What is given gets given back – Importance of repayment
Mutumba said one of the Bank’s dictum is ‘what is given gets given back’. Explaining the concept, he said that the Bank has a fair approach to lending that fosters the mandate of development. However he said that DBN also has to ensure that loans are repaid, as it uses the capital and interest that it recovers to make more loans for development of enterprise and infrastructure.
“The contract between DBN and clients is a contract to responsibly use national resources, as DBN was established from national resources,” he said. “The contract allows clients to start up new enterprises or strengthen existing ones, and we expect our clients to prosper, but at the same time the Bank must prosper as well,” he added.
He pointed out that since its inception 10 years ago, the Bank’s annual level of lending had grown consistently. In the financial year 2005, when the Bank achieved full operating capacity, loan approvals were N$110 million, growing to N$840 million for the 2013 financial year, with a total of N$3,379 billion approved since the Bank’s inception.
“These amounts translate into prosperity for recipients of loans, infrastructure, employment creation and retention, as well as improved social development. If repayments are not made, the pace of development will slow, and enterprise and infrastructure will slow,” Mutumba said.
Talking about impediments to repayment, he said the Bank has observed three primary causes of impairments and defaults.
He said the first primary impediment is unrealistic business planning. “Entrepreneurs are often overoptimistic in the early stages of planning, and may not be able to cope with the operational reality of the plans on which they base their applications for finance.”
He said this would lead to lower streams of revenue than initially expected, and would have an impact on the enterprise’s ability to keep up with repayment.
Secondly, he said, the administration of enterprise also plays a critical role in the ability of the enterprise to repay. If administration is lax, additional costs may mount up, placing strain on the enterprise’s ability to service its loan repayments.
Thirdly, he said, some entrepreneurs do not reinvest earnings, or they are quick to make drawings on profits. This also reduces the ability to repay loans in future. Mutumba stressed that an enterprise must never be seen as an instant source of wealth for owners, but should instead reinvest revenue in operations and in growth. By taking the long-term view, owners would achieve financial stability and subsequent wealth.
Mutumba discussed the importance of collateral. He said while DBN does not base its credit extension on collateral, the Bank does request a certain level of collateral in some instances.
“Collateral serves two main purposes. Firstly it helps align the borrower’s interest with that of the Bank, i.e. the borrower shares the risk with the Bank and it ensures the borrowers commitment to the success of the enterprise. Secondly, collateral serves as a secondary source of loan repayment in case of the worst case scenario of business failure. If the entrepreneur is collateral-resistant, he said, the Bank perceives this as a lack of confidence on the part of the entrepreneur in his or her own business,” he said.
He said that the Bank does however make provision for reduced collateral for emerging entrepreneurs who have not yet been able to build up a portfolio of assets which can be pledged as collateral. He pointed to the Bank’s acceptance of certain assets acquired with Bank finance serving as collateral.
He said recovery of capital through collateral was inevitable, if the enterprise defaulted on loan obligations, as the Bank is duty bound to preserve its capital to apply to the projects of other borrowers.
In the final analysis, Mutumba said, finance from the Development Bank of Namibia, should be considered a privilege, not an entitlement. The decision to allocate finance is based on what is best for national development, although it envisages growing wealth on the part of the borrower.