Development of a Character Evaluation Model in Risk Management for Microfinance in Individuals of Small Medium Enterprise

Abstract : This study develops a character evaluation model for PT.XYZ’s customers in microfinance credit risk management. Integrating psychological and industrial engineering approaches, this research assesses customer personality using the International Personality Item Pool Big-Five Factor Marker-25 (IPIP BFM-25). The five personality dimensions, which are Openness, Conscientiousness, Extraversion, Agreeableness, and Neuroticism, are assessed to classify customers according to their credit risk level. Decision Tree is employed for the classification of customers into risk groups, and the latter are represented graphically with Traffic Light Analysis (TLA) color codes green (low risk), yellow (medium risk), and red (high risk). Research reveals that the predictors of the classification of credit risk are most powerful for conscientiousness and neuroticism, with more conscientiousness equating to less risk and more neuroticism equating to more risk. Most of the customers are medium-risk, and more assessment is necessary prior to granting credit. The study reveals advantages of applying tests of psychology for making financial judgments, giving a better method to financial institutions than traditional financial standards for assessing creditworthiness. The approach enhances risk forecasting quality, assists with the minimization of non-performing.