Savings and Credit Cooperatives (SACCOs) have become more popular in recent years; they are providing a much-needed alternative to the mainstream banking industry.
However, even SACCOs face challenges when it comes to assessing lending risk while still being able to provide fair services. This is why many of these cooperatives are looking into using Risk-Based Pricing.
NLS Tech Solutions explores what Risk-based pricing means for Saccos and how they can benefit from employing a robust credit scoring system.
WHAT’S RISK-BASED PRICING?
It’s a framework lenders use to evaluate and price loan products based on the borrower’s creditworthiness. The higher the perceived risk of the borrower, the higher the interest rate charged on the loan.
This model has been in place for a few months now, and it’s working well for most lenders.
However, there are some drawbacks. For one, it can be difficult for people with poor credit to get approved for a loan. Additionally, some people have complained that the interest rates are too high.
Despite these drawbacks, risk-based pricing is still the best option for all lenders.
It helps them manage their risk and protect their bottom line. And, most importantly, it gives borrowers access to the funds they need when they need it.
HOW DOES THIS TYPE OF PRICING DIFFER FROM TRADITIONAL LENDING?
There are several key ways in which risk based pricing differs from traditional lending.
First, risk-based lending takes into account the unique circumstances of each borrower, rather than using a one-size-fits all approach. This means that the interest rate and terms of the loan are tailored to the individual borrower, rather than being set by the lender.
Second, risk-based pricing relies on data and analytics to assess a borrower’s creditworthiness, rather than relying on subjective measures. This allows for a more accurate assessment of each borrower’s risk profile and results in more efficient allocation of capital.
Finally, risk-based pricing is typically available at a lower cost than traditional lending products, making it an attractive option for borrowers.
WHAT ARE SOME OF THE POTENTIAL BENEFITS OF THIS PRICING MODEL FOR SACCOS?
When it comes to lending, Saccos have traditionally used a one-size-fits-all approach.
However, this approach can often lead to higher levels of non-performing loans (NPLs). A risk-based pricing model has the following benefits:
- It takes into account the different risk profiles of borrowers and customizes loan products and pricing accordingly.
- It can help to reduce high NPLs. By taking into account the different risk profiles of borrowers, Saccos can better assess which individuals are more likely to repay their loans on time. Saccos can then use this information to target loan products and pricing at those who are less risky, thus reducing the overall level of NPLs.
- It has the potential to increase financial inclusion. In many cases, those who are most in need of credit are also the ones who are least likely to qualify for a traditional loan. However, by tailoring loan products and pricing to individual risk profiles, Saccos can make credit more accessible to those who would otherwise be excluded. This can help to promote economic development and reduce poverty levels in communities where access to credit is limited.
Saccos should rely on a robust credit scoring engine/system that automatically calculates the score of a loan application based on data points entered and the score card used. Such a system is designed to interface to the Saccos’ internal system, thereby ensuring funds only go to those who qualify.
