Building a strong credit culture in Zambia

PETER Sichinsambwe.

FOR over 20 years until the early 1990s, Zambia had entailed extensive government ownership and administrative controls over markets, including financial and banking markets.
The strategy, motivated by economic nationalism, led to the collapse of the economy.
A major programme of market-oriented economic reforms was adopted in the early 1990s, which included financial sector reforms aimed at building and strengthening financial sector infrastructure to enable it to support economic diversification and sustainable growth and these reforms offered an opportunity for a revival of the economy.
Many Zambian households have entered the consuming class and businesses across the nation have grown their footprints and at the same time banks have expanded their loan books rapidly.
Unfortunately, the credit risk management practices have lagged, across the major steps of the credit value chain and Non-performing loans (NPLs) are high. Lending has increasingly become riskier thus pushing banks to equip themselves more on risk management through strengthening of credit culture.
Credit culture is a discipline and ability to forego, sacrifice, and tolerate some present financial use or benefit and put aside funds to meet certain future obligations. Developing a culture and discipline of saving a certain percentage of income, for investment and consumption (which includes loan repayment), is important. This circle applies both to consumer credits and businesses. Once you develop that discipline of foregoing your consumption, obviously without killing oneself, then it will be easy to repay borrowed funds because that discipline is already in place.
While all efforts are being made by banks and financial institutions to build a strong credit culture. It is imperative to look at what is happening from the client’s perspective. Any client of the bank must view the bank as its supplier of banking services. From a strategic point of view there is a need to ensure that a dependable relationship between the customer and the bank is developed and maintained on a long-term basis for a mutual survival and growth of both the customer and the bank. For borrowing clients, the strength of the relationship is the starting point of building a strong credit culture for both the bank and the customer (borrower). When extending credit to a customer the bank feels more comfortable taking the risk if there is a well-entrenched relationship between the bank and the customer
As part of building a strong credit culture from the borrower’s perspective, the following suggested questions at the minimum need to be addressed well by the borrower before approaching the bank: How is the relationship with the bank? The better the relationship the higher the likelihood of obtaining credit. Is there an identified clear purpose (use) of the credit intended to be sought from the bank? Is there a sufficient future cash flow from the business to be financed by the credit from the bank? Does the business have capacity to take more debt? It is important to establish debt sustainability levels. Are all credit requirements by the bank known and clearly understood? What are the key success factors for the business to be financed? Are there legal and regulatory changes that may impact the business to be financed? Is there a collateral that can be offered to the bank to cover the bank credit?
These are some of the pertinent questions that a borrowing customer must ask themselves before approaching the bank to discuss a credit. In most cases where these questions and many more depending on the policy of your bank are not addressed thoroughly, the result is usually frustrations by the borrower because the credit request will likely be declined by the bank. These questions will assist in building a strong credit culture which equally from the borrower’s perspective must be built continuously.
For example, if borrower successfully obtains credit/loan from the bank, should the borrower relax and celebrate? The answer is no because the risk of default must be closely monitored by the borrower. This monitoring from borrower’s side will assist in managing any surprise call on the loan by the bank. At the minimum the borrower need to do the following; Ensure that the credit agreement and security documents work together. The contents must be well understood, Engage the bank in advance should default signs pop up. Say no to any temptation towards diversification of borrowed funds.
Track the credit repayment schedule. Notify the bank in advance should there be any adverse changes on the cash flows. Always maintain an open dialogue with your bankers and other suppliers; it helps to build trust.
The banks are among the most highly regulated businesses; they are intermediaries linking depositors and borrowers. Regulators are therefore keen to ensure that banks remain stable with well protected interest of both the depositors and borrowers. It should be noted that banks are not obliged to extend credit simply because there is a collateral being offered to secure the credit. The business/activity to be financed must evidence availability of future cash flow to repay the loan.
Development of a strong credit culture by both the bank and the borrower can help to create stronger business relationship and the market needs remain as large as ever.
The author is an economist/ chartered accountant.

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