Lack of centralised consumer credit information

Although there are institutions in a few of these countries that are taking steps to consolidate the consumer credit information, centralised credit bureaux similar to the Credit Reference Agency in the UK or the Credit Bureau in SA do not exist. The impact of this is that underwriters are unable to accurately assess the indebtedness of potential borrowers at the time of booking the loans.

Interestingly, collections agencies, that is, companies to whom collections and recoveries are outsourced, often have a richer view of the obligations facing customers as they store this information from their clients in the banking sector as well as mobile phone providers and retailers. Unfortunately this information is only used in the collections activities rather than at the point of underwriting by which time the proverbial horse has long since bolted.

Poor understanding of how loan financing works

Our observation of customer behaviours suggests that they have a poor understanding of the mechanics of loan financing. This leads to an unhealthy appetite for debt which is fuelled by inappropriately incentivised loan underwriters who try to make it as easy as possible for people to take on debt so they can meet their targets. Combine this with the absence of centralised consumer credit ratings and it’s easy to see how many customers’ debt service ratios often exceed the recommended levels of 30% ultimately leading to an inability to service debt and subsequent delinquency.

Lack of national identification schemes

Although many of the countries visited had effective national identity schemes, where these were absent, there were significant challenges. The Ugandan government has ceased issuing national identity cards and Tanzania has only recently introduced a national identity scheme. This makes it very difficult to uniquely identify customers and consolidate their credit information. This not only leads to asymmetric information at the point of underwriting, but also at the point of collections where customer contact information may have changed and it is not possible to link one John Smith to another.

Poor job stability

In many of the countries visited (most notably Zambia and Tanzania), there is poor job stability, particularly in the mining sector where the demand for labour fluctuates. Given the fact that miners are relatively well paid, underwriters are generally willing to grant them loans which would be unserviceable in many roles to which their skills might be transferrable (e.g. construction). This means that when miners find themselves out of employment in the mining industry they face immediate delinquency even if they can find alternative employment in another sector.

Poor quality contact information

KYC (Know Your Customer) regulation requires institutions to consolidate and maintain accuracy and currency of their customer contact information. Unfortunately, this is far from the reality in Africa. In Ghana for example, the growth of housing developments has outstripped the ability of local governments to create an address system (see here for details). In other countries, some customers provide addresses of empty plots and given the lack of a proof of address requirement, there is no way of validating this information. The end result is that bankers are often unable to locate their customers once their obligations are past due and the loans ultimately get written off.

When it comes to phone numbers, the increasing prevalence of mobile phones and the disposability of pay -as-you-go numbers mean that as soon as customers become delinquent, they discard their lines and obtain new ones to thwart the debt collectors’ efforts.

Prevalence of predatory short-term lending

If you take all of the above and add to the mix the rise and rise of microfinance institutions in the African market, you get a worsening situation. Unscrupulous short term lenders often prey on individuals who are unable to pay back debts to other institutions like banks or retailers. These individuals will use the short term loans to finance their longer term obligations and get stung with astronomical interest rates for their troubles, only to re-enter delinquency the following month.

Limited focus on customer lifetime value

Customers who have been poorly treated by collections agencies associate that experience with the lending institution and invariably will move to another bank once they become rehabilitated. As a result, the potential future earnings from these customers are lost. There is an increasing focus by global market-leading lenders on viewing their collections efforts as more of a customer debt rehabilitation exercise, rather than an effort to reduce distressed debt. This distinction is important because the difference is in the treatment of the customer, the ultimate source of profitability.

So what’s the answer?

From what I observed, the operations with the healthiest portfolios were those with the most conservative credit risk strategies, loaning only to those with the utmost likelihood of repaying their debts. But as we all know, risk and reward are inextricably linked and for those wishing to profit in this new world, addressing these issues is going to be the battlefield on which the fight for supremacy in the African retail credit space is won.

Are these challenges in line with your experience? We’d love to get your take in the comments below.

The post Insights from the African retail credit market appeared first on BSG (UK).

The industry has become synonymous with society’s ills – greed, immorality, recklessness – and bankers are emblazoned in scandal. They’re responsible for everything from miss-selling insurance products to being conduits for money laundering and rigging Libor (or, if you like, Lie-bor). All of this comes in the wake of a financial meltdown. Caused by bankers. Saved by the taxpayer.

In some ways, banking and cycling have been hit by the same blow. For years, problems have been building and they’ve finally surfaced, smothering any positive practices which may indeed lie beneath.

Armstrong has said that for him, it was about “winning at all costs”. He was prepared to do whatever it took to keep winning and keep yellow. And it seems some bankers will do whatever it takes to avoid red.

But these scandals aren’t isolated. They’ve weaved their way throughout the financial industry and spilled over into the shadow banking system (hedge funds, money market funds etc). In cycling, Armstrong had a network of doctors and team managers involved in what’s been labelled the ‘most sophisticated doping programme in the history of sport’ by USADA.

Throughout, their reputations have been tainted and the people running the teams and organisations are less respected. We only have to look at the spate of resignations from senior players in the banking industry to know they don’t feel the love. Something needs to change at the very core.

Slow and steady wins the race. Culture doesn’t have a quick fix

An organisation’s culture is the shared belief of ‘why’ the organisation exists – it’s reason for being. It is the collective behaviour of the people who are part of it, and it’s the values, visions and habits which drive those behaviours.

A bank’s culture is passed down from long standing employees to newer employees and it affects the way people interact within the organisation, with their industry partners and with their clients.

In my organisation, our reason for being is clear. It’s evident in every internal meeting and every client meeting. As Business Analysts we’re all driven by the same passion for positive change. We talk about our ‘why’ and share our organisational values.

But cultures, by their very nature are evolving things and they take time to develop and change. Changing the culture of banking will take time. In the view of Stephen Hester (CEO of RBS) it will ‘take a generation’ and it doesn’t have a quick solution.

Regulate to renovate. What role do rules and regulations play in changing culture?

There’s a minefield of new regulations on the radar. Regulations designed to increase transparency and reduce risk in the banking system. To prevent ‘too big to fail’ and protect consumers. Banks are coping with so much change in order to comply, but will these changes bring about a cultural shift? Or even, can they bring about a cultural shift?

We create rules for the things we think we need rules for. We cannot identify every eventuality.

In cycling there are rules about the weight of your bike, what gear ratios are allowed and when you can use race radios. There are also unwritten rules about racing on the last day of ‘Le Tour’ and when to slow for a ‘comfort break’. But when new performance enhancing drugs come about, and the line becomes just that little bit greyer, we have to write up new rules.

In banking there are rules about which trades must be cleared centrally, how much capital must be held, what you can and can’t advise customers and even how many hours you have to report incidents to the regulators. But when we identify that traders have manipulated the Libor, will we have to write another regulation? Can a fraud exist even if has not yet been identified in a regulation?

Blind spots will inevitably exist and we don’t know what we don’t know. In the “conscious competence” learning model  there are places where we’re unconsciously unskilled. Because our industry is forever changing, these will always exist.

But rules exist as in a cultural context too. They’re not created for the rule’s own sake, but because of a broader intention. In sport, typically, the broader intention is fair play. In business, it’s usually about enabling fair markets and protecting the consumer. But in both sport and business, it’s the culture which guides us through the blind spots. It is the cultural principals which ensure that we navigate in the right direction and which give us clarity in the decisions we make.

We’re just touching the surface. But, as BAs, we’re still touching it.

Regulations play an important role in building a more stable and transparent financial market, and I’m not for one moment implying they’re not crucial to the future of the banking world. But we also need to keep a wider viewpoint about what motivates people and organisations to do what they do. And so something far deeper and more fundamental has to change. Something which affects every aspect of our work.

It’s easy to view regulatory change projects as purely about responding to external forces and just about being compliant or ‘ticking the boxes’. For us, whilst it is about all of these things, it’s also about understanding the broader context of what the regulation is trying to achieve and why. The key to successful regulatory change projects is about communicating this broader regulatory message and in keeping the organisational culture in mind throughout. For example, if the broader framework of the European Markets Infrastructure Regulation (EMIR) is about having more transparency in the OTC derivatives markets in order to reduce risk in the market place, then, if people understand ‘why’ this is important in the context of their organisational culture, it aids the implementation and shapes the resulting projects.

As BAs, part of our job is to challenge assumptions, question how things are done, why it’s important to store this data here and whether this procedure could be run like this, rather than that. As agents of change however, our broader role is to help organisations effect cultural change. We have a role to play in questioning motives, or at least in understanding the reasons people do what they do in the context of the organisational culture. Only when we understand this can we truly effect meaningful organisational change.

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