Structural credit risk modeling using Merton model and its default probability: A case study of commercial banks in Namibia
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Date
2024
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Publisher
University of Namibia
Abstract
This research work presents a comprehensive study on commercial banks in Namibia, focusing on
three main banks over the period from December 2011 to December 2021. The primary objective
is to assess the credit risk position in the light of the Merton Structural credit Risk Model. The
financial statements of these banks are analysed, specifically the balance sheets and statements of
income, to extract relevant information for the computation of various ratios. The ratios examined
include the working capital, total assets, retained earnings before interests and taxes ratio, and sales
over total assets ratio. These ratios serve as risk factors for both the Merton Model and within the
logit model framework. The Merton approach is utilized to estimate the default risk for the three
commercial banks in Namibia, and the accuracy of these estimates is assessed using a range of
different techniques. The efficiency of the estimates is assessed by testing the extent to which the
predictive power of the estimates could be improved by incorporating other information publicly
available in company accounts. The event of default is determined by the market value of the
bank’s assets in conjunction with the liability structure of the bank. When the value of the assets
falls below a certain default point, the firm is considered to default. Through this research, valuable
insights into the financial performance and default risk of the commercial banks in Namibia are
gained, contributing to a deeper understanding of the banking sector in the country
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Science in Applied Mathematics
Keywords
Credit risk, Financial statements, Merton structural Model, Logit model, Default risk, Namibia, University of Namibia