WINDHOEK – The Development Bank of Namibia (DBN) says while it is not profit oriented, it still aims at recovering the loans extended to businesses, if the banking operations are to remain sustainable.
“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,” said DBN Communications Manager Jerome Mutumba in a statement issued this week. This is necessary to ensure that proceeds from the repayment of loans and interest, are mainly used to finance more projects. If borrowers do not repay the amounts and interest, DBN would not be able to finance additional projects. Mutumba says that is the reason why it is imperative for DBN to carefully manage impairments and recover bad debts. “[Hence], collateral is required in some instances to back up loans advanced,” he said. DBN 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 bank says it has come to realise 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 DBN says. Moreover, 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 socio-economic inequity in Namibia. Development finance is equated to obligation-free handouts in some instances.” The DBN further points at numerous studies that have shown that owner’s collateral is a key factor, in ensuring the success and enhanced lifespan of an 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,” the bank said. Collateral is vital to development finance institutions as well. If the owner abandons the attempt at enterprise, then the development finance institution has to recover as much capital as it can so that other projects can be financed. However, the DBN is 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 DBN 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 borrowers.
The DBN takes three steps to guard against borrowers defaulting on their loans. These include ensuring 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. The DBN seeks to finance businesses that have realistic plans, and that will be sustainable in the long run. Although most enterprises that approach the DBN for finance hold development benefits, the bank must finance those, which appear most likely to succeed and those with long-term prospects. Moreover, the bank 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, the DBN registers the delayed payments as impairments.
When impairments arise, the DBN does not immediately register the payments as bad debts. If it recognises the development value of the enterprise, it will discuss with the entrepreneur the best means to make up the delayed payments. Only when the enterprise fails and the entrepreneur halts payments is the loan amount declared a bad debt. Once the amount is declared a bad debt, it is handed to the DBN’s panel of lawyers. Even at this stage, the client is given the opportunity to negotiate the debt and repayment.
The DBN also recognises that a failed enterprise has a bad impact on borrowers, but also on employees and the broader stakeholders, and therefore will do 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.
By Staff Reporter