On Debt Collection: Like Family and Friends or Like Foe

One goal of informal money lenders and formal financial service providers is to have a steady stream of credit-worthy customers who pay off their high- or low-interest loans on schedule. This serves to keep the cycle of credit steady and available throughout business cycles.

 

Whatever happens when debtors are running late with their scheduled repayments reveal the value systems of the creditors. On one hand, creditors may be patient and understanding, offering extension periods to hitherto faithful customers. 

This is with an understanding of the financial history of such customers with the firm. Customers who may have been shown consideration with piecemeal payment options are likely to retain patronage of such financial service firms.

 

On the other hand, aggressive firms may demonstrate draconian methods (for instance, as reported by customer reviews of Fintech firms operating in Nigeria). These include recruitment of unpleasant customer service representatives, who use open threats, shaming practices, and circulation of debt information around debtor’s social circles to compel prompt repayment.

 

While such unethical actions may produce immediate gratification, evidenced by facilitated loan repayments that debtors probably gather through beggarly means. This crude and unfriendly approach may contribute to irrecoverable customer account losses in the longer term, necessitating aggressive advertisement expenditure. Such an outcome is ultimately counter-productive.

 

In business climes like Nigeria, where double-digit interest rates are maintained, even on short-term personal loans, persons who seek loans as fuel for small business development or as salary advance, may find that potential business profits are eroded by high lending costs.

 

In response to such unfavourable business climates, informal and social forms of saving and lending, with little or zero transaction costs are preferred. Practices such as rotating savings and credit associations (RoSCAs) are worthy of note. In this manner, individuals can save and lend with trusted members of their close-knit social or work circle without the hassles of securing loans at exorbitant rates from money lenders.

 

On the part of the government, fostering financial inclusion will require more than lip service. It may require crashing lending rates to as low as 1-2 per cent, in order to boost household production and economic activity. This can help curb high unemployment rates among the youths, who may have viable business ideas but little or no funding for take-off. Pragmatic steps may also entail  earmarking credit guarantees to financial service providers who serve women and members of the ‘no-income class’ (for example, educated unemployed), as well as low-income earners.

Establishing and monitoring best practices such as financial reporting, which contributes to individuals' credit score, rather than the use of threats and shaming tactics can go a better way to make financial service agents act like family and friends to their current and prospective customers, rather than as foes.

Otherwise,  the best thing a sincere debtor can do is plead patience and understanding till they can pay up fully, with the hope that their creditors will be merciful.

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Photo credit: Wise Bread