From time to time, issues arise that can only be clearly and convincingly articulated by qualified industry experts.
Financial Sector Spotlight with Omen Muza
In this instalment, I have invited a guest columnist, Alan Goodrich, to shed light on how the few who default on their debt obligations spoil it for the majority who don’t.
He highlights how credit providers can leverage on credit scores to distinguish between these two groups and optimise both risk and returns:
ZimAsset is a blueprint that provides the opportunity for us to create an enabling environment for the sustainable economic empowerment and social transformation of the people of Zimbabwe.
But how can it be implemented effectively when it’s up against a financial services sector that struggles to recognise its shortcomings or to identify where its big opportunities really are, or both?
According to various sources, close to 75% of Zimbabwe’s population is under 35 years old, i.e, those considered as “youths”.
Unfortunately, the vast majority of this age group is yet to benefit directly from the fast-track land reform programme, so collateral is likely to remain an issue in the short-to-medium-term for a market segment that represents the majority and the future of our economy.
We are told that only 24% of the adult population is banked, only 6% of all bank lending is directed to Small and Medium Enterprises (SMEs), only 14% of SME owners are banked, and yet some 85% of our population is either running an SME or employed by an SME.
Most providers of credit will only lend to those with salary slips and with a stop-order in place, which represents only about 11% of the population.
And yet, the Reserve Bank of Zimbabwe (RBZ) reports that Non-Performing Loan (NPL) rates are running at 18,5% (with unofficial reports putting this figure at close to 70% for some banks).
Credit providers are lending to this small minority of the market, presumably because they consider it the more manageable or lower risk group.
However, the performance of the loans clearly would suggest otherwise.
The Financial Clearing Bureau (FCB) — a leading credit reference bureau in Zimbabwe — recently released figures showing that it has information on over 2,24 million Zimbabweans and over 140 000 businesses, representing over 35% of the adult population.
The same statistics reveal that over 1,2 million Zimbabweans have benefited from having a positive financial identity created or confirmed by FCB so far in 2014, with less than 10% of the total searches resulting in a negative result.
Indeed, FCB recently analysed the bad debt portfolio of a large retail lender and found that around 25% of those responsible for bad debts already had a negative history at FCB, i.e, were serial defaulters.
In September 2013, the RBZ gave its consent to FCB to pilot credit scoring and resultantly, some 50 000 individuals and over 1 000 companies are now being scored each month.
Elsewhere in the market, another large retail lender, recognising the huge potential opportunity of the informally employed segment (if it gets it right), has embarked on an initiative to provide credit to borrowers without salary slips.
The risk assessment is done using scoring techniques — proven elsewhere in Africa and other emerging or developing markets — which indicate a subject’s willingness to repay.
By all accounts — and it is early days yet — the NPL rate on the non-salary-slip portfolio is currently actually lower than the salary-slip portfolio.
If economic empowerment of our population is going to be achieved, then credit providers in Zimbabwe need to start embracing scores — whether from FCB or any other reliable source — as a valuable, alternative asset to the traditional fall-back option of collateral as insurance.
Most individuals and SMEs offer the same response to the question of what is most important to them when accessing finance.
First is the decision turnaround time, second is the amount of collateral, and third is the interest rate.
The priorities of the borrower are actually perfectly oppositely aligned to those of the banker and suited to risk-based pricing. For example, a trader at Mbare market would be happy to pay 10% interest per day, if an instant decision and disbursement are possible.
The greater cost to the trader is in lost opportunity. If the trader can buy double his usual volume at the start of the day and resell it before the end of the day with 100% mark-up, then 10% interest on half of his daily working capital is acceptable compared to the additional profit and, to the banker, reflects the risk being taken.
Managed well, this kind of low-value, high-volume unsecured lending has proven to be incredibly profitable for credit providers, while stimulating economic empowerment, growth and financial inclusion.
The process of acceptance must be highly automated and at very low cost.
Decisions need to be made based on referencing a score, while disbursement of funds and repayments are made directly to and from the mobile wallet of the applicant.
If the traders are made aware of and agree to the fact that if they default, then they will be listed in the credit bureau and therefore will be unable to open an account or obtain credit from any other credit provider, then there is a strong incentive to pay back on time.
By adopting a cycle of portfolio management whereby bad traders are immediately dropped and good traders get to borrow more, a quality portfolio with low default rates and very high returns is quickly achieved.
Credit providers need to think outside their traditional markets — which are not performing very well in any case — and use the assets at their disposal such as credit bureaus and scores to tap into the real and great Zimbabwean opportunity.
Alan Goodrich is the Managing Director of the Financial Clearing Bureau and can be contacted on email@example.com