Yearly Archives: 2018

Understanding credit products

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Understanding credit products

April 11, 2018

Business herald: 11 APR, 2018 – 00:04    Dr Sanderson Abel
Financial institutions play a pivotal role in the granting of credit to the various sectors of the economy.

A bank is just like a heart in the economic structure and the capital it provides is like blood in it. As long as blood is in circulation the organs will remain sound and healthy.

If the blood is not supplied to any organ then that part would become useless, so if the finance is not provided to any economic sector, it will be destroyed.

The availability of credit is important in every economy since households and firms are not in a position to generate enough resources on their own. Credit, which is the pivot for financing of business enterprise serves as an essential, facilitating agency in the primary economic functions of production, exchange, consumption and distribution.

In its simplest sense finance refers to those activities involved in seeing that an individual or organisation has the resources with which to pay its bills promptly

In their endeavour to provide funding to the various sector of the economy, banks develop various products to suit their customer needs. It is important for bank clients to understand these various products so that they approach their various banks with the knowledge of the type of product they require for them to derive maximum value from the credit products provided.

There are different types of financing that you can choose depending with the agreement with your bankers. For example, in acquiring business equipment, fixtures and fittings, you can choose to finance the acquisitions through an industrial hire purchase, leasing or a term loan. Some of the credit products offered by the banking sector are discussed below.

Term Financing: This type of loan is availed by the borrower to acquire fixed assets (immovable properties i.e. land and buildings and vehicles for commercial use). The loan carries a predetermined length of time (tenure), with repayments done in instalments.

Lease Financing: This type of facility helps the borrowers to acquire equipment’s and machineries for their businesses on lease. This type of finance is long Term in nature and as such, the repayment is made in instalments.

Overdraft (OD): This is a short term facility which is granted to the borrower to enable him meeting his day to day funding needs; like payment of salaries, utilities and purchases of inventories etc. An agreed limit is sanctioned by the bank and the borrower is allowed to draw that amount through his current account.

Revolving Credit: This type of loan is also short-term in nature and is used to meet short-term funding requirements of the borrowers. This type of loan does not have a fixed number of payments, as in the case of instalment loan.

Cash Finance and Running Finance are types of revolving loans. Once the loan limit is approved, then the borrower is free to withdraw amounts to the extent of that limit. The borrower can withdraw and repay the amount as many times as he wishes to; but he has to pay mark-up on the amount which he has actually used.

Letter of Credit (LC) or Documentary Credit (DC): Letter of Credit is a written undertaking by a financial institution in favour of the supplier/seller to pay him the amount of imported/purchased goods, in case the actual importer/buyer fails to pay

Unsecured financing: Unsecured loans are those where the banks do not demand tangible securities such as land, building, fixed/current assets, tradeable inventory etc. as security; whereas, in secured financing, the banks demand any of the security as mentioned above. Secured financing is also called collateralised financing.

Credit provision by the banks to their clients through the various channels outlined above gives an obligation towards the borrower to dutifully service the obligation.

Failure to honour that obligation will disturb the whole credit system leading to reduced resources to other potential borrowers. In other words, the potential funding by the banking system is seriously reduced. Resultantly, the problem of credit impairment drags on the economy in the following ways: disintermediation of bank-system lending caused by the erosion of banks’ profitability; stagnation of economic resources, such as labour and capital, in fields with low productivity and cautious behaviour of corporations and consumers due to a decline in confidence in the financial system.

It is now an indisputable fact that economies are dependent on their growth and development on the provision of credit by the financial sector. Corporates, individual and other players provide credit to one another with the banks lying at the centre of the system. A cycle of credit is thus created in an economy where each economic agent is one way or the other in receipt of credit from another directly or indirectly. Any hiccup within the cycle might end up disturbing the smooth flow of resources among the economic agents.

On a broader macroeconomic level, this would translate to economic stagnation as some sectors become grappled with working capital and capital challenges as they fail to access loans and overdrafts from the banks while those who access the resources fail to repay as a consequence of the high cost of the funds.

Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008.

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Digital Lending Models From Accion

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The rapidly changing landscape of digital lending
March 12, 2018

Taking stock of the top seven emerging digital lending models
By Priya Punatar

The rapidly changing landscape of digital lending
March 12, 2018

Taking stock of the top seven emerging digital lending models
By Priya Punatar

 Last year, Amazon grabbed headlines by giving $1 billion in small-business loans to over 20,000 merchants in the United States, Japan, and the U.K. Their near real-time data on sellers’ businesses and access to customer reviews allow Amazon to evaluate customers and manage the risk of lending to small merchants. WeChat also made waves when it entered the game in 2015. As China’s largest social network, it’s been able to deploy more than US$14.7 billion in funds in just two short years. Like Amazon, WeChat benefits from access to data and the ability to offer convenience and efficiency for the customer — it only takes 0.3 seconds to approve a loan application.
These tech giants have joined a host of other players in a continually evolving digital lending ecosystem. Other prominent digital lenders include Konfío in Mexico and Kenya-based Kopo Kopo. Each platform in this space leverages technology to offer loans that are faster, more cost-efficient, and more straightforward for the customer.
Digital lending is proving to be a potent force for reaching people who haven’t been able to access financial services in the past. Innovative products can overcome the challenges of geography, reduce transaction costs, and increase transparency. But distinct market structures, regulatory environments, and customer needs have led to a wide variety of digital lending models that are each tackling financial inclusion in different ways.
When we evaluated the current state of play, we identified seven primary digital lending models:
• Online lenders. These lenders offer full end-to-end digital lending products online or via mobile applications. In this model, customer acquisition, loan distribution, and customer engagement are entirely digital. This process is specially designed with no need for face-to-face contact or even for customers to phone a call center. Fintech companies like Lidya, Branch, and Tala are online lenders that help entrepreneurs access funding in emerging markets, including Nigeria, Kenya, and the Philippines.
• P2P platforms. P2P platforms are purely digital platforms that match a borrower with an institutional or individual lender and facilitate the digital transaction. The platform typically plays an ongoing central role in the relationship between these parties. In this model, P2P lenders like CreditEase and KwikCash often design the product, score the borrower, and may support repayment and collection processes.
• E-commerce and social platforms. These platforms include the likes of Amazon and WeChat. These are digital platforms where credit is not their core business, but they leverage their digital distribution, strong brand, and rich customer data to offer credit products to their customer base.
• Marketplace platforms. Marketplaces, like Loan Frame in India, are digital platforms that use proprietary algorithms to match a borrower with the right lender. Lenders typically use these types of platforms to acquire new customers, and they pay an origination fee to the platform. Once funds are dispersed, the customer relationship is direct with the lender.
• Supply chain lender. Firms such as Tienda Pago and M-Kopa Solar provide digital short-term working capital loans for microenterprises to purchase inventory from their distributors or for pay-as-you-go financing of an asset purchase. The distribution network enforces repayment through penalties if necessary. For example, suppliers might withhold deliveries of goods or turn off utilities in the case of late payment.
• Mobile money lenders. Firms such as Kopo Kopo partner with mobile network operators to offer mobile money loans to their customer base, leveraging mobile phone data for credit scoring. In this model, physical agent networks where customers can go to complete cash-in/ cash-out transactions supplement the digital interface of the mobile phone.
• Tech-enabled lenders. These are traditional lenders who have embraced technology to digitize part of their otherwise manual lending process. This digitization could include adding digital acquisition channels or digital repayment options. Tech-enabled lenders like Aye Finance in India and Accion Microfinance Bank in Nigeria, supplement their physical distribution networks with technology — providing a ‘tech and touch’ approach.
Adding to the complexity of the digital lending ecosystem is its dynamic nature, which makes strict categorization difficult. Key players continue to test, refine, and evolve their business models and value propositions based on customer needs and market experience.
For example, Creditas, a digital lender in Brazil, started solely as a marketplace platform but has subsequently moved into credit scoring, customer engagement, and financing solutions for customers, to become an online lender. JUMO, an online lender in Kenya, started as an end-to-end mobile money lender but is moving away from funding its own portfolio and becoming a marketplace platform.
Innovation and market expectations will continue to alter and refine the digital lending landscape. However, the similarities shared by today’s successful models are likely to remain prominent: they digitally source customer data, rely on hundreds, and even thousands, of data points to score customers, offer instant and remote approval, create data-driven mechanisms to drive repayment, and engage customers digitally. Advanced digital lenders have leapfrogged over traditional lenders to provide customers with a faster, more transparent, and convenient service. Traditional banks will have to give customers similar benefits if they hope to compete.
To learn more about the ways that digital lending is advancing financial inclusion and how financial service providers can evolve in today’s digital landscape, look out for Accion’s Global Advisory Solutions team’s upcoming publication on Demystifying Digital Lending.
http://blogs.accion.org/features/rapidly-changing-landscape-digital-lending/

 Last year, Amazon grabbed headlines by giving $1 billion in small-business loans to over 20,000 merchants in the United States, Japan, and the U.K. Their near real-time data on sellers’ businesses and access to customer reviews allow Amazon to evaluate customers and manage the risk of lending to small merchants. WeChat also made waves when it entered the game in 2015. As China’s largest social network, it’s been able to deploy more than US$14.7 billion in funds in just two short years. Like Amazon, WeChat benefits from access to data and the ability to offer convenience and efficiency for the customer — it only takes 0.3 seconds to approve a loan application.
These tech giants have joined a host of other players in a continually evolving digital lending ecosystem. Other prominent digital lenders include Konfío in Mexico and Kenya-based Kopo Kopo. Each platform in this space leverages technology to offer loans that are faster, more cost-efficient, and more straightforward for the customer.
Digital lending is proving to be a potent force for reaching people who haven’t been able to access financial services in the past. Innovative products can overcome the challenges of geography, reduce transaction costs, and increase transparency. But distinct market structures, regulatory environments, and customer needs have led to a wide variety of digital lending models that are each tackling financial inclusion in different ways.
When we evaluated the current state of play, we identified seven primary digital lending models:
• Online lenders. These lenders offer full end-to-end digital lending products online or via mobile applications. In this model, customer acquisition, loan distribution, and customer engagement are entirely digital. This process is specially designed with no need for face-to-face contact or even for customers to phone a call center. Fintech companies like Lidya, Branch, and Tala are online lenders that help entrepreneurs access funding in emerging markets, including Nigeria, Kenya, and the Philippines.
• P2P platforms. P2P platforms are purely digital platforms that match a borrower with an institutional or individual lender and facilitate the digital transaction. The platform typically plays an ongoing central role in the relationship between these parties. In this model, P2P lenders like CreditEase and KwikCash often design the product, score the borrower, and may support repayment and collection processes.
• E-commerce and social platforms. These platforms include the likes of Amazon and WeChat. These are digital platforms where credit is not their core business, but they leverage their digital distribution, strong brand, and rich customer data to offer credit products to their customer base.
• Marketplace platforms. Marketplaces, like Loan Frame in India, are digital platforms that use proprietary algorithms to match a borrower with the right lender. Lenders typically use these types of platforms to acquire new customers, and they pay an origination fee to the platform. Once funds are dispersed, the customer relationship is direct with the lender.
• Supply chain lender. Firms such as Tienda Pago and M-Kopa Solar provide digital short-term working capital loans for microenterprises to purchase inventory from their distributors or for pay-as-you-go financing of an asset purchase. The distribution network enforces repayment through penalties if necessary. For example, suppliers might withhold deliveries of goods or turn off utilities in the case of late payment.
• Mobile money lenders. Firms such as Kopo Kopo partner with mobile network operators to offer mobile money loans to their customer base, leveraging mobile phone data for credit scoring. In this model, physical agent networks where customers can go to complete cash-in/ cash-out transactions supplement the digital interface of the mobile phone.
• Tech-enabled lenders. These are traditional lenders who have embraced technology to digitize part of their otherwise manual lending process. This digitization could include adding digital acquisition channels or digital repayment options. Tech-enabled lenders like Aye Finance in India and Accion Microfinance Bank in Nigeria, supplement their physical distribution networks with technology — providing a ‘tech and touch’ approach.
Adding to the complexity of the digital lending ecosystem is its dynamic nature, which makes strict categorization difficult. Key players continue to test, refine, and evolve their business models and value propositions based on customer needs and market experience.
For example, Creditas, a digital lender in Brazil, started solely as a marketplace platform but has subsequently moved into credit scoring, customer engagement, and financing solutions for customers, to become an online lender. JUMO, an online lender in Kenya, started as an end-to-end mobile money lender but is moving away from funding its own portfolio and becoming a marketplace platform.
Innovation and market expectations will continue to alter and refine the digital lending landscape. However, the similarities shared by today’s successful models are likely to remain prominent: they digitally source customer data, rely on hundreds, and even thousands, of data points to score customers, offer instant and remote approval, create data-driven mechanisms to drive repayment, and engage customers digitally. Advanced digital lenders have leapfrogged over traditional lenders to provide customers with a faster, more transparent, and convenient service. Traditional banks will have to give customers similar benefits if they hope to compete.
To learn more about the ways that digital lending is advancing financial inclusion and how financial service providers can evolve in today’s digital landscape, look out for Accion’s Global Advisory Solutions team’s upcoming publication on Demystifying Digital Lending.
http://blogs.accion.org/features/rapidly-changing-landscape-digital-lending/