Circumstances under which financial institutions would consider using non-traditional collateral to provide loans

Abstract

Based on identified factors, non-traditional collateral secured loans can be viable to low income borrowers in developing markets. By being innovative and adjusting the typical banking business model, these loans can provide funding to people who otherwise would not have been able to get funding through the formalised banking system. A large number of individuals, at the bottom of the pyramid in developing countries, do not have access to property rights (property is usually used as collateral in secured loans). The purpose of this study is to determine if non-traditional collateral secured loans can be provided to individuals, SME’s and entrepreneurs at the bottom of the pyramid in developing markets. A qualitative study was conducted from interviews with Heads of Credit, Chief Risk Officers and Secured Lending Heads in financial institutions that provide secured lending offerings in developing markets. The study indicates that specific behavioural trends are associated with secured loan repayments that indicate favourable for lending institutions. Economies of scale in collateral evaluation and monitoring, is a critical factor to this lending approach to enable cost reduction. Being entrenched in the market and pro-active management in a market where very little infrastructure exist is a key factor to success.