Responsible Lending: A risk mitigant of consumer lending
Since 1999, commercial banks operating in Saudi Arabia have expanded their consumer loans to individuals, and as consequence personals loans have risen from SR38.4 billion ($10.2 billion) in 2001 to SR324.7 billion at the end of Q3, 2019 (excluding credit cards loans extended to individuals, totaling SR18.3 billion for the same period).
The main reason for this significant rise in personal loans is the high demand on such loans from retail customers, supported by the service of the Saudi Arabian Riyal Interbank Express (SARIE) which provides direct transfer of salaries to customers’ accounts at banks, guaranteeing these loans to enable them to deduct installments from customers’ accounts on due dates electronically.
The Saudi Arabian Monetary Authority (SAMA) has chosen to control the huge expansion in personal loans by issuing “principles of responsible lending” to encourage lending that meets actual needs of consumers.
The principles aim to enhance financial inclusion by providing adequate financing for all borrowers, while taking into account a reasonable deductible percentage ratio that the consumer can afford.
In addition, the principles focus on ensuring fairness and competitiveness among creditors, making sure credit evaluation procedures and mechanisms are effective and applied to all creditors fairly.
Moreover, the principles dictate that creditors must adopt a clear method for evaluating the creditworthiness of the consumer, to ensure his/her ability to repay. These criteria and procedures must be applied to all borrowers before granting them any type of loan, and must be documented in the customer’s file held by the lending institutions.
Based on a credit study and assessment of a consumer’s financial state, the lending institutions must also identify and classify the regular basic expenses of various borrowers, such as food expenses, and housing and services expenses, which depend on whether the consumer is a homeowner or tenant. They must take into account the health, transportation, communications and insurance expenses of the consumer, which are all affected by their number of dependents.
In my opinion, SAMA has succeeded in encouraging responsible lending by issuing such principles, evidenced by the noticeable shift to asset-based financing, as mortgage lending has grown by 21 percent in the third quarter of 2019 compared to the same period of the previous year, while the personal loans offered by financial institutions to its customers have shown a drop of 1.2 percent for the same period.
I totally agree with Jonathan Westley, a financial analyst, in saying: “Responsible lending is to act in a customer’s best interests, ensuring affordability, transparency of terms and conditions and supporting a borrower if they experience repayment difficulties.”
Talat Zaki Hafiz is an economist and financial analyst.