Powering Growth with Responsible Lending

Whether they operate roadside kiosks, market stalls, online stores or have built retail chains across cities, every entrepreneur is driven by their desire for growth. While the specifics of growth may vary from business to business, it can usually be powered by one thing: money. Entrepreneurs need money, commonly referred to as capital to grow and scale their businesses. Credit remains one of the most viable means to access this capital while retaining equity in their businesses. However, many entrepreneurs remain wary of credit due to a lack of responsible lending practices in the loan service industry. 

So, what is responsible lending?

Picture this: 

James, a young entrepreneur, requires capital to purchase tools and resources that will enable him meet a growing demand for his services. To access this capital, James seeks a 5-million-naira loan from a retail lender. Economic realities, trends in James’ industry and his business portfolio indicate that he will be unable to repay a loan of this sum in the stipulated time and would fare better with a loan of 2 million naira. The lender, however, does not take these factors into consideration and furnishes James with the sum he initially requested. Predictably, James is unable to repay this loan and the lender resorts to unfounded methods to reclaim it. As a result, James goes into debt and resorts to shun credit, regardless of how much his business could benefit from it. 

Responsible lending entails ensuring that your lending practices are in line with best interests of your customers i.e., ensuring that loans are relatively affordable, that there is no ambiguity in the terms and conditions under which they are taken and that customers who may have trouble with repayment can find support with the lender if necessary. 

Modern economies are powered by credit. The availability and use of credit facilities makes it easier for people and business – and, consequently, the economy – to grow. Because irresponsible lending is so exploitative, it builds poor trust amongst customers and the loan service industry, causing many to shy away from services that are meant to be beneficial to them. It also causes an increase in Non-Performing Loans (NPLs) which can take a toll on economic growth as they reduce lenders’ profitability and their ability to lend. 

In the long run, it is in the best interest of the loan service industry and the economy at large, for lenders to employ responsible lending practices. This can begin by making reasonable inquiries about a customer’s financial capability and need by simply carrying out KYC (Know Your Customer) and even KYCC (Know Your Customer’s Customers) exercises and verifications at the initial stages of any lending conversation. These exercises aim at putting the borrower at the centre of the lending decision by avoiding unsustainable financial agreements that would put these customers in financial hardship. Also, companies can help build credit profiles for their customers, which can be updated, and consulted to determine their credit-worthiness. 

Credit profiles also create a means for lenders to aggregate statistics on the borrowing trends of certain demographics, which is valuable data for loan and general financial service organisations. 

For lenders and financial enabling institutions who operate in low-income and low-trust societies, growth is heavily dependent on building goodwill between the industry and the general public. With responsible lending, growth becomes possible, not just for the lenders, but for the entrepreneurs whose growth will, in turn, power the economy.