scoring models are presented in Sect. 3.
Section 4 introduces a two-phase fuzzy AHP-TOPSIS
hybrid MCDM model to improve credit scoring model.
Section 5 presents a case study to illustrate the two-phase
algorithm on the credit scoring models that utilize the
fuzzy AHP and TOPSIS methods. The aspects of credit
scoring are analyzed by conducting sensitivity analysis in
Sect. 6. Lastly, Sect. 7 concludes this study and presents
some suggestions for future research directions.
2 Literature review
One could claim that the first multi-criteria decision-mak-
ing approach to analyze a borrower’s credit quality is the
FICO score. Engineer Bill Fair and mathematician Earl
Isaac, a FICO founder company, held onto the principle
that data can be intelligently used for improving business
decisions, and the $800 dollar initial investment by the two
of them led to its first credit scoring system for American
investments. The FICO scientific approach to credit quality
appraisal started its expansion into Europe in the 1970s,
and later the UK in the 1990s. Its first real global move is
perceived to be its first Asian headquarters in Beijing,
China, in 2007. Now, the variation of the original credit
scoring approach has also been adapted across developing
countries, and recently in 2014, its initiative of integrating
analytics for Hadoop to the FICO Analytic Cloud is con-
sidered to be a major step forward in tackling big data head
on.2
In the history of the credit industry, conventional
probabilistic-based models such as Discriminant and
Logistic Regression (DLR) have often been applied to
build credit scoring models ([39, 43]). Some researchers
([16, 33, 34, 42]), however, claimed that Neural Networks
(NN) approach is a better tool for credit analysis. Desai
2
See http://www.fico.com/en/about-us/history/ for the history of
FICO.
et al. [16] analyzed the performance between NN and the
traditional probabilistic techniques in the credit scoring
model and found that NN performs better than DLR in the
classification of bad loans. The performance measure is
observed based on the greater risks associated with incor-
rectly classifying bad loans versus the wrongful rejection
of financially savvy individuals.
However, researchers began to realize that NN cannot be
applied to a ‘‘peer group analysis’’ that distinguishes between
two or more groups in terms of their financial characteristics.
Thus, Data Envelopment Analysis (DEA) being an efficiency
measurement concept of Charnes et al. [14] was later applied
to credit scoring models (see [15, 18, 37, 41]). DEA translates
input and output data into a credit score, thus ensuring that the
loan applicant can be ranked accordingly.
Inspired by these techniques, Yurdakul and İç [45]
included financial ratios into the AHP model, thus gener-
ating efficiency scores to evaluate automotive and textile
firms in Turkey. AHP [40] is a well-known method of
arriving at a ranking order of alternatives based on
assessment of trade-offs among criteria. Although AHP is a
good tool for solving MCDM problems, the subjectivity in
human decision making tends to make it difficult to elicit a
fixed value judgment for a certain criterion as compared to
an interval judgment. Decision makers are unable to state
their preferences precisely when tasked with the subjec-
tivity nature in the comparison process [31]. The uncer-
tainty in judgment will give rise to ambiguity in
determining the position of alternatives and hence render it
difficult to ensure the consistency of preferences.
The pairwise comparisons in the conventional AHP
technique tend to eliminate the longer chains of interde-
pendency which the decision maker might perceive during
an evaluation process. Moreover, an arbitrary starting ref-
erence point is needed in pairwise comparison which may
influence the solution of the credit score. The usage of crisp
(non-fuzzy) value in the conventional AHP technique may
cause failure in capturing the decision maker’s uncertain
informed preference.
As such, a number of credit scoring models have been
developed based on fuzzy sets theory. Yu et al. [44] pro-
posed using artificial intelligent approaches to capture
fuzzy risk thresholds of loan applicants across decision
makers, which in the later stages could be defuzzified to
achieve group consensus. Capotorti and Barbanera [10]
introduced a hybrid methodology (incorporating fuzzy and
rough sets as well as conditional probability evaluation) for
its classification scheme in credit risk analysis.
In another vein of MCDM used for credit scoring is the
TOPSIS approach. TOPSIS addresses the position of an
alternative based on geometric distance, with the best
alternative being closest to the Positive Ideal Solution (PIS)
and as far as possible from the Negative Ideal Solution (NIS).
123

Iç and Yurdakul [29] established a simple scoring fuzzy
TOPSIS decision aid for banks to evaluate ratio-derived
financial measures of manufacturing firms that seek busi-
ness loans in Turkey. Iç [28] used the fuzzy TOPSIS
approach to compute the rating of each subsidiary and later
to distribute concentration limits based on a linear pro-
gramming model that maximizes the total value of capital
allocation. More recently, Bilbao-Terol et al. [7] used
TOPSIS to develop a unified measurement model for
assessing the sustainability performance of government
bond funds.
In summarizing our assessment of fuzzy MCDM models,
we find it to provide better results in terms of interpretative
ability. They are also comparatively more efficient in making
qualitative forecasting. Specifically, we note that fuzzy AHP
was developed as an extension to the conventional AHP
method, and takes into account the existence of fuzziness and
vagueness, as well as the imprecise judgment of a decision
maker. Various contributions were made to this model, such as
Chang’s [12, 13], Mikhailov’s [35], Kulak and Kahraman’s
[31] methods and many more which covers different aspects:
application selection, evaluation process, forecasting and
location selection. However, fuzzy AHP was rarely applied to
credit scoring models. In addition, we find that the limitation
of using any variant of fuzzy AHP will involve a large number
of pairwise comparisons depending on the quantity of criteria
and alternatives under evaluation. We have an answer to this
problem by complementing the use of fuzzy AHP with
TOPSIS. This reduces the number of pairwise comparisons
required in the credit assessment while still preserving the
subjectivity of the decision makers prior to the evaluation.
3 Background
In this section, we first review a number of definitions of
fuzzy sets theory. Then, we briefly review two fuzzy AHP
methods presented by Chang [12, 13] and Mikhailov [35]
as well as overviewing TOPSIS (Hwang and Yoon [27]).
3.1 Fuzzy sets theory
Some basic definitions of fuzzy sets theory are reviewed
([17, 47]).
Definition 3.1 Suppose X is a group of objects repre-
sented by x. a~ is called a fuzzy set in U if a~ is defined as
a~ ¼ fðx; la~ðxÞÞjx 2 X g where la~ðxÞ is the membership
function whose value varies within [0, 1].
Definition 3.2 A fuzzy subset a~ of universe set U is
convex if la~ðbx1 þ ð1  bÞx2 Þ  minðla~ðx1 Þ; la~ðx2 ÞÞ;
8x1 ; x2 ; b 2 ½0; 1:
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Neural Comput & Applic
Definition 3.3 A fuzzy subset a~ of universe set U is
normal if there exists at least xo 2 R, with la~ðxo Þ ¼ 1.
Definition 3.4 A fuzzy subset a~ of universe set U is a
fuzzy number if a~ is both normal and convex.
Definition 3.5 [17] A fuzzy number a~ is a triangular
fuzzy number, denoted by a~ ¼ ðe1 ; e2 ; e3 Þ, if its member-
ship function is defined as follows:
8
>
> ðx  e1 Þ=ðe2  e1 Þ; e1  x  e2 ;
<
1; x ¼ e2 ;
la~ðxÞ ¼ ð1Þ
>
> ð e3  x Þ= ð e 3  e 2 Þ; e 2  x  e3 ;
:
0; Otherwise:
Next, some fundamental fuzzy arithmetic operations on
two positive triangular fuzzy numbers a~ ¼ ðe1 ; e2 ; e3 Þ and
b~ ¼ ðf1 ; f2 ; f3 Þ ðe1 [ 0; f1 [ 0Þ are defined as follows:
• Addition: a~ þ b~ ¼ ðe1 þ f1 ; e2 þ f2 ; e3 þ f3 Þ.
• Subtraction: a~  b~ ¼ ðe1  f3 ; e2  f2 ; e3  f1 Þ.
• Multiplication: a~  b~ ffi ðe1 f1 ; e2 f2 ; e3 f3 Þ.
Definition 3.6 Linguistic variables are expressions or
terms rather than values, which are used to describe very
complicated and imprecise circumstances such as ‘‘very
weak’’, ‘‘weak’’, ‘‘neutral’’, ‘‘strong’’, or ‘‘very strong’’. As
such, these imprecise circumstances when attempted to be
replaced by quantitative values are best represented by
fuzzy numbers.
Definition 3.7 [12] Let H1 = (l1, m1, u1) and H2 = (l2,
m2, u2) be two triangular fuzzy numbers; then, the degree
of possibility for H1 [ H2 is defined as
8
>
< 1; m1  m2 ;
FðH2  H1 Þ ¼ 0; u 2  l1 ;
>
:
ðl1  u2 Þ½ðm2  u2 Þ  ðm1  l1 Þ1 ; Otherwise:
ð2Þ
3.2 Fuzzy AHP
Analytic Hierarchy Process (AHP) developed by Saaty [40]
is a powerful tool for reducing the complexity in decision
making, and allowing the decision maker to prioritize its
options across the relevant trade-offs. The scaling in fuzzy
sets theory extends the AHP method from an original crisp
1- to 9-point scale to a linguistic scale. Table 1 provides
the fuzzy triangular scale and its reciprocal, as well as the
associated linguistic preference scale. In our case, by
integrating AHP with fuzzy sets theory, a fuzzy ratio scale
is created to indicate the relative strength of the sub-factors
in a particular criterion through the aid of a fuzzy triangular
function (see Fig. 1). As such, a set of fuzzy numbers
representing the rating of alternatives and the weights of
Neural Comput & Applic

Table 1 Linguistic scale for

Linguistic scale Triangular fuzzy scale Triangular fuzzy reciprocal scale
the fuzzy triangular
Equally important (EI) (1, 1, 1) (1, 1, 1)
Slightly important (SI) (1, 3/2, 2) (1/2, 2/3, 1)
Moderately important (MdI) (3/2, 2, 5/2) (2/5, 1/2, 2/3)
More important (MI) (2, 5/2, 3) (1/3, 2/5, 1/2)
Very important (VI) (5/2, 3, 7/2) (2/7, 1/3, 2/5)

" #1
µx X
p n X
X p
EI SI MdI MI VI Si ¼ Hij  Hij ð3Þ
1 j¼1 i¼1 j¼1

where 9 represents the multiplication sign and

!
Xp
j
Xp X
p Xp
Hi ¼ l ;
j¼1 ij
mij ; u
j¼1 ij
and
0 1 3/2 2 5/2 3 7/2 j¼1 j¼1
hXn Xp i1
Fig. 1 Fuzzy triangular scales i¼1 j¼1
Hij
!
the criteria are used to construct the fuzzy decision 1 1 1
¼ Pn Pp ; Pn Pp ; Pn Pp :
matrices. The alternatives are then subjected to a set of i¼1 j¼1 uij i¼1 j¼1 mij i¼1 j¼1 lij
operations in order to obtain the priority scores.
Step 2: Calculate the possibility degree
In this study, we employ two methods for the calculation
of eigenvectors and compare both their performances, which Based on Definition 3.7, the possibility degree for a convex
were then used in obtaining the credit score. The methods of derived fuzzy element number to be greater than q convex
Chang’s [12, 13] extent analysis and Mikhailov’s [35] pri- fuzzy elements Hi ; i ¼ 1; 2; . . .; q can be expressed as
oritization method are discussed in the subsections below. follows:
  
F ðH  H1 Þ; ðH  H2 Þ; . . .; H  Hq
3.2.1 Chang’s extent analysis (CEA)
¼ min F ðH  Hi Þ; i ¼ 1; 2; . . .; q: ð4Þ
 
Chang’s [12, 13] used fuzzy numbers in the triangular form Suppose d_ ðBi Þ ¼ min F Si  Sq : Next, the vector of the
to derive inputs from the comparison process. The usage of priority weights can be computed by W_ ¼
the extent analysis method in CEA is used to synthesize the
½d_ ðB1 Þ; d_ ðB2 Þ; . . .; d_ ðBn ÞT ; where Bi ; i ¼ 1; 2; . . .; n con-
pairwise comparison judgments. This method allows for
sists of n levels.
manual computation based on simple arithmetic and is
therefore easier to compute than other existing fuzzy AHP Step 3: Obtain the normalized weight vectors
approaches [11].
Firstly, let A ¼ fa1 ; a2 ; . . .; an g and C ¼ fc1 ; c2 ; . . .; cp g W is a deterministic number that gives priority weights of a
be an alternative set and criteria set, respectively. The criterion or an alternative in the normalized weight vector
extent analysis for each criterion associated with each W ¼ ½dðB1 Þ; dðB2 Þ; . . .; dðBn ÞT :
alternative can be accordingly performed. Therefore, P
extent analysis values of each alternative are denoted by 3.2.2 Mikhailov’s prioritization method (MPM)
Hi1 ; Hi2 ; . . .; Hip ; i ¼ 1; 2; . . .; n; where Hij ; j ¼ 1; 2; . . .; p
are characterized by fuzzy numbers. Then, the CEA pro- MPM can trace the consistency index for the children
cedure can be outlined is a series of steps as follows: nodes under each parent branch, when conducting pair-
wise comparisons. The author claims that MPM outper-
Step 1: Obtain the normalized weight vectors of forms CEA, given that the latter uses the arithmetic
criteria mean which may lead to an inconsistent comparison
Let B = (bij)n9p be a comparison matrix of fuzzy elements matrix. In addition, MPM can also be used to
under each criterion, where bij = (lij, mij, uij) satisfies solve nonlinear models using mathematical programming
lij = 1/lji, mij = 1/mji and uij = 1/uji. We can define the software. The MPM procedure can be outlined as
synthetic extent (fuzzy) of the ith object as follows: follows:

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 Neural Comput & Applic

Step 1: Define the decision structure 3.3 TOPSIS

Suppose a decision maker can produce a set of fuzzy com-
Technique for Order Preferences by Similarity to an
parison judgments in the triangular form a~ij ¼ ðlij ; mij ; uij Þ,
Ideal Solution (TOPSIS) is a popular MADM model
where i = 1, 2, …, p - 1; j = 2, 3, …, p, and i \ j. This
which was first presented by Hwang and Yoon [27]. It
makes up a positive reciprocal matrix as A={aij} belongs to
follows a distance function principle which rationalizes
<pxp where p is the number of decision elements for the par-
that the alternative of choice must be closest possible to
ticular level. The concern is then to develop a priority vector
 T  the Positive Ideal Solution (PIS) and the furthest pos-
w ¼ w1 ; w2 ; . . .; wp with its ratio wi wj conforming to the sible from the Negative Ideal Solution (NIS). If we
acceptable range of the fuzzy or subjective judgments. consider n possible alternatives of Ai (i = 1, 2, …, n),
Step 2: Define assumptions for the fuzzy prioritization which are evaluated against p attributes Cj (j = 1, 2,
method …, p), the TOPSIS algorithm can be summarized as
follows:
The non-fuzzy priority vector w takes the ratio
  (i) The decision matrix is gained based on the
wi =wj lij  wwij  uij with a linear membership function: performance ratings assigned to each alternative
8
with respect to each attribute as ðaij Þnp .
>
> wi
>
>  lij
(ii) The decision matrix ðrij Þnp with its normalized
> wj wi

> >
< ; mij 
wi mij  elements rij is computed as
lij ¼ lij
wj
ð5Þ
wj > wi !1=2
>
> uij 
Xn
>
>
>
> wj
mij 
wi rij ¼ aij a2ij ;
: ; ð9Þ
uij  mij wj i¼1
i ¼ 1; 2; . . .; n; j ¼ 1; 2; . . .; p:
where lij is monotonically non-decreasing within (-?, mij)
while monotonically non-increasing within (mij, ?). This step (iii) The normalized decision matrix, with its weighted
requires consideration on two assumptions, starting with a normalized element gij ¼ wj rij ; i ¼ 1; 2; . . .; n;
P
non-empty fuzzy feasible area in p - 1 dimensional simplex j ¼ 1; 2; . . .; p, where pj¼1 wj ¼ 1:
of Sp-1, Sp1 ¼ ðw1 ; w2 ; . . .; wp Þ subject to wi [ 0 and (iv) The PIS (Aþ ) and NIS (A ) solutions are calcu-
Pp
i¼1 wi ¼ 1 which gives the fuzzy feasible area [30]. The lated as
membership function of the aggregated fuzzy set is therefore n o
A þ ¼ gþ þ þ
1 ; g2 ; . . .; gp ;
defined as follows:
n o ð10Þ
lp ðwÞ ¼ min lij ðwÞ; A  ¼ g 1 ; g 
2 ; . . .; g 
p ;
i ¼ 1; 2; . . .; p  1; j ¼ 2; 3; . . .; p; and i \ j: ð6Þ
where
The second assumption determines a priority vector gþ 
j ¼ maxj fgij g & gj ¼ minj fgij g for benefit criteria,
through a selection criterion of largest membership value in gþ 
j ¼ minj fgij g & gj ¼ maxj fgij g for cost criteria.
the above fuzzy feasible region. Given lk is a convex set, a
priority vector w* [ Sp-1 is always present with the largest (v) Calculate the distance measures of each alterna-
membership degree [36]: tive from the PIS and NIS as follows:
  vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
k ¼ lp ðw Þ ¼ max min lij ðwÞ ð7Þ uX
w 2Sp1 ij u p
Dþ ¼ t ðgij  gþ 2
isi j Þ ; i ¼ 1; 2; . . .; n; and
Step 3: Solve the fuzzy prioritization problem j¼1
   sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
Given the specific membership function lij wi wj , the X n
2

following linear program is formulated as: Disi ¼ ðgij  g i Þ ; i ¼ 1; 2; . . .; n:
i¼1
Maximize k
s:t: ðmij  lij Þkwj  wi  lij wj ;
ð11Þ
ðuij  lij Þkwj  uij wj  wi ; (vi) The relative closeness to the ideal solution can be
X n
measured as
wk ¼ 1;
i¼1
wi [ 0; ð8Þ Disi
Ci ¼  ; i ¼ 1; . . .; n ð12Þ
ðDþ
isi þ Disi Þ
where i ¼ 1; 2; . . .; p  1; j ¼ 2; 3; . . .; p; i \ j:

123
Neural Comput & Applic
(vii) The ranking preference order of the alternatives is
determined according to Ci in decreasing order.
This ensures that an alternative that is closest to
the PIS and furthest from the NIS would register
the highest rank, i.e., Ci approaches 1.
4 A proposed method
The Fair Isaac Corporation (FICO) credit scoring model is an
internal means for gauging mortgage repayment ability.
Although each credit bureau has its own proprietary scoring
models, their measures are derived from some variation of the
original FICO. To a large extent, after controlling for income
differences, the score captures one’s ability to manage his or
her own cash flow, which ultimately translates into trustwor-
thiness; and for example, whether the individual possesses a
high credit risk owing to a high propensity for impulse
spending activities [1]. However, management may find
assigning scores across criteria to be somewhat difficult,
especially when a fixed value judgment or score is needed.
This poses another problem as inconsistency in approving or
rejecting loans across branches of the same lending institution
persists due to different judgments and interpretability of the
scores across the lending institution. We propose a two-phase
fuzzy AHP-TOPSIS hybrid MCDM model for the purpose of
incorporating the uncertainty into the credit scoring model in
terms of providing decision-making implications into the
credit assessment. The proposed algorithmic process in this
study adapted from existing MCDM/MADM principles
involving AHP and TOPSIS. We utilize fuzzy sets theory to
address the human subjectivity involved in modeling and the
assessment of credit worthiness of a customer. The fuzzy
AHP-TOPSIS hybrid MCDM consists of two phases: (i) fuzzy
AHP and (ii) TOPSIS. In the first phase, we build the hierarchy
diagram and employ CEA and MPM methods to calculate the
local and global weights where linguistic variables are char-
acterized by fuzzy numbers. In the second phase, the weights
generated from the CEA and MPM methods are integrated into
the TOPSIS method, separately, which allows us to compare
the results between the two when TOPSIS eventually ranks the
applicant against the established risk baseline levels. Finally,
we will conduct the sensitivity analysis to observe how fluc-
tuations in criteria weights influence the perceived risk of an
applicant. Figure 2 illustrates the proposed framework.
5 Application of the proposed method on credit
assessment
We illustrate a fuzzy AHP-TOPSIS hybrid utilized for the
purpose of credit assessment. We consider a case study
where a particular lending institution with the global
presence in Malaysia wants to assess the credit worthiness
of loan applicants. This institution has a full-service suite
for its clients ranging from cross-border investments to
mortgages. We consider the case where the applicant is
assessed with respect to two alternatives; ‘‘low risk’’ and
‘‘high risk’’ categories derived from baselines of past non-
performing loans. To initiate the baseline splits between
‘‘low risk’’ and ‘‘high risk’’ alternatives, credit card data of
a full-service retail bank are considered. The ‘‘low risk’’ is
formed based on the extent to which the loan applicant
matches the characteristics of the 20th percentile of default
cases, while the ‘‘high risk’’ category is formed based on
the 80th percentile of default cases. This preprocessing
information is proprietary; and therefore, for confidentiality
reasons we are unable to provide more detailed information
regarding this process. Nonetheless, the preprocessing at its
fundamental level is similar to some discriminant models
(e.g., [9, 20]), proposed for credit evaluations, albeit at a
more complex level and requiring the use of neural net-
work models and ensemble classifiers. Neural network
models are beneficial in preprocessing as they are not
constrained by statistical assumptions such as normality
and linearity of the data (Malhotra and Malhotra [34]).
In the discriminant process, a combination of classi-
fiers is used, such that predictions of multiple base
models are pooled in the preprocessing stage. The
algorithm may provide a different perspective on the
same data, but they complement each other. For exam-
ple, one algorithm may address issues on recurring credit
activities while another may focus on large ad hoc
purchases. In the validation process for predictive
accuracy, a measure is used to ascertain the reliability of
the credit decision; that is, the proportion of correctly
classified bad versus good loans.
Credit card data are used because it acts as a proxy to an
individual’s credit behavior and health, and ultimately will
be reflected in the risk absorbed by the lending institution.
Given an individual’s habitual pattern can be reflected by
his or her expenditure, credit card data go beyond assessing
affordability for the potential borrowers and it includes the
willingness of the individual to service his or her debt.
Preliminary data suggest that high-income individuals are
more prone to the latter than former, which is a psycho-
logical issue in credit risk analysis.
The assessment team in this study selected 5 main cri-
teria for the credit score evaluation, which are Payment
history (A), Length of credit history (B), New credit (C),
Amount outstanding (D), and Type of credit (E). The sub-
criteria are listed as follows:
(A) Payment history:
(A1) Presence of adverse public records—This involves
public records on bankruptcies, judgments and tax liens,
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 Neural Comput & Applic

Fig. 2 Proposed framework

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Neural Comput & Applic
after a judgment is made against an individual following
court proceeding.
(A2) Severity of delinquency—The severity is judged
based on the number of months that the applicant has failed
to service his loans.
(A3) Amount past due on delinquent accounts—This is a
predictor of future payment risk, reflecting greater the risk
for higher balances on past-due accounts.
(A4) Time since violation of past-due items, or posting
of adverse public records or collection initiated on the loan
applicant—This is a measure of recency of the delinquency
event.
(A5) Number of past-due items—This is a measure of
the frequency of delinquency events.
(A6) Number of accounts serviced as obligated—This is
a measure of the fiscal responsibility of the individual in
meeting his/her financial obligations.
(B) Length of credit history:
(B1) Time since accounts first activated—This measure is
considered to be one of the first lines of defense. In the past,
there are syndicates that opened up accounts for individuals
with relatively recent credit history. Large loans were
awarded to such individuals, which were later defaulted.
(B2) Time since last account activity—This measure is
similar to B1 but monitors the transaction of the account.
The loan officer will require to review whether there are
active account activities and those accounts were not cre-
ated for the purpose of getting the present loan.
(C) New credit:
(C1) Number of recent account openings and credit
inquiries—This reflects the amount of credit enquiries by
potential lenders for the loan applicant. The loan officer
Fig. 3 Credit scoring hierarchical framework
usually reviews this in tandem with how many successful
eventual accounts that the applicant possesses.
(C2) Time since recent account opening(s), credit
inquiries—This measure is important because it will
question why the loan applicant would require a loan if he
or she has a recent account opening. If the credit enquiry
was not successful previously, it will further reflect the
greater risk exposure of the lending facility for the appli-
cant’s present enquiry.
(C3) Re-establishment of positive credit history—If the
loan applicant does not meet his past financial obligations,
this measure seeks to address how fast it took the applicant
to recover and fulfill its obligations. This is also perceived
as a factor of effort on the part of the loan applicant.
(D) Amount outstanding:
(D1) Amount owing on accounts—This indicates the total
balance outstanding for all the loan applicant’s accounts.
(D2) Number of accounts with balances—This considers
the total amount in all of the loan applicant’s accounts
including current accounts, fixed deposits, bonds and
stocks.
(D3) Fixed asset—This measures the total outstanding
amount on fixed assets.
(E) Type of credit—This accounts for the number of
credits that are being serviced by the loan applicant
including credit cards and mortgage loans. A higher
number would indicate greater risk exposure of the loan
applicant if he or she defaults on future loans.
All the criteria and alternatives for the credit assessment
are displayed in a hierarchy diagram as shown in Fig. 3.
We assume the following assumptions are met before
the potential borrower’s credit worthiness is subjected to
the screening process.
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 Neural Comput & Applic

• The monthly instalment based on the tenure and Table 2 Fuzzy comparison matrix of new credit (C)
amount sought must not exceed one-third of the C1 C2 C3
potential borrower’s total monthly income.
• The potential borrower’s race, marital status and gender C1 (1, 1, 1) (1, 3/2, 2) (1, 3/2, 2)
are not taken into consideration as risk factors. They are C2 (1/2, 2/3, 1) (1, 1, 1) (1, 3/2, 2)
assumed to be of equal risk. C3 (1/2, 2/3, 1) (1/2, 2/3, 1) (1, 1, 1)
• The potential borrower’s age must exceed 18 years and
at least possess 5 more years prior to retirement.
• The potential borrower’s income source is considered Table 3 Calculation of fuzzy synthetic extent value
stable, and the risk of loan default can be minimized by " #1
PP
Pn PP Si
mortgaging the potential borrower’s current assets. Hip H p
p¼1 i
• Co-borrower can be sought in the event that the i¼1 p¼1

principal borrower does not have sufficient earnings or C1 (2, 7/3, 3) (0.166, 0.245, 0.400)
tenure to justify the amount of intended borrowing. In C2 (5/2, 19/6, 4) (0.083, 0.105, 0.133) (0.208, 0.333, 0.533)
the event that a co-borrower is presented, we evaluate C3 (3, 4, 5) (0.250, 0.421, 0.666)
the co-borrower and principal borrower as a single
entity. This means that both data are consolidated prior
to analysis. Table 4 Possibility degree F (Hi C Hq)
We here apply the proposed fuzzy AHP-TOPSIS hybrid F (Hi C Hq) Bi Weights
MCDM in this study to evaluate the credit worthiness of a
C1 – 0.6860 0.4609 0.4609 0.2072
loan applicant.
C2 1 – 0.7636 0.7636 0.3433
Phase 1: Weighted fuzzy AHP C3 1 1 – 1 0.4495
In order to carry out the screening process, the weight of
each criterion is first evaluated using fuzzy AHP approach.
This is done for each level of the hierarchy (see Fig. 3), Step 1: Obtain the normalized weight vectors of criteria
respectively. However, for ease of simplicity, we only with regards to a parent goal. In other words, the value of
show the derivation of weights for the sub-criteria. We base fuzzy synthetic extent Si is calculated as the product of the
the weight of the main criteria on the FICO score weights: values in the second and third columns in Table 3. For
Payment History (A = 0.35), Length of Credit History example: (2, 7/3, 3)
(0.083, 0.105, 0.133) = (0.166,
(B = 0.15), New Credit (C = 0.1), Amount Outstanding 0.245, 0.400).
(D = 0.3) and Types of Credit (E = 0.1). These weights
can also be derived using the fuzzy AHP approach or any Step 2: Define the possibility degree of F (Hi C Hq).
other scoring technique. In doing so, we demonstrate the From Definition 3.7, the degree of possibility can be
robustness and flexibility of our model. computed as m2 C m1 and thus F (H2 C H1) = 1. Then,
Once the weights of the main criteria are derived, the the convex fuzzy number Ai is defined to measure the
weights of the sub-criteria are evaluated based on the minimum value for each set of the degree of possibility (F).
parent node. For instance, the decision maker of a partic- Step 3: Normalize the weights. The local weights of sub-
ular lending institution may initiate pairwise comparison of criteria C are shown in Table 4. For example: 0.4609/
the sub-criteria C1, C2 and C3 for the main criterion of (0.4609 ? 0.7636 ? 1) = 0.2072.
New Credit (C) based on the scale (fuzzy linguistic) in
Table 1. A fuzzy comparison matrix for each sub-criterion We now discuss the detailed procedure of MPM method
is then prepared using the triangular fuzzy scale, and its for identifying weights of the sub-criteria. In this method,
reciprocal scale. Table 2 shows the fuzzy comparison we employ model (6) to maximize l based on a number of
matrix for the sub-criteria of New Credit (C). Since both constraints in which the weights are variables. In our study,
methods, CEA and MPM, are computationally different Mathematica software is used to solve model (6). The l
after the initial matrix, we will first discuss the former. value can be interpreted to be the consistency index. For
CEA has more steps than MPM. However, the steps can be example, the following model is formulated to obtain the
manually computed without the help of any mathematical local weights:
programming software. The procedure is as follows:

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Neural Comput & Applic

Maximize l CEA indicates 3 sub-criteria with zero weights (A2, A3,

D3) as the lowest rank. The results show that MPM method
2 1 1
s:t  l  w2  w1 þ w2  0; may provide better weight dispersion than CEA.
3 2 2

The results from both methods indicate that the
2 emphasis on credit worthiness is placed the most in Amount
1  l  w2 þ w1  w2  0;
3 owing on accounts (D1), which shows 0.143 and 0.216 in

2 1 1 MPM and CEA (in bold in Table 5), respectively. This

 l  w3  w1 þ w3  0;
3 2 2 implies that credit worthiness of an applicant might be

2 compromised if one has a low score in D1.

1  l  w3 þ w1  w3  0; In Phase 2, we show how TOPSIS is used to rank the
3

applicant with respect to the risk categories.
2 1 1
 l  w3  w2 þ w3  0;
3 2 2 Phase 2: TOPSIS

2
1  l  w3 þ w2  w3  0;
3 wise comparisons needed if one were to use the fuzzy AHP
X 3
wk ¼ 1;
k¼1
wk  0; k ¼ 1; 2; 3:
As a result, the local weights of C1, C2 and C3 obtained
are 0.255, 0.327 and 0.418, respectively. The rest of the
local weights are evaluated by the same procedure. The
global weights are obtained by multiplying the local
weights for the sub-criteria with the weights of the corre-
sponding main criteria, and these weights can either be
derived from the CEA or MPM as reported in Table 5.
The local weights derived by both methods are different.
The rank of the sub-criteria in terms of global weights
remains unchanged in most criteria. The lowest priority of
CEA differs from MPM. The Number of recent account
openings (C1) has the lowest priority (0.026) in MPM, but
TOPSIS is introduced to minimize the number of pair-
approach entirely for credit assessment. It can be seen as a
way to aggregate the alternatives across the criteria weights
initially derived by the fuzzy AHP method. Table 6 shows
an example of a rating system derived by the lending
institution. The rating can be based on a separate evalua-
tion mechanism that takes into account the historical data
and pattern of non-performing loans. The value in Table 6
can be seen as thresholds for the scores. This has been
established with the aid of the assessment credit team. The
rating is generated for a particular assessment period and
for a specific housing loan scheme. It can be changed
depending on the economic climate and the lending insti-
tution’s risk exposure during the assessment.
In order to establish the credit worthiness of the loan
applicant, there must be a basis for comparison. If the loan
applicant is considered to be risky, then the ‘‘riskiness’’

Table 5 Criteria weights

Criteria Sub-criteria MPM CEA
Local weight Main criteria weight Global weight Local weight Main criteria weight Global weight

A A1 0.181 0.063 0.241 0.084

A2 0.085 0.030 0 0
A3 0.085 0.030 0 0
A4 0.288 0.35 0.101 0.463 0.35 0.162
A5 0.202 0.071 0.251 0.088
A6 0.159 0.056 0.044 0.016
B B1 0.600 0.090 0.650 0.098
B2 0.400 0.15 0.060 0.350 0.15 0.053
C C1 0.255 0.026 0.207 0.021
C2 0.327 0.1 0.033 0.343 0.1 0.034
C3 0.418 0.042 0.450 0.045
D D1 0.475 0.143 0.721 0.216
D2 0.343 0.3 0.103 0.279 0.3 0.084
D3 0.182 0.055 0 0
a
E – 1.000 0.1 0.100 1.000 0.1 0.100
a
Criteria E has no sub-criteria

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Table 6 Example of a rating

Score 1 3 5 7 9
system for an applicant
A1 (status) Bankruptcy File bankruptcy Court Judgment Delinquency None
A2 (month) [6 4–5 2–3 B1 None
A3 (RM thousand) [10 6–10 4–5 2–3 B1
A4 (year) B‘ ‘–1 2–3 4–5 [5
A5 (no.) [5 5 3–4 1–2 None
A6 (no.) None 1–2 3–4 5–6 [6
B1 (year) \5 6–10 11–15 16–20 [20
B2 (month) [18 13–18 7–12 4–6 B3
C1 (no.) C4 3 2 1 None
C2 (month) B1 2–3 4–6 7–12 [12
C3 (month) [6 5–6 3–4 1–2 \1
D1 (RM thousand) [500 201–500 101–200 51–100 \50
D2 (RM thousand) \10 10–50 51–200 201–500 [500
D3 (RM thousand) [500 251–500 81–250 50–80 \50
E (no.) C5 3–4 2 1 None

Table 7 Initial matrix

Alternatives Sub-criteria
A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E

High-risk baseline (H) 3 1 5 1 3 1 1 3 3 1 3 5 3 1 1

Low-risk baseline (L) 7 7 9 7 7 5 7 9 5 7 9 9 7 7 5
Applicant data (A) 5 5 7 3 5 7 9 9 3 7 5 9 5 7 9

Table 8 Normalized matrix

A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E

H 0.3293 0.1155 0.4016 0.1302 0.3293 0.1155 0.0874 0.2294 0.4575 0.1005 0.2798 0.3656 0.3293 0.1005 0.0967
L 0.7683 0.8083 0.7229 0.9113 0.7683 0.5774 0.6116 0.6882 0.7625 0.7035 0.8393 0.6581 0.7683 0.7035 0.4834
A 0.5488 0.5774 0.5623 0.3906 0.5488 0.8083 0.7863 0.6882 0.4575 0.7035 0.4663 0.6581 0.5488 0.7035 0.8701

must be a relative measure to a particular benchmark. In
this study, we establish baselines to judge the risk levels of
the loan applicants. A high-risk alternative is formed based
on the profile that was analyzed on the 80th percentile for
each of the criteria under assessment. For a low-risk
alternative, we formed the low-risk profile based on the
20th percentile across all the criteria under study. In so
doing, past knowledge is still embedded in future credit
evaluation exercises. This proposed solution allows lending
facilities to evaluate their loan applicants relative to their
past performances. Hence, three alternatives are formed
through this procedure: (1) the applicant, (2) the high-risk
baseline and (3) the low-risk baseline. Our procedure
allows us to evaluate the loan applicant against a risk
continuum.
The high-risk baseline, the low-risk baseline and the
applicant’s data are summarized in the initial matrix (see
Table 7). TOPSIS has the capability to consider the
applicant’s scores across all criteria as a distance function
from the low- and high-risk baselines.
In this study, if an applicant ranks above the low-risk
baseline, the applicant would be an ideal candidate for loan
eligibility, whereas an applicant who falls below the high-
risk baseline would be immediately rejected. An applicant
who falls between the low-risk and high-risk baselines is
said to be within the further negotiation region, where
lending facilities are required to request for more proof of
eligibility to pay the debt. The strictness of the scrutiny
would depend on the economic climate, the lending insti-
tution’s risk exposure and its policy during the application
process.
The weights obtained from CEA are multiplied with the
corresponding column of the normalized matrix (see
Table 8) to obtain the decision matrix (see Table 9).
Hence, the positive and negative ideal solutions can be
computed as A? and A- (see Table 10). In addition,

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Table 9 Decision matrix (multiplying normalized matrix with correspond CEA’s weights from Table 5)
A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E

H 0.0278 0 0 0.0211 0.0290 0.0018 0.0085 0.0120 0.0095 0.0034 0.0126 0.0791 0.0276 0 0.0097
L 0.0649 0 0 0.1477 0.0676 0.0090 0.0596 0.0361 0.0158 0.0241 0.0377 0.1423 0.0644 0 0.0483
A 0.0463 0 0 0.0633 0.0483 0.0126 0.0767 0.0361 0.0095 0.0241 0.0210 0.1423 0.0460 0 0.0870

Table 10 Positive and negative ideal solution of CEA’s weights

A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E

A? 0.0649 0 0 0.1477 0.0676 0.0126 0.0767 0.0361 0.0158 0.0241 0.0377 0.1423 0.0644 0 0.0870
A- 0.0278 0 0 0.0211 0.0290 0.0018 0.0850 0.0120 0.0095 0.0034 0.0126 0.0791 0.0276 0 0.0097

Table 11 Decision matrix (multiplying normalized matrix with correspond MPM’s weights from Table 5)
A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E

H 0.0208 0.0035 0.0120 0.0131 0.0233 0.0064 0.0079 0.0138 0.0117 0.0033 0.0117 0.0521 0.0339 0.0055 0.0097
L 0.0486 0.0242 0.0216 0.0918 0.0543 0.0320 0.0550 0.0413 0.0194 0.0230 0.0351 0.0938 0.0790 0.0384 0.0438
A 0.0347 0.0173 0.0168 0.0394 0.0388 0.0449 0.0708 0.0413 0.0117 0.0230 0.0195 0.0938 0.0565 0.0384 0.0870

Table 12 Positive and negative ideal solution MPM’s weights

A1 A2 A3 A4 A5 A6 B1 B2 C1 C2 C3 D1 D2 D3 E
?
A 0.0486 0.0242 0.0216 0.0918 0.0543 0.0449 0.0708 0.0413 0.0194 0.0230 0.0351 0.0938 0.0790 0.0384 0.0870
-
A 0.0208 0.0035 0.0120 0.0131 0.0233 0.0064 0.0079 0.0138 0.0117 0.0033 0.0117 0.0521 0.0339 0.0055 0.0097

Table 13 Final result of

Alternative MPM CEA
TOPSIS
Dþ
isi D
isi Priority Rank Dþ
isi D
isi Priority Rank

High-risk baseline 0.1627 0 0 3 0.1915 0 0 3

Low-risk baseline 0.0437 0.1394 0.7615 1 0.0424 0.1734 0.8035 1
Applicant data 0.0638 0.1315 0.6733 2 0.0922 0.1366 0.5971 2

weights obtained from MPM go through the same process
as CEA in order to compute the values of A? and A- (see
Tables 11, 12). Then the distance of the alternatives from
their ideal solutions is measured by Dþ 
isi and Disi in
Table 13. We further compared the rank of the applicant
between fuzzy AHP-TOPSIS from MPM and CEA. We can
clearly see that the ordering of priorities of both methods is
different although they show the same ranking.
In our example, the applicant is ranked second and
remained within the negotiation region, which means that
he/she is considered to be a medium-risk applicant. As
such, it is recommended that the lending institution
enforces additional procedures to scrutinize the eligibility
of the applicant to service the loan. For medium-risk loans,
the lending institution may consider obtaining guarantors
or collaterals from the applicant.
6 Sensitivity analysis
It would remain a major drawback if the reasoning behind
the decision could not be articulated to the loan applicant
(in the case of rejection) by the credit-risk manager. This is
most commonly faced by credit scoring decisions that use
neural networks; despite having a high predictive accuracy
rate, credit-risk managers would still be left to make up
their conclusions about why a loan applicant is rated good
or bad (see [2]). Hence, in this study, we perform

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sensitivity analysis to overcome the lack of explanation
capability in credit evaluation decisions.
There is a strong relationship between the final priority
scores and the changes in criteria weights. Hence, small
changes of the weight may cause major changes to the final
rank. By varying the weight of the main criteria, the
changes in the priority order of the alternatives can be
observed and insights gained. This strategy when done in a
systematic manner is termed as sensitivity analysis. In this
regard, the main criteria weights are individually treated,
when we simulate the weight changes between the values
of 0–100 %. We then observe the changes in TOPSIS
computation and the final rank.
We first explore the ‘‘ideal’’ situation in Figs. 4, 5, 6, 7
and 8, where one of the main criteria weights is fixed to a
value of 1, while the rest are fixed to a value of 0. This

Fig. 4 Sensitivity analysis of

priority scores when weight of
criterion A is decreased by
20 % for every run

Fig. 5 Sensitivity analysis of

priority scores when weight of
criterion B is decreased by 50 %
for every run

Fig. 6 Sensitivity analysis of

priority scores when weight of
criterion C is decreased by 20 %
for every run

Fig. 7 Sensitivity analysis of

priority scores when weight of
criterion D is decreased by
20 % for every run

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Neural Comput & Applic
Fig. 8 Sensitivity analysis of
priority scores when weight of
criterion E is decreased by 50 %
for every run
means that the strength/weakness of the loan applicant will
solely depend on the criterion that is fixed to a value of 1.
In our example, the loan applicant has a higher rank than
the low-risk alternative baseline when emphasis was given
to the main criteria B and E, respectively (see Figs. 5, 8).
On the other hand, he/she would have a lower rank than the
low-risk alternative baseline if emphasis were given to the
main criteria A, C and D, respectively (see Figs. 4, 6, 7).
In the event of a looming housing bubble, weights of main
criteria A, C and D can be adjusted upwards, thus posing a
stricter loan assessment. In our case, our applicant would be
termed as high risk should criteria A, C, D be heavily
weighted. On the other hand, if the lending institution has a
surplus reserve, they may be less conventional and provide a
more lax treatment to the criteria. Our applicant would then
be converted from medium risk to a low risk if criteria A, C
and D have their weights reduced. In addition, any changes
for the weights of the main criterion B would not affect the
final rank of the loan applicant.
The sensitivity of the applicant’s ranking toward chan-
ges in the criteria is tested through varying the weights of
the criteria such that the remaining weights are shared
equally across all other criteria.
In Fig. 4, criterion A is dropped by 20 percent in test 2,
and criteria B, C, D and E absorb this drop by increasing
each weight equally; that is, 5 percent for each of the
remaining criteria. We then observe the rank of our
applicant to the high-risk vs. low-risk baselines. The
applicant is considered to be medium risk until the fifth test
run, when he/she achieves the status of low risk. At this
juncture, criterion A has a weight of 0.33, while criteria B,
C, D and E all have the weight of 0.17. Since reducing the
weight of the applicant’s credit history reduces the risk of
the applicant, it implies that applicants that are new to the
job market may be penalized under a restrictive economy.
In other words, lending institutions may not take the risk
with newly employed individuals that do not have some
form of credit history to their name, such as credit card
billings or student loans.
Figure 5 provides an interesting insight, with criterion B
being reduced 50 percent for every test run. Regardless of
the amount of weight being reduced across the test runs,
the applicant is still considered to be a credit worth
applicant. This also implies that the candidate is strongly
scored on payment history (criterion A) and weakly scored
on length of credit history (criterion B).
As shown in Fig. 6, criterion C exhibits the same trend
as criterion A when subjected to a decrease of 20 percent
per test run. In test 5, the applicant moves from a medium-
risk category to a low-risk category. Beyond test 5, the
applicant is considered to be an ideal candidate for
approval (see Fig. 6).
As shown in Fig. 7, for criterion D, the applicant moves
from medium risk to low risk in test 4. Hence, the applicant
is considered to be an ideal candidate for approval beyond
test 4.
In Fig. 8, for criterion E, the candidate remains an ideal
candidate until the second test run. Reducing criterion E
beyond the second test run would result in an ideal can-
didate being a medium-risk candidate. This implies that
using more types of credit would provide a more favorable
perspective for the lending institutions to judge the credit
worthiness of the applicant.
Overall, varying the main criteria weights will result in
the changes of priority scores belonging to the alternatives.
There are 2 trends that can be observed across Figs. 4, 5, 6,
7 and 8: (1) the changes in priorities led to an intersection
point and (2) the trend is stabilized without an intersection
point (see Fig. 5). The intersection points can be inter-
preted as the point where the rank of the applicant changes.
The changes in priorities and ranks are observed and
recorded in Table 14. The stability of an alternative is said
to be identified by all these changing point values. When
Table 14 Point where alterna-
tive ranking changes
Ranking change point
A \ 0.3277
B [ 0
C \ 0.3125
D \ 0.4096
E \ 0.1342
123

the weight of each main criterion satisfies the constraints
stated in Table 14, the alternative is considered to be
highly stable.
The degree of difficulty for an applicant to get the loan
can be defined as the range of priority between high-risk
baseline and low-risk baseline. When the range of high-risk
and low-risk baseline is larger, the degree of difficulty is
higher. Therefore, more loan applicants fall under the
negotiation region. The range between high-risk baseline
and low-risk baseline reaches its stable stage within the
range of 0.35 and 0.5 (see Figs. 4, 5, 6, 7, 8) where the
alternative is considered to be highly stable. During the
economic recession period, the lending institution can
minimize the range of negotiation region by increasing the
requirements of the high-risk baseline. Thus, our model
considers the risk taken by the lending institution and
provides a means to respond accordingly to the economic
climate.
7 Conclusion and suggestions for future research
In this paper, we formulated a new credit scoring model by
improving the FICO scoring method using the MCDM
methods of AHP and TOPSIS. The decision makers’ sub-
jectivity in the assessment process is taken into account by
incorporating fuzzy sets theory in the model. We termed
the new FICO model as a fuzzy AHP-TOPSIS hybrid, with
the fuzzy AHP aspects being compared between two
methods: CEA and MPM. We also improved the flexibility
of our model such that the decision maker could easily
modify the weights of the criteria under evaluation without
disrupting the effectiveness and flow of the current FICO
model. The robustness of the method allows decision
makers to adapt their own rating system depending on the
economic climate when the assessment is being carried out.
The proposed fuzzy AHP-TOPSIS hybrid model can be
programmed into a software package as a decision support
tool for any lending institution. This could reduce the time
required for a customer’s loan application, and efficiency
as a result of improved credit screening process could
provide cost savings. Lastly, with the aid of our proposed
decision support system, lending institution can spend
more time in value-added activities, such as promoting
ancillary products and services to targeted customers,
rather than being caught in the process of loans approvals.
In the long term, decision support systems may aid in
reducing the risk owing to default payments.
Although we included two types of fuzzy AHP methods
in our model, we place emphasis on MPM for calculating
the weights over CEA. This is because CEA has a setback
that may reduce the least important criterion to a weight of
zero, which subsequently ignores the influence of that
123
Neural Comput & Applic
particular criterion in the total credit score of an applicant.
Also, CEA provides poorer weight dispersion and may
allow few criteria to be of same importance in the final
ranking exercise of the credit scoring model. In addition,
MPM presents a consistency index for the interval judg-
ments which cannot be found in CEA.
Although our example only shows three alternatives
(two risk groups and one applicant), our method can be
extended to incorporate multiple risk groups and appli-
cants. Our method can be largely scaled to account for
trade-offs between applicants, so that the lending institu-
tion can minimize its risk while preventing non-performing
loans in the long term. We would like to point out that our
assessment of using the 80th percentile of bad loans to
establish a high-risk baseline, and the 20th percentile as a
low-risk baseline to be an example. Future assessment
exercises could redefine the categorization of ‘‘high risk’’
and ‘‘low risk’’ depending on the economic climate and the
lending facility’s financial position. A major angle to
pursue further research in credit scoring would be to
automate scenario generation, which was treated procedu-
rally through the sensitivity analysis section in this study.
This calls for those who are in the case-based reasoning
and meta-heuristic optimization (e.g., [8, 25, 32]) to eval-
uate rule construction based on historical data as to predict
future defaults, while accounting for the impact of those
risks on the lending institution’s reserve. In terms of
MCDM, future researchers may perform credit scoring
studies by comparing our results with other MCDM models
such as fuzzy VIKOR, fuzzy ELECTRE [22] and fuzzy
PROMETHEE.
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