Abstract:
Credit risk is a major concern in the banking and nance sector and has been one of the reasons
for credit market imperfections across the globe. Moral hazard in credit markets, causes a
major impact and a ects the determination of interest rates in the banking sector. This study
set out to ascertain the probability of defaults of unsecured assets and secured assets. The
study calculates the probability of occurrence of the behavior of borrowers and nd moral hazard
e ects on individual credit risk system. Essentially, the study sought to nd how micro nance
institutions are a ected when customers default on their payments. The study assessed the risk
associated with micro nance business when the asset follows the Ornstein- Uhlenbeck process.
Due to the fact that risks cannot be assessed using numerical data because we are dealing with
human behaviors, we assumed that they invest their money in secured and unsecured assets. The
study found that the impact of credit default was lesser with secured assets than it was with
the unsecured assets and therefore recommend that micro nance institutions give credits with
collateral more than the ones without collateral.