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A hand up, not a hand out
- Jerome Mutumba talks about the Bank's approach to collateral, impairments and management of defaulters

By Asser Ntinda
Banking, by its very nature, is a business of interests. It is in the process of managing or attempting to align different parties' interest that some natural conflict arises. Unfortunately, aligning the interests of business and those of its clients, in most instances, lies at the core of any bank's risk management framework, and DBN is no exception.

As may be expected in the development finance arena, Development Bank of Namibia (DBN) does not prioritize financial profit, but it ought to conduct its business in a form and manner that makes it sustainable.

This is necessary to ensure that proceeds from the repayment of loans and interest, are mainly used to finance more projects. If the Bank's borrowers do not repay the amounts and interest, the Bank will not be able to finance additional projects. This is why it is imperative for DBN to carefully manage impairments and recover bad debts. Against this backdrop, collateral is required in some instances to back up loans advanced.

Sustainability in development finance

While the achievement of large financial profits is not the objective of DBN, achieving and maintain financial sustainability is. Financial sustainability over the medium to long term entails the preservation and maintenance of moderate growth of the Bank's capital and reserves. This in turn requires an appropriate risk pricing of loans and maintenance of a low level of bad debts.

The above requires DBN to thoroughly evaluate and risk rate development projects it plans to finance, and only invest in those with a reasonable degree of success and also high development impact. In the same vein, it also requires DBN to maintain an acceptable level of collateral for loans advanced.

The question of collateral

At DBN, we have come to realize that collateral, or security requirements for a loan, is often foremost in a loan seekers mind, and considered as a stumbling block to obtaining a loan. This is an incorrect disposition. A loan seeker should ideally be focused on the financial viability of his enterprise, and ensuring that the targeted lender sees and is convinced about the enterprise's potential and viability. The question of collateral is always difficult, in particular in our context, where DBN is mandated and expected to render a helping hand to transformation and reduction of the socio-economic inequity in Namibia. Development finance is equated to obligation-free handouts in some instances.

On the other hand, numerous studies have shown that owner's collateral is a key factor in ensuring the success and enhanced lifespan of the enterprise. In the vast majority of cases, the owner's 'stake' and the risk of losing it motivates entrepreneurs to ensure that the enterprise generates returns, even under difficult circumstances when the owner might be encouraged to abandon the attempt.

Collateral is vital to the development finance institution (DFI) as well. If the owner abandons the attempt at enterprise, then the DFI has to recover as much capital as it can so that other projects can be financed.

The Development Bank of Namibia is however flexible in its levels of required collateral, and will also consider the means of the entrepreneur, the projected development outcome of the project and the entrepreneur's skills and track record. In some instances, assets financed by the Bank can serve as collateral. Where the risk profile of an enterprise is such that it requires some level of collateral, partnerships may be encouraged to strengthen the balance sheet of the borrowers.

Three steps to prevent loan defaults

The Bank takes three steps to guard against borrowers defaulting on their loans.

The first step is to ensure that applications are sound, and the enterprise has high potential for financial viability. Each application is rigorously scrutinised for its strengths and weaknesses. Areas of particular interest are the cash flow projection, and the experience and capacity of the potential borrower to successfully implement and run the enterprise. DBN seeks to finance businesses that have realistic plans, and that will be sustainable in the long term. Although most enterprises that approach DBN for finance hold development benefits, DBN must finance those which appear most likely to succeed, and those with long-term prospects.

DBN accepts that some enterprises will run into difficulty and that repayments may be impaired. If a business delays payment due to difficulties such as a slump in the enterprise, client payment difficulties or external factors such as delayed supplies, DBN registers the delayed payments as impairments.

This is the second step. When impairments arise, DBN does not immediately register the payments as bad debts. It recognises the development value of the enterprise, and will discuss with the entrepreneur the best means to make up the delayed payments.

Only when the enterprise fails and / or the entrepreneur halts payments is the loan amount declared a bad debt. Once the amount is declared a bad debt, it is handed to DBN's panel of lawyers. Even at this stage, the client is given the opportunity to negotiate the debt and repayment.

DBN recognises that a failed enterprise has bad impact on it borrowers, but also on its employees and the broader stakeholders, and the Bank does everything in its power to ensure that the enterprise can continue. However as a matter of accountability to the nation and its development requirements, it has to ensure that capital is recovered.





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