1 College of Business Administration, Department of Accounting, Maharishi International University, Fairfield, Iowa, USA.
2 Kogod School of Business, American University, Washington DC, USA.
Review Article
World Journal of Advanced Research and Reviews, 2024, 23(02), 2019–2027
Received on 09 July 2024; revised on 20 August 2024; accepted on 23 August 2024
Credit risk assessment and fraud detection are critical functions in the financial industry, necessary for ensuring the stability and integrity of financial institutions. Traditional approaches often struggle to accurately assess risk and detect fraudulent activities in a timely manner. However, the rise of machine learning has introduced powerful tools that leverage large datasets and advanced algorithms to improve these processes. This research paper investigates the application of machine learning techniques in credit risk assessment and fraud detection within financial transactions.
The paper begins by emphasizing the importance of accurate risk assessment and fraud detection in the financial sector and introduces machine learning as a solution to the limitations of traditional methods. A thorough literature review examines existing methodologies, algorithms, and trends, highlighting the advancements in this field. The discussion covers data acquisition and preprocessing techniques, underscoring the necessity of clean and relevant data for effective model training. Additionally, feature engineering strategies are explored to extract valuable insights from financial transaction data, enhancing the predictive power of machine learning models.
The research analyzes various machine learning algorithms, such as logistic regression, decision trees, random forests, support vector machines, and neural networks, as well as ensemble methods. Model evaluation metrics, including accuracy, precision, recall, and ROC-AUC, are employed to assess the performance of these algorithms. The paper presents case studies and experimental results to demonstrate the practical application of machine learning models in real-world scenarios, showcasing their effectiveness in improving credit risk assessment and fraud detection.
Furthermore, the research explores challenges such as imbalanced datasets, model interpretability, and regulatory compliance, offering insights into potential solutions and future research directions. The integration of behavioral finance, Bayesian networks, and optimization methods is also discussed, highlighting how these modern approaches, combined with big data analytics, can enhance predictive accuracy and decision reliability.
In conclusion, this research underscores the transformative potential of machine learning in credit risk assessment and fraud detection within financial transactions. By adopting advanced algorithms and data-driven approaches, financial institutions can significantly improve their risk management strategies, mitigate potential risks, and protect against fraudulent activities. This ultimately contributes to a more secure and resilient financial ecosystem, enabling institutions to maintain a competitive edge in an ever-evolving market.
Credit Risk Assessment; Financial Decision-Making; Machine Learning; Bayesian Networks; Big Data Analytics; Financial Stability
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Jennifer Muhindo, Kevin Mukasa, Doreen Kitakufe and Jimmy Kato. Advancing credit risk assessment and financial decision-making: Integrating modern techniques and insights. World Journal of Advanced Research and Reviews, 2024, 23(2), 2019-2027. Article DOI: https://doi.org/10.30574/wjarr.2024.23.2.2565