Reasons for a loan without a bank account

loan without a bank account

The argument was that the bank account enabled the bank to determine the ability of the potential borrower to service the loan. The bank account would be used to compare the credit turnovers against the debit turnovers.

Most banks  have realized that this concept does not really make sense to a certain category of potential borrowers; the people in formal employment. Majority of these people in formal employment have only one source of income, that is, the salary income. A salary is reliably paid at the end of every month.

 Loan without a bank account through check off system

In order to have a competitive edge, most banks have reviewed the requirement to operate an account for a minimum of six months before being considered for a loan. They have therefore instituted what is called ‘check off system’ with the employers.

Loan without a bank account through check off system is an agreement between the banks and the employers of the potential borrowers. Deductions for loan repayment are deducted at source through the payroll.

When lending to this category of potential borrowers, the banks appraisal is on the employer and not the borrower.  Banks analyze the employer to know:  how long they have been in business, who the directors of that company are and even staff turnover within the company.

This has made governments to be seen as trusted employers of potential borrowers. Banks have been targeting many Government institutions like Teachers Service Commission (TSC), civil servants, Armed forces, international organizations and even the police forces.

The banks, on agreement with the employer to give a loan without a bank account, will sign a Memorandum of Understanding which will clearly indicate the following:

• The agreed date the deductions for the loan repayment will be done from the payroll and when the same will be submitted or remitted to the bank.
• The preferential interest rate the employees will be charged by the bank.
• The maximum repayment period for the loan granted to the employee by the bank.

 The only requirements for loan without a bank account these potential borrowers need are:

1. Pay slip for at least three months as proof of the amount of net salary they receive on a monthly basis.
2. Letter of appointment from the employer which indicate the terms of employment for example if they have been employed in permanent or temporary basis, retirement age.
3. To be able adhere with the two thirds rule, employers approval must be obtained and confirm that there are no other loan commitments. The two thirds rule means that the borrower must retain two thirds of their salary to live on.

Inspite of the above the responsibility and risks of lending to the potential borrower does not pass to the employer, the bank must still practice prudent lending. Giving a loan without a bank account is a decision that banks all over the world are using to make higer profits.

 Relationship between Lenders and Debt problem loans

debt problem loans

Lending is  risky business which often leads to debt problem loans; it is therefore inevitable that on occasion things will go wrong. Even seasoned lenders will experience cases of bad debts. Many times they will be tempted to indulge in wishful thinking and that the debt problem loans are only temporary. The debtor or borrower believes they will get things right in the end. Debt Problem loans like any other problems in life, do not just go away and  help with debt solutions must be developed.

Irrespective of how soundly based the original lending decision was, at the first sign of trouble, a new appraisal of the position should be done.

Some of the reasons that create  debt problem loans include:

• Natural disasters that have affected the cash flow, for example, earthquakes or floods. Sometimes a person may take up amortgage finance loan, which they expect to pay comfortably. If a natural disaster causes the home to collapse, the loan repayments have to continue. if the home is insured then the insurance pays for the loan. This will lead to debt problem loans
• Political instability and/or civil wars may escalate the debt problem loans. Civil wars and instability lead to displacement of populations. This in turn causes the borrower to default, especially if they have relocated to a far off land.
• Acts of terrorism. This like natural disasters and relocations aggravate the debt problem loans. Acts of terrorism cause distraction of property and loss of jobs. The destroyed property may be the reason why the loan was sourced originally.
• Death of Key man in management of the business is a major cause of debt problem loans. The key man or point man may be the only person who handles many of the financial functions of the company. When this point man dies, the new office holder may not be aware of some of the loans that need to continue being repaid. This interruption in installment repayments leads to debt problem loans since the installments may have grown to unmanageable levels.
• The borrower diverting the cash from the business to other uses may cause debt problem loans. The borrower may lack discipline in managing their finances and diverts money from loan repayment to other uses in the running of the business. This diversions lead to loans not being paid in time and the penalties and interests for such indiscipline are substantial. The diversion of cash may be due to corrupt practices by the borrower or borrowers agent.

Many lenders especially those banking in Kenya have to report on the debt problem loans and provide for these problematic amounts. This means that the profits that are reported by banks is reduced by the debt problem loans amounts.

 Mortgage finance business and commercial banks

Mortgage finance

For a long time, commercial Banks shied away from Mortgage financing. They argued that it was such a long term financing and most of them were not ready to tie down their customers deposits for such a long extended period. They preferred lending for medium term (that is three to five years) and short term (that is two years and below). Mortgage financing was therefore left to institutions which were specialized mortgage financing institutions, for example, Housing Finance Corporation of Kenya (HFCK).

However, with increased demand in the market in recent years for property ownership and competition in the banking industry, the Commercial Banks have had to re-evaluate their previous position on mortgage financing. With so many Banks penetrating the market, banks have had to think outside the box to enable them survive in banking industry.

 Strategies in use by commercial banks to enter mortgage finance platform

Unfamiliar territories come with great challenges, which if not tackled well will result in huge failures. Some of the commercial Banks have decided to build synergies with already existing mortgage financing institutions by purchasing shares in these institutions. The main advantage of this is that they obtain human expertise. The banks provide capital financing.

Other commercial banks have opted for the option of creating mortgage finance departments. these option comes with challenges for the new enttrants into mortgage finance.

Challenges faced by banks as new entrants to mortgage finance.

1. Lack of knowledge and experience-Most new mortgage finance banks have little understanding about the property market and end up dealing with un-scrupulous property developers who overvalue the properties. These properties are over-valued because of the demand which is not marched to the supply.
2. Staff de-motivation due to lack of expertise by the employees on the concept of mortgage finance. This has resulted in frustration for both the employees and their customers.
3. Raising capital by the commercial banks to accommodate mortgage finance. the banks have to explain to existing and potential shareholders the importance of venturing into this new line of financing and this is not easy. Shareholders must be convinced and give consent for such large capital outlays.
4. Identifying the right property developers to work with and who will not take advantage of the banks customers in terms of the property value and even reliability.
5. Time constraints while balancing the expectations of the shareholders in terms of immediate returns verses the reality that the benefits from mortgage finance will not be released immediately. Closing a deal on mortgage finance would not be as fast and the returns are realized after a long time.

However, the commercial banks are in the right track as this is the current growth area to be tapped in order to survive the market. Diversification is the key to survival for banks in highly competitive markets and Commercial banks must get into mortgage finance business to reap the benefits.

Bank Lending to small businesses

Bank Lending to Small Businesses must understand the Nature of the product

Understanding of the nature of the product of the business is very important. Whether the business is dealing in perishable  goods(food stuff, flowers etc) or un-perishable products. How long the business takes to convert the stock of the product to cash. If the products they deal in have substitutes and are they essential products or what would be termed as luxury products. The products could have a substitute, for example, if the business is dealing in footwear is there other alternatives to the same which can serve their customer.

 Bank lending to Small businesses must understand the Market for the product

Understanding the market for the product is very crucial. Consider if the market is local or they deal with the international market. Does the market consist of a certain age group or is it for the mass population. Products dealing in fashion outfits generally target a certain population. Other factors of the market to be taken into consideration will be if the market is expanding or is it shrinking, as the population grows demand for food products increase hence the market increases. The issue of how easy competitors can enter this market is very crucial with a better product at a subsidized price.

 Bank lending to Small businesses must have background information on the owner

The background information of the entrepreneur running the business is very key. Consider if he or she is a person of integrity because this will determine whether they will keep their word to their customers, which then results to loyalty from their customers. The length of experience he or she has should also be put into consideration, the longer the experience the more certain the success of the business and vice versa. If the business has a Board of Management – what are their composition. does it have a marketer, a financial expert, a human resource individual. These will be able to add value to the business other than a business where the spouses are the Board members just to meet a legal requirement. Take into consideration the business continuity in a case where the founder of the business dies.

The professional lender therefore must not only be able to read and understand complex business accounts and analyze ratios. Bank lending to small businesses must therefore employ competent resources to get it right.