Risk Management in Using Artificial Neural Networks

The article examines risks faced by banks during their lending processes and the mechanisms for managing these risks, utilizing modern statistical methods. Specifically, the study focused on the artificial neural network model as a technique of artificial intelligence that has successfully applied various classifications and discrimination tasks among institutions. A random sample of 46 institutions obtained loans from the branches of the National Bank of Algeria (BNA), Local Development Bank (BDL), Popular Credit of Algeria (CPA), and Agricultural and Rural Development Bank (BADR) in El Bayadh province, Algeria. Each of these institutions was characterized by 14 measurable variables with numerical values derived from the financial statements (balance sheets and income statements), as well as 3 qualitative non-accounting variables extracted from the loan applicants’ files (age of the institution, sector of activity (services/productive), institution status (viable/struggling). The sample of these 46 institutions was initially divided into two groups: 64% comprised financially stable institutions, and the other 36% were struggling institutions. The research checks whether the risk assessment of each of these 46 institutions using artificial neural networks will identify their institution status (viable/struggling) in the same way as it was in the base sample. The training phase recorded a prediction error rate of 0%, and the network testing phase misclassification rate was 5.6%. The overall correct classification rate for the multilayer artificial neural network was 92.9%, with a total error rate of 7.1%. The contribution rate of the non-accounting variable “sector of activity” was 100%, and the variable “age of the institution” was 94.4%. Other variables had minor percentages, underscoring the importance of qualitative variables in the classification process. Thus, the study proved that artificial neural network model is an effective model for distinguishing between viable and struggling institutions, significantly contributing to banking risk management.