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).

Challenges are just opportunities to think differently

Offshoring has its horror stories. Many of them resulting from putting the desire to drive cost down ahead of the desire to deliver against business benefit. Throwing specs “over the fence” may be cheap, but there is often significant business upheaval in the wake of a poorly built software system. The cost of correction (in the software) and disruption (in the business) is often significantly greater than would’ve been incurred had a smarter approach to working as a team been pursued from the outset. Effective collaboration within distributed development teams is thus becoming increasingly important.

We recently conducted a lessons learned exercise on a project in which we built a reporting tool for a London based insurance market corporation. The team was split across London (business design) and Cape Town (software development). The system, which has approximately 100 users, extracts, collates and submits data from multiple sources to a regulatory authority. Inspired by the lessons learned exercise, and building on our collective experience across a number of distributed projects, we want to share our reflections which all sit in the realm of collaboration.

Teamwork begins best in person

It would be naive to ignore that the best way to cultivate effective working relationships is face-to-face. Ideally, the delivery team should meet in person at the outset. Sometimes it’s not possible for the business users to be involved in this. On this project, the business analysts, after having spent time understanding the business’ ambition, hopped a plane and spent some time with the development team with the aim of clarifying the requirements. I hear Cape Town in March is spectacular.

Collaborate on estimating and planning

No matter how experienced the Project Manager, there is no point in planning without the involvement of the team responsible for delivering the product. Expecting team members to take accountability for their delivery requires suspension of a degree of control in setting the estimates.

We found that delegating estimation at a task level to those responsible for task delivery helps to create ownership and accountability. It also creates a feedback loop: plan the work, do the work, reflect on the plan and improve planning capability. The best estimates are sense-checked by peers to ensure that the team are not setting themselves up for failure.

Share the plan

It almost goes without saying that once the plan has been compiled, it should be shared with the entire team. We recommend that this take place in a forum where people are encouraged to raise concerns such that they can be understood, addressed and either dealt with up front or influence the subsequent planning. This will ensure that the team is committed to achieving the objectives of the project.

Adjust working hours

So as it turns out, offices on either sides of the planet often exist in different time zones. Go figure. A simple way of resolving this is to align working hours across the team in a reasonable fashion (i.e. create a set of core hours when everyone on the team is working). That way when Sarah identifies a bug during system testing at 15h00 in London, John can be reasonably expected to respond, even though his local time in Bangalore is 20h30. The key here is to set expectations across the team (including external stakeholders) upfront.

Stand up

Make sure the team keeps talking. One of the most effective ways to keep one’s finger on the pulse is to meet at the start or end of each day for 15 minutes. The purpose of this is to provide an overview of what was completed the previous day, what will be tackled the next day and to raise any burning issues which are holding team members back from progressing. It’s a well known practice across agile delivery methodologies and our experience reiterates its importance.

Talk more

Despite the natural gravitation towards email and/or instant messaging, we found that the best way to avoid ambiguity was to pick up the phone. A message sent is not necessarily a message understood, but a message discussed is far more likely to be. Better yet, we used video conferencing to discuss product features and ensure that the development team understood exactly what was meant by each requirement. There is significant richness in real-time personal conversations.

Use the right tools

Finally it’s important to use the right tools which enhance a collaborative working environment. We’ve already touched on the use of video messaging (we used Google+ Hangouts) and instant messengers, but there are a plethora of online project management tools becoming available. These allow users to allocate tasks to individuals, ensuring there is transparency (i.e. everybody knows what has been assigned to whom) and task ownership (i.e. the person to whom a task has been assigned is responsible for its completion). We’re currently experimenting with Asana, but different teams will find different tools are productive for their working practices.

These ideas and techniques allow the whole team to have early sight of any potential problems which can then be addressed proactively. The approaches also engender a culture of sharing where team members are encouraged to speak up sooner rather than later. The simple things are often the most constructive.

What practices have you found helped you to overcome the challenges of working in teams spread across distributed geographies? We’d love to hear from your comments.

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