Credit risk management is a continuous process that lenders must adapt to – Transkredit MD

Kayode Stephen is the managing director of Transkredit Financial Company Limited. In this interview with Ngozi Okpalakunne, he spoke on the current challenge; the factors responsible for the surge in inflation, the steps being taken by the Central Bank of Nigeria, how Nigerians can best manage their financial investments using financial services offered by the company in this moment of economic distress, among other issues. Excerpts:

What is your general perspective on the economic, and in what direction should Nigeria reset its policies?

The Nigerian economy has bedeviled with rising cost of goods and services, following the removal of petrol subsidy and the devaluation of the official exchange rate in 2023. Inflation is expected to remain on the rise albeit slowly in the first half of the year, with moderations expected in the later part of the year. Meanwhile, we anticipate a cautious approach to interest rate hikes by the CBN, in a bid to tame the rising inflation without impacting on economic growth and on the health of the financial system. I believe that tackling insecurity, food security, FX stability, industrialisation, and trade can help spur expected growth in the broad economy, as these areas could help attract FX inflows, non-oil trade earnings, as well as minimise importation.

Considering the current inflation rate of 31.7 percent in February 2024, how can financial institutions like Transkredit adapt their strategies and initiatives to help ease the impact of inflation on their clients and the broader economy?

The surge in inflation, caused by an unprecedented demand for certain goods, supply-chain disruptions, fiscal policies, warring nations, and other factors, is affecting businesses and individuals, including banks and other financial institutions. High inflation rates significantly impact lending and can cause both positive and negative outcomes for customers and financial institutions. Inflation can benefit borrowers because they can pay back the money at a lower rate than the face value, they originally borrowed it for.

How does inflation potentially help Transkredit?

Inflation can be beneficial to TransKredit, especially in financing. When the prices of goods and services are higher, it ultimately means that more people will need credit to purchase both daily and higher price tag items. Since a rise in inflation is rarely ever met with an equivalent raise in wages, most businesses and individuals will experience a pinch in their pocketbooks.

Due to this, lenders now have new customers who need credit and are willing to take on a temporary debt to make ends meet. This puts pressure on banks and other institutions to ensure that their credit risk models can accurately predict the total risk profile of all customers. Higher interest rates often also mean more installments, which can further increase the profit for lenders.

Therefore, times like the current economic environments can potentially be revenue-generating periods for credit lenders like banks. However, this is only as true as the institution’s ability to analyse financial data, credit history, market demand, and other credit risk factors.

How does inflation potentially Hurt Transkredit?

Inflation benefits borrowers and hurts lenders if the loan is taken before inflation spikes. Likewise, an overwhelming wage increase could benefit borrowers over banks and other lending partners compared to inflation.

Suppose wages do increase for borrowers due to high inflation. That could mean fewer installments and less interest as the borrowers might use this extra money to repay their loans sooner. Similarly, the money lenders receive during high inflation has a lower value than the money they originally lent to the borrower — before inflation struck. In this case, it is critical that lenders are careful in managing credit risk and do not overextend themselves with contractual obligations that will lead to a new borrower’s ability to pay owed principal and interest. This would further damage their overall balance sheet and potentially put the lending institution in an unnecessary bind.

Impact of inflation on Credit Risk Management

Over the years, lending institutions have improved their forecasting abilities. However, the economy is still unpredictable, and unprecedented changes can happen anytime. Considering this, credit risk management must be a continuous process that lenders adapt to, swiftly.

Volatility is one of the biggest dangers for lenders during periods of high inflation. Volatility occurs when there is an increase in the dispersion of outcomes for a given variable. Moreover, it is not always possible to know the intensity of the swings, consumer behaviour, and the impact of the global market on the national economy.

Due to this, lenders can face more credit risk during high-inflation periods. Even good borrower candidates can be poor customers with significant financial uncertainty since inflation may negatively impact their financial standing.

For instance, if people lose their jobs or their wages don’t increase, they might be unable to repay their loans. As a result, lenders can end up with more nonperforming loans, decreasing their profitability and fuelling a potential financial crisis.

What assurances does Transkredit offer through its lending schemes to ensure the loyalty of its customers?

This year, we’ve created a number of loyalty programmes to wow our clients. Rewards, discounts, commissions and other exclusive offers will be extended to our devoted clientele as a means of saying “thank you,” drawing in new business, and keeping the old ones around. Our rewards programme offers consumers an incentive for their brand loyalty, which is intended to promote repeat business. On further purchases, we will give discounts on our products and services. Senior citizens, veterans, and students will receive extra attention. Discounts create a situation where Transkredit and the clients both benefit.

We’ll make it simple for clients to use their points for redemption. We will start promoting our incentive programs extensively on all of our channels, in our office, and through email blasts.

We are going to launch a comprehensive referral scheme. There won’t be any doubt in our efforts to spread our boundless method of showing our clients affection. Furthermore, we are developing a loyalty management system that is customised to meet your specific needs.

Customers who use our ATM cards will receive discounts from us in collaboration with other businesses. We will go through and try to apply our customers’ continuous feedback (review). Remember to reply to reviews that customers post, regardless of how positive or negative they may be. This demonstrates that we are aware of what others are saying about us and that we are able to use their criticism to get better. Loyal consumers are those that are actively engaged.

We promise to always be grateful to our customers by routinely repeating a big “Thank You.” Expressing thanks promotes loyalty. We always show empathy for our customers and are very honest with them.

We nearly never forget to honour our clients’ important occasions. We make sure to get in touch with every client and make an effort to participate in their special days and events. As a result, we are now closer to our clients. One of our most reliable currencies to spend on our esteemed customers.

Considering the government’s challenges with FX and currency issues, what strategic changes would you recommend for the government to effectively address these concerns?

The FX volatility problem in Nigeria over the years is majorly driven by two things, insatiable demand for dollars by Nigerians and shrinking FX inflows. According to the NBS, Nigeria only attracted $2.8bn between January and September 2023 ($3.9bn annualised). This is already looking like the worst inflows in the last 10 years. Our market is not currently attractive to foreign investors, instead, we are having more foreign firms divest from Nigeria. Some of the key strategies that I believe that the government can adopt to improve liquidity and improve the local currency include: incentivise foreign direct investments; bridge the arbitrage between the official and the parallel market, and make the process of FX conversion at the official market seamless compared to road-side black market trading.

What may be your advice the Central Bank of Nigeria on the support to the real estate sector and MSMEs?

The CBN needs to be deliberate in identifying key sectors of growth like the real estate sector amongst others to direct credit facilities. Only about 9.3 percent of total private sector credit is allocated to the broad financial industry, the same for trade and general commerce. There is need for the banks to support these growth areas as they offer great room for growth. For example, to develop and bridge the infrastructural deficit in the country, you need the real estate sector to be running at full gear, which also solves housing deficit currently being experienced in many parts of the country. In the same vein, the MSMEs currently account for over 94per cent of all businesses in Nigeria; hence, improved credit allocation in this industry could drive significant growth in the economy.

It appears rate hikes by the CBN haven’t affected inflationary pressure; how would you want them to approach the rising inflation?

Firstly, the rising inflation is driven by the combination of demand pull and cost push inflation. On the demand side, Nigeria’s money supply has surged to unprecedented levels currently above N78.7trn. Also, about 94percent of the total currency in circulation as of December 2023 is outside the banking system. It becomes difficult for monetary policy tools to be effective in taming inflation in a system where almost all the cash in the economy is in the hands of the citizens, or most citizens are unbanked. Hence, in a bid to make monetary policies more effective in taming inflation, the CBN must strive to increase financial inclusion in the country, reduce reliance on cash, which will help aid the mopping of excess liquidity in the economy.

Lending rates for businesses are intense, leading to funding challenges. What innovative solutions does Transkredit propose to solve this and ensure accessible funding for businesses?

Funding is necessary for practically every sector in Nigeria to flourish. We are putting ourselves in a position to appropriately meet this requirement with our creative finance solutions. With product, service, process, market, and social innovations, we are growing our financial flow in terms of volume, value, efficiency, and effectiveness.

Financial knowledge is essential for both people and companies. To help close the financial gap and create a sustainable economy, we have planned financial literacy trainings for several economic sectors.

Through the numerous bureaus and credit registries, we plan to increase the number of credit checks and ratings. We still advise people and businesses who wish to obtain credit to consider their credit history carefully.

Lastly, in an effort to increase borrower traceability, we will make significant investments in technology, such as block chain, to preserve data, authenticate identities, and record transactions.

The global unemployment rate has risen from 5.1 to 5.2 percent. What do you think can be done differently to address this?

Generally, the 5.2 percent unemployment rate was a projection for 2024 considering the level of hardship and eroding purchasing power across most economies, especially emerging markets as well as large layoffs in the tech industry. While I cannot really speak to the global economy and how to improve level of employment, Nigeria and Africa need to prioritise industrialisation through private-public partnerships, which is also a function of FDIs. There is a lot of potential in the manufacturing sector as well as the entire agricultural value chain. If the ease of doing business is appealing, and there are incentives for individuals to set-up businesses and thrive, then employment levels will improve across all sub-sectors of the economy.