The Challenges of accessing Credit and Lending in an ailing economy

 

The Challenges of accessing Credit and Lending in an ailing economy

This space is hosted by ThaMVP

Space Summary

In this Twitter space, the focus was on the operations of a Development Agency, emphasizing proactive strategies to positively impact the economy. Discussions highlighted the importance of targeted approaches, hands-on monitoring, and overcoming implementation challenges. Speakers and participants engaged in constructive dialogue aimed at enhancing the effectiveness of Development Agencies in driving economic growth and development. Topics included credit, lending, economy, interest rates, borrowers, and financial institutions.

Questions

Q: How can DFIs better influence the economy beyond monetary returns?
A: DFIs can influence the economy through strategic conditions, targeted benefits, and impactful operational strategies that go beyond mere financial transactions.

Q: Why is hands-on monitoring crucial for DFIs’ effectiveness?
A: Hands-on monitoring allows DFIs to ensure the real impact of their operations, maintain accountability, and address any implementation challenges effectively.

Q: What challenges do DFIs face in implementing impactful strategies?
A: DFIs face challenges such as aligning strategies with real economic needs, ensuring targeted benefits, and overcoming implementation hurdles to achieve meaningful impact.

Q: How can pricing strategies be optimized for the benefit of end-users?
A: Pricing strategies can be optimized by focusing on benefiting specific audiences, avoiding punitive pricing, and ensuring affordability and accessibility for end-users.

Q: What role does targeted audience benefit play in DFI operations?
A: Targeted audience benefit ensures that DFIs create meaningful impact by directing their efforts towards specific groups or sectors, maximizing positive outcomes.

Highlights

Time: 00:06:03
Introduction to Credit Assessment Challenges, Overview of the challenges faced by financial institutions in assessing creditworthiness during economic downturns.

Time: 00:19:17
Exploring Opportunities in Challenges, Discussion on how challenges can lead to opportunities for innovation and improvement in lending practices.

Time: 00:30:55
Significance of Trust in Lending, Insights into the crucial role of trust between lenders and borrowers, especially in turbulent economic times.

Time: 00:42:55
Emphasis on Long-Term Planning, Importance of long-term, end-to-end planning for effective risk management instead of short-sighted solutions.

Time: 00:49:53
Understanding Risk-Based Pricing, Introduction and explanation of risk-based pricing as a method to manage and mitigate financial risks.

Time: 00:57:35
Role of Advisory Services, Discussion on how enhancing advisory services can help businesses navigate economic challenges and reduce risks for lenders.

Time: 01:20:46
Challenges in Capital Allocation, Highlighting the difficulties of balancing capital allocation between high-value transactions and ensuring cash flow for loan repayment.

Time: 01:57:56
Lending Opportunities Post-Economic Recovery, Exploration of unique lending opportunities that arise during the post-economic recovery period and the need for strategic management.

Time: 02:03:14
Closing Remarks and Gratitude, Summary of key points discussed in the session and expression of gratitude to participants and speakers.

Key Takeaways

• Focusing on influencing the economy strategically rather than just financially.
• Advocating for benefitting specific audiences and avoiding punitive pricing.
• Ensuring effective impact of Development Financial Institutions (DFIs) on the real economy.
• Highlighting the significance of hands-on monitoring and engaging with end-users.
• Acknowledging the challenges in implementing impactful strategies in the sector.

Behind the Mic

Ladies and gentlemen, good morning and welcome to yet another enlightening edition of our weekly Friday Itas sessions. We are in for an informative session today. My name is Ralph Adesanya. I will be your anchor for the session today. We have guests from the CBN, Nigeria Mortgage Refinance Company, Renaissance, and, of course, some of our internal speakers too. The only part of what we do now is the frequently asked questions that we treat every week. This week, we have a couple of questions. It’s very interesting to know that our clients are actually following up on weekly conversations. We will also be teming up this session from our last week’s conversation on credit risk management in lending. And the essence of this, basically, is to actualize and implement FIs in our risk management framework, especially in today’s dynamic world. We’ll be having our keynote speaker, who is the MD of Trankrite, Dr. Nkiru Arinze, who needs no further introduction. Thank you very much for joining us. Just to set the tone for this conversation, Trankrite, in partnership with NGX Regulation Limited and the Nigerian Exchange, would champion driving this conversation. And this is because of our belief that financial institutions have a core role to play in driving Nigeria’s economic growth and realizing Vision 2030. Just to give you more clarity, our roadmap for the conversation today will begin with Dr. Nkiru’s remarks, followed by our keynote addresses, and then we’ll take some questions from our guests. As you all know, the COVID-19 pandemic has thrown a spotlight on the critical importance of financing in achieving any type of lifetime or business plan. We, as humans, are vulnerable, and finance is required as a buffer. Having said that, credit risk management has become more pertinent than ever. The reason is simple. With quite a number of organizations going down south within the short period of lockdown globally, banks and other financial institutions have no option but to position themselves and build a strategic resilience framework. I will now quickly hand over to Dr. Nkiru for her keynote. Over to you, ma’am. Thank you. Thank you, everyone, for joining this discussion. I think from my own perspective, I would just like to make my remarks in about 10 minutes. I would say in our climb in Nigeria, credit risk management is of paramount importance. And that is because the macroeconomic environment can actually be a prime determinant as it speaks directly into credit risk of the borrowing community. This is also true when we look at credit risk. When we look at the wider financial infrastructure, you have to assess the probability that the borrowers are able to fulfill the financial obligations timeously. So what happens in essence is that the credit markets and policy responses are intertwining. And that is why the Central Bank of Nigeria has in place policies like I think of the loan-to-deposit ratio, or framework around new interest rates, and also guidelines regarding credit risk management. These form the back bone and must be embedded in the overall business strategies of any financial institution. So much so that they are able to align not just with the expectations of the regulatory bodies but also with that of the credit market itself. Moreover, credit risk can be dynamic. Sometimes they come unexpectedly. I like to draw from economic disruptions. Like in 2008, when we had the last financial crisis, the ability of lenders to extend credits worsened. In fact, access to credit for individuals, let alone businesses, became difficult. This unexpected event brought forth cracks within the system. Fast forward to 2020, the COVID-19 pandemic again presented unique challenges. It was an unpredictable domino effect on the global economy. It’s worsened the credit health of entities that were already weak. In addition, there was an extensive government intervention. So essentially, you want to ask yourself the question, how can financial institutions better position themselves in the post-pandemic economy? Undoubtedly, the requirement to reassess the credit risk landscape that involves stress testing is more central than before. And when we speak of the Nigerian economy, we must understand the importance of diversification. Because of the heavy reliance on oil revenues, the associated volatility can affect the financial stability of entities, therefore impacting on credit. Equally important is the policy of debt forbearance which was critical to the swift recovery of credit markets during the pandemic. We must recognize that tailored solutions and strategies must be in place to mitigate against systemic risk. So I would like to sum up by repeating, especially to lending institutions that a robust credit risk management system is paramount. This doesn’t necessarily translate to an overly conservative lending approach. On the contrary, what it means is ensuring there is sufficient internal risk capacity and the right tools for efficient monitoring. You must build resilience, especially in light of the increasing vulnerability to economic shocks. Also, my advice to the authorities, especially the central bank and other regulators, is to continuously reevaluate the regulatory framework to ensure it aligns with the evolving credit risk landscape. So thank you for your time and attention, and thank you, Ralph. Thank you so much, Dr. Nkiru. In order not to waste too much time, I need to bring on the next speaker, Olugbenga Agbaje. Over to you. Good morning, everyone, and thanks for joining us today. Most points have already been captured from the previous speaker. However, I would like to emphasize something. Credit risk management is undoubtedly a significant part of the financial institution’s core structure and strategy in any economy. Dr. Nkiru rightly pointed out the relevance in today’s financial structure. But let’s explore further its implications on the entire financial value chain. In essence, credit risk not only impacts the lenders but the entire economy. From the supply chain to consumption patterns, it affects macroeconomic parameters. For instance, if you tour the financial system of strong economies, you’d notice the level of credit intricacies. The higher the efficiency in managing credit risk, the higher the probability of financial growth and development. Hence, financial institutions need excellent evaluation and management tactics to mitigate these risks. Undoubtedly, this involves key frameworks in place in areas like regular audits, ensuring robust credit history evaluation before extending credits to borrowers, robust risk models, and best practices for reporting. But let’s understand this better using data points. For the Nigerian economy, delinquency and non-performing loans, NPL ratios, are high as well as the associated recovery risks. This makes credit extension tricky. Data from the CBN disclosed that the NPL ratio for the Nigerian financial sector was around 6.3% in 2020. This is significantly high compared to the international threshold of 5%. Here is the point. The rate of defaults acts as a deterrent to financial institutions in extending credits. Secondly, when we broke down data, we discovered that some sectors had higher default rates than others. For instance, sectors like oil and gas, manufacturing, and generalized trade witnessed higher levels of NPLs. This presents concentrations risks, which must be managed effectively. Hence, institutions must deep-dive into sector risk assessments before lending, something we thoroughly stress. Furthermore, there’s an element of economic cyclicality and how it impacts credit risks. During economic downturns, institutions face higher risks. Therefore, a counter-cyclical buffer system is vital, where higher provisions are made during boom periods to mitigate downturn risks. Additionally, the real economy interplay must be explored where banks must lend to sectors that spur growth in both long and short terms. This could involve reinforcing credits to MSMEs, ensuring their sustainability, thereby diversifying income structures away from sole reliance on oil and heavily concentrated sectors. Policies like the Anchor Borrowers’ Programme and others are good strides, but banks must ensure they align with their internal credit risk modulating approaches. Lastly, the borders of technology must be utilized for credit risk assessment. For instance, Fintech that utilizes AI and big data analytics aids in predictive modeling of risk procurement thereby improving decisions. The adoption of advanced credit risk systems cannot be overstressed. So in sum, financial institutions have significant roles, but a balanced internal and external framework must be adopted. Again, I’d like to thank everyone for joining the session. Thank you. And over to you, Ralph. Thank you so much, Mr. Olugbenga. Very insightful analysis and so down-to-earth. Our next speaker is Juliet Dike. Thanks, Ralph. Good morning, everyone. It’s a pleasure to be in a forum where we engage in thought-provoking conversations about moving our nation forward. The angle I want to approach is credit risk management from a banking perspective, particularly as it pertains to our economy. Engaging in effective credit risk management considers the impact on the bottom line of financial institutions. Unquestionably, credit risk remains a primary risk in the banking landscape. But more importantly, there needs to be a shift in perspectives. Traditionally, banks have been more collateral-based in their lending. But globally, the narrative is moving towards being more cash flow based. This change essentially means evaluating a potential borrower’s ability to generate cash flow to meet their debt obligations more than solely relying on the collateral provided. Here’s the point. Although not dismissing collateralized lending, it requires a subtle balance with cash flow-based. Especially for sectors like small and medium enterprises (SMEs), this approach is critical. Lending to SMEs, which form part of the economy’s backbone, often requires their cash flow evaluation rather than heavy collateral demand resulting in actual growth stimulation. Thus, it must be embedded as a practice going forward. Contingently, credit risk models are essentially predicting future risks using historical data. However, given the financial disruptions experienced recently, relying solely on historical patterns may be misleading. This points to the need for dynamic monitoring models that accommodate realtime market changes. So dynamic management constituted from current insights and market data is ongoing, thereby ensuring alignment. Moreover, there’s a need for detailed sector-specific credit risk assessments. Understanding the unique risks of each sector helps produce targeted lending strategies, balancing risks optimally. Let me give you an example. We could ascribe higher risks to agricultural loans but slice further when evaluating a subset within agriculture, like processing or raw production. This level of assessment ensures a nuanced understanding of each segment’s specific risks. Next, robust credit risk management aligns closely with regulatory frameworks. Continuous assessment and collaboration with regulatory bodies ensure consistency and adherence to standards. In Nigeria, for instance, the CBN’s guidelines on credit risk governance is quite clear, outlining expected practices. Thus, flawless synchronization between internal bank policies and regulator expectations cannot be overemphasized. A noteworthy point: credit scoring and rating systems must be adopted comprehensively. In more developed financial systems, sophisticated credit scoring forms the backbone of lending decisions. In ours, integrating standardized credit reporting systems means adopting best-in-class practices where credit scores reflect true credit behavior. Finally, let me touch on emerging financial technology, Fintech, as a critical driving force. Fintech’s embedded credit scoring, AI, data analytics, and machine learning models offer enhanced accuracy in predicting credit risks. Thus, institutions must assimilate this technology within their existing framework rigorously. Altogether, credit risk management in our banking system must transition into a balanced, forward-looking strategy encompassed with current, sectorial, regulatory, and technological dynamism. Thank you for your attention. Over to you, Ralph. Alright, thank you very much, Juliet. Very insightful. Okay everyone, at this juncture, I’ll introduce Tope Tokan. He’s going to talk about the intersection of credit risk and regulatory compliance. Over to you. Good day everyone. Thanks, Ralph. Credit risk management is a broad framework governing financial decisions. In considering regulations, it’s essential to understand that regulator expectations continuously evolve to accommodate financial system changes. In our context, the legislative landscape profoundly impacts credit risk outcomes. Generally, regulatory compliance is akin to navigating the regulatory ecosystem ensuring safe lending processes devoid of systemic risks. Regulatory frameworks like the Basel Committee on Banking Supervision’s guidelines underscore capital adequacy, stress testing, and liquidity buffers. Following suit, local regulators like CBN integrate similar constructs within our system. However, they tailor approach contextually. A critical takeaway is stress testing and scenario planning. Building scenarios under different economic circumstances aid financial institutions to visualize potential impacts and preemptively align segments of their credit risk models. Stress testing diverse portfolios under varied economic stressors pegs and calibrates the institutions against shocks. Another crucial compliance angle revolves around reporting standards. Effective risk reporting ensures the dynamics of changing market conditions. Institutions incorporate comprehensive risk indices to determine forefront lending decisions, maintaining comprehensive data pools aligned with standards. Furthermore, proportional risk management incentives are necessary. Higher risk-based capital for businesses should be accounted, ensuring credit exposure isn’t diluted. Ensuring proportionate capital reserves help mitigate excessive leverage, balancing systemic risks. Speaking of regulatory updates, the periodic alignment between financial institutions and CBN guidelines align credit risk activities with evolving legislative changes. Compliance requirements often involve dynamic recalibration within risk models to meet updates issued by the central authority. Another important factor is APRA (Application Process Risk Assessments) in the financial institutions to evaluate inherent operational risks. Proper application processes, from initial submission to sanctions, ensure residual risk assessments. Summarily, credit risk management must embody dual relationships, not only institutionally internal but largely regulatory. Keeping abreast with updated standards promotes alignment and systematic risk avoidance robustly. In conclusion, financial institutions adhering to stringent regulatory compliance means exceeding base thresholds essentially guaranteeing resilient credit risk systems. Thank you. Over to you Ralph. Thank you very much, Tope. That’s been so enlightening. We’ve now come to the last guest speaker, Mr. Papikay, to identify industry pain points and provide practical recommendations. Over to you. Good day everyone. Pleased to be here. Having followed up, I understand our conversations revolve deeply around the themes stressing our financial institution’s mandates, credit risk management tipping over into economic healthiness. Highlighting certain pain points would accentuate definitive solutions. For instance, monitoring and loan administration when driven remotely invite compliance and monitoring lapses. Practically, physical field monitoring interventions enhance accurate risk assessment. Secondly, adequate client outreach education is potent. Often clients misunderstand credit offerings, leading to poor credit health. Financial literacy programs build client’s understanding, ensuring informed lending decisions. Moreover, industry’s profit chasing attitudes may sometimes skew appropriate credit risk postulations. It’s crucial integrating quantitative and qualitative measures in risk assessments to ensure balanced approaches. On regulatory policies, intervention policies address exigent economic scenarios. However, they must synthesise longer-term risk mitigation strategies. Regular feedback loops originating from active banks provide for responsive policy making decisions. Practically, proper structuring of credit extends emphasizes cash flow projections, ensuring balanced checks and lending conservatively. Further, sector specificities should be aggregately identified. Lending patterns focusing unique sector attributes aid segment lending accurately reducing misallocation. Implementation evaluation against developed economies unveils midway realization gaps—actualization is paramount. Finally, technology promising advanced credit solutions ensures streamlined credit processes, real-time monitoring, predictive analysis optimizing risk dynamics. Therefore, industry players systematically incorporating tactical recalibrations must remain actively responsive in structuring viable credit solutions. Summarily, embedding risk comprehension paralleled with proactive monitoring forms sustainable credit risk management. Thank you very much. Over to you Ralph. Alright then, ladies and gentlemen, at this juncture we’ve come to the tail end of the program. Thank you very much, Dr. Nkiru, Juliet, Olugbena, Tope, and Papikay for your contributions today. Okay, um, we’ll quickly look at some of the questions that came from our audiences. So let me read from my screen. The first question: What are the ways banks can implement advanced credit risk assessment techniques effectively? I’ll direct that to Mr. Tope. Alright, thanks for the question. Effective implementation of advanced risk techniques starts from understanding emerging trends. Adopting digital analytical tools to visualize credit data presents enhanced accuracy. Modelling predictive analytics aids anticipating sector-specific risks bolstering lending confidence. Hence, advanced techniques housed under responsive frameworks align risk assessments systematically. Thank you for the response. Next question, how can banks’ risk frameworks accommodate unpredictable economic shocks? Juliet, that’s for you. Great question. Stress testing across portfolios mirrors realistic economic conditions. Building diversified sector allocations cushions economic shocks effectively. Nextena certified reserves assure lending confidence during downturns. Essentially, continuous assessments amplify risk adaptability enhancing forward strategies. Alright, moving on, another question here: How can Fintech impact lending decisions positively? I’ll direct that to Tope. Thanks. Fintech integrates credit scoring alleviates lending portfolios dynamically elevating credit worthiness. AI predictive models leverage large data volumes enhancing decisions quantitively accurately. Improved assessment speeds leverageable Fintech increases lending efficiency. Thank you very much. Okay, I’m mindful of the time. Uh, this next question is for everyone. How crucial operative monitoring frameworks enhance credit risk management? Quick thoughts from each. Juliet? Undoubtedly vital. Real-time monitoring feeds precise credit profiles ensuring accurate proactivity within lending institution parameters. Thank you. Olugbenga? Continuous enhancements fortify forecasting reliability ensuring institution guided metrics correspond real-time horizons. Additionally, I’ll emphasize leveraging technology to supplement current manual checks for enhanced accuracy. Thank you everyone. Uh, Papikay, your thoughts please? 1 minute. Okay, let me just quickly say this. So what I will say is that DFI need to do more. I mean, they should not just be particular about seeing their money returning back to them. They need to give condition that will influence and impact the economy. I mean, if you want it to be things that is targeted to Msmevere, let it be so, and make sure that in the monitoring and reporting it is actually not Sakam and Jay report they are giving you. I mean, let the money that the audience that you targeted, let them be the recipient. If the rate that you are giving them, plus their own markup should not be punitive, the margin should not be astronomical in nature to the extent that the end users will not benefit. Because the ultimate target of the DFIs mandate is that they should impact the real economy. So they should make sure that they get on the ground with their monitoring hands on monitoring and not paper armrest monitoring reporting wise, they should get to the field and interact with the end users so that these ZFIs and the MMB will not be just taking advantage of the funds they are getting cheaply. That’s what I will say. Thank you very much everyone. Ok, alright. I just want to say thank you all for your contributions. Uh, without taking much of your time, I really want to just stress what my colleagues have said earlier. Number one, each institution should build a robust credit risk frame work, because the real implementation aspect has always been the issue. So on this note, I want to say thank you to everyone that has come out of their busy, you know, instead of us, to preparing for tomorrow. Yeah, I want to say thank you and I will use the mic to go now. You can take it off from here. Thank you very much. Okay. Thank you so much. Gokay and all the speakers. You guys did a wonderful job today. While I was listening, I was also thinking from a risk management perspective, there’s something called risk based pricing. It’s a Basel initiative, which many organizations do not really pay attention to because I think that the flat pricing structure favors us, especially looking at the high NPR rate that we have now. So what we’ve done is to apply, assume that everybody bears the same risk, and then we apply the risk premiums across board. But if we can actually implement the risk based price, I think it will go a long way to encourage those who have low credit risk profile to actually patronize institutions. So I want to thank everyone for coming. Alright. We’ve come to the final end of the actualization. Uh, thank you, everyone. Thank you.”