Access to credit is such a basic need that lenders should embrace risk-based lending to widen the net of those who qualify for loans.
In Kenya for instance, since the introduction of the Credit Referencing Bureau, which keeps borrowers’ credit history, many Kenyans who were initially unaware of how this would affect them have ended up being adversely mentioned on this platform. The resultant effect is that such negative listing has highlighted them as ; risky borrowers’ and thus causing the mainstream financial institutions to shun dealing with them
In most cases, the amounts owed are actually trivial, with the average of those listed on the CRB platform having owed initial principal of less than ten thousand Kenyan shillings. This is because of the ubiquitous nature of credit platforms including mobile loan lenders.
The fact that many lenders simply observe a negative listing as a prerequisite to withhold lending speaks to the very high levels of risk averseness that our financial sector has had for a long time. That is why I submit that it is about time that the sector considers heaving embracing risk-based lending.
Risk-based lending refers to the practice of a lender pricing their loans pro rata with the risk or exposure of the borrower. Hence, higher-risk borrowers face a higher interest rate while lower risked borrowers get to enjoy a much lower interest rate.
This pricing of risk and hence interest is advantageous in a couple of ways. Firstly, it is helpful as a ‘pull factor. By having such a truncated pricing system, borrowers are incentivized to calculate good manners and repay their loans. This benefits them directly but it also benefits everyone in the financial system as it allows for more optimal circulation of funds in the economy.
Meanwhile, on the other hand, the second point is that it also plays an important role in offering a second chance to those who for some reason get it wrong the first time. Although they are directly punished for having a riskier credit profile, they are still granted an ‘opportunity to borrow’ albeit at slightly higher rates.
This is still helpful because it grants the borrower the chance to right the wrong that happened the first time. One cannot grow without access to capital. You may find that the first time around things doesn’t flow smoothly. But that should not mean you should be totally shunned from participating in the economic system of the day.
Good risk-based lending practices involve being thorough in the way in which you calculate risk to be able to monitor small nuances that could mean even decimal changes in the interest pricing. There should be attempts to make the system as scientific as possible and to avoid being pushed by wide biases like race and religion.
It is wrong to make a blanket condemnation for instance, that ‘ Women pay their loans and men don’t’ and price leans for men higher. This is a generalization since the sample size is just too large. However, it is possible through research to find the demographic and behavioral tendencies that create different risk points for clients.
Simply looking at a borrower’s credit history and adverse mention on CRB, even though easy, can still be distorting. One has to carefully analyze the cause of the adverse listing, the materiality of it but more important, the future capacity of the borrower to repay both his previous debts and the fresh one if you were to advance him.
That means that your credit score is not just a matter of quantitative factors but one should rope in qualitative factors as well.
In the end, we all have to embrace risk. To live without risk is to not live at all.