A new science of loan recovery and economic development

Micro, Small and Medium Enterprises (MSMEs) are the incubators of innovation and bedrock of employment. Reports indicate there are approximately 37 million of them operating within the Nigerian economy and their contribution to economic growth and job creation is significant. However, many of these smaller businesses struggle to gain access to the capital they need to grow and prosper since they lack traditional collateral such as land and buildings.

Generally, providing credit facilities is one of the major roles of financial institutions. But granting loans will depend on the conviction of the institution that it will be recovered in due time. Loan making is a risky business with chances that the funds may not even be recovered. So financial institutions will always like to keep the risk low and manageable.

Credit risk is the oldest form of risk in financial markets. If we define credit as the expectation of a sum of money within some limited time, then credit risk is the chance that this expectation will not be met. Credit risk is as old as lending itself, dating back as far as 1800 BC.

It is to keep credit risk manageable that financial institutions demand for collateral. Something tangible that can be sold to recover the funds loaned in the case of default. But this model also shuts out millions of SMEs competent to handle loans and leaves the economy with a negative impact with attendant multiplier effects.

The idea behind loans is to ensure the effective management of the money within an economy for economic development. Usually in the economy there are surplus and deficient units. Some people are in possession of more money than they need while others with useful economic ideas may not have the funds to prosecute their ideas. The financial institutions as custodians of funds therefore play an intermediary role by effectively managing the surplus in the economy.

The primary idea is to ensure that people with profitable economic ideas and the right capacity can have access to the funds they need. This means that the core idea is not really that the funds were returned at the agreed time. It is that the intent for which it was fulfilled. If a customer who took a loan borrows elsewhere to return the loan, the loan was not successful because there is no effective positive impact in the economy.

A life unexamined is not worth living. The power behind the various industrial revolutions from the first to where we are today is challenging popular business models. You will notice that whenever we challenge assumptions, we discover new possibilities and drive our life to a whole new level. The world has always moved forward because of people who challenge assumptions.

The question is, do we think a market worth about $245 246 000 is worth fighting for? Do we think it will affect our economy positively and make us wealthier corporately and otherwise? Can it make us more globally competitive if we review our position on credit access to Nigeria’s MSMSE?

In May 2016, the CBN launched a modern online collateral registry with the support of the World Bank to allow low-income people and SMEs to secure loans against movable assets such as machinery, livestock, and inventory.

“This is a major achievement to help improve access to finance for MSMEs and more broadly the financial inclusion agenda in Nigeria,” said Sebastian Molineus, Director of the World Bank Group’s Finance and Markets Global Practice.

When that bill is passed more MSMSE can have more access to credit. That’s a great move, yet forward thinking companies must move beyond that. An effective executive moves the competition, he controls the market by possessing areas not contended by his competitors. So irrespective of the Economic Growth and Recovery Plan, financial institutions who wants to dominate the market will need to do more.

First Bank of Nigeria is already thinking this way and that’s the commendable reason why they grant unsecured loans to SMEs who passes their psychometric test and presents a good business plan. That’s also why they organize seminars and workshops for this group of entrepreneurs.

Being loan service oriented is a predisposition to making loans accessible to those who genuinely need it and there are four ways to determine a customer’s loan capacity. Any customer who possesses this capacity will most likely return a loan whether or not it is secured against a collateral.

There are four metrics which can be used to access the loan capacity of a customer and they are:

• Business culture

The business culture of an individual defines his/her attitude and response to business issues. This is the conviction upon which decisions are based

• Business character

Character is important. Anybody with strong value orientation will most likely use a loan for the intended purpose and of course return it.

• Business knowledge

As a credit officer, you want to draw the line between fantasies and competence. You want to know the intuitive and cognitive capacity of the customer requesting for a loan regarding the business. You want a man who is skilled in his craft and possess the competencies required to be successful.

• Understanding of the macroeconomic landscape

You can trust someone who understands the interplay and interaction of the macroeconomic indicators and their effects on his business. You don’t want someone who will come back with excuses and you don’t want the inconveniences of looking for who will buy a collateral asset. You want results only.

How to test for loan capacity

But how do you test for these competencies and for those deficient in some areas how can you help them develop them? This is the key for dominating the market.

A psychometric examination, games and simulations are reliable means of determining capacity and also openness and willingness. This will be particularly helpful for those who will be recommended for trainings to help them build the capacity they require.

 

Brian Reuben