INNOVATIVE MACHINE LEARNING APPROACHES TO FOSTER FINANCIAL INCLUSION IN MICROFINANCE

Abstract

This study examines the application of machine learning algorithms to enhance financial inclusion in microfinance, focusing on credit scoring, risk and fraud detection, and customer segmentation. We performed feature engineering and employed models such as Logistic Regression, Decision Trees, Random Forests, Gradient Boosting Machines (XGBoost and LightGBM), Support Vector Machines (SVM), Autoencoders, Isolation Forests, and K-means Clustering. LightGBM achieved the highest accuracy (89.6%) and AUC (0.92) in credit scoring, while Random Forests demonstrated strong performance in both loan approval (86.7% accuracy) and fraud detection (87.6% accuracy, AUC of 0.88). SVM also performed competitively, and unsupervised methods like Autoencoders and Isolation Forests showed potential for anomaly detection but required further refinement.K-means Clustering excelled in customer segmentation with a silhouette score of 0.72, enabling tailored services based on client demographics. Our findings highlight the significant impact of machine learning on improving credit scoring accuracy, reducing fraud risks, and enhancing customer service delivery in microfinance, thereby promoting financial inclusion for underserved populations. Ethical considerations and model interpretability are crucial, particularly for smaller institutions. This study advocates for the broader adoption of machine learning in the microfinance sector.