Much has been said and written about the ability of the local banking industry to manage risk, improve approach towards service delivery to clients etc. A number of risk approaches have been suggested by the Central Bank, economists and multilateral financial institutions like the International Monetary Fund.
The latest is the African Development Bank’s former economists’ call for credit institutions to acquire equity stake in businesses that they finance because it would allow them (banks) to take up leadership roles (board members) in businesses.
Leonard Rugwabiza, who was last week appointed to head the Planning Unit in the Ministry of Finance and Economic Planning, says that this will give banks a chance to monitor closely their clients hence minimizing losses arising from poor management of businesses which in turn make it difficult for them to pay back.
On whether banks should hold a share of their borrowing firms’ equity, I think yes because without the equity participation, lending institutions usually do what is called insider trading, taking advantage of accessing information that other sources of finance like competing banks don’t have in order to exploit the borrower.
But if the bank has some equity stake in the business, it reduces its tendency to maximize profit at the expense of that borrowing firm hence in turn increasing the borrowers’ incentive to generate profit for survival and expansion.
Secondly, just the same way banks need to see you investing a fraction of your money in the business in order to take you serious, in order to work hard to make the business a success banks also ought to own equity stake in them.
However, it is hard to believe that at this time when confidence in the credit market is still low, owning shares in businesses by banks will play a big role in affixing the problems in the banking industry.
It requires better credit management practices that help to accurately forecast, measure, monitor and report potential credit risk exposures across the entire economy, industry, and organization on both counterparty and portfolio levels.
The writer is Journalist