Abstract for: Lending to Small and Medium Enterprises: A Novel Approach to Credit Portfolio Management

There is a vast unmet demand for credit from SMEs in emerging markets, while banks need novel ways of approaching their risk strategies. These inspired a pilot project within a major commercial bank. The goal of the project is to investigate in what ways exploratory system dynamics (SD) could support lending decisions and monitoring of a SME credit portfolio. This paper reports on this project as a practical application of SD modeling for a bank. The first stage of the project consists of `quick and dirty’ modeling and analysis intended to illustrate the possibilities of this approach. A generic model of a company with debts was created to explore plausible dynamics given the assumptions about how the company’s environment may affect its performance. The 2nd and 3rd stage – modeling of actual companies and aggregating them into a portfolio for stress testing – is work in progress.