What Banks Can Do to Tame the Tide of Bad Debts

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Alex is a mid-manager at an NGO in Nairobi.  He’s servicing a home loan for a two-bedroom apartment in an upmarket neighborhood, and two car loans – one for him and one for his wife. His four-year-old son is in a private nursery school and Alex is considering enrolling him in a private elementary school next year.

Two years ago, he took another loan to buy the land where he intends to build his family home. The land is 50 kilometres from the main road and the access road is yet to be paved. None of the owners of other plots near his have considered developing their properties but there are plans to connect electricity and water.

The family goes on holiday twice a year – again, financed through personal loans. Alex is also financially responsible for taking care of his elderly mother, who has no income and lives in the village. On top of that, he pays for his younger sister’s college education; she’ll be finalising her diploma course in the next two years. He also employs his cousin, who recently dropped out of college, in a small business Alex started to supplement his income.

Since he has a pay slip and a contract of employment, the bank considers Alex to be a good customer and often tops up his home loan whenever he faces financial pressure. In addition, Alex is a member of a SACCO. He has a loan there, as well as two peer groups – one is a welfare group and the other is an investment club.

With all this to consider about Alex’s background, how can the bank properly assess the risk of lending to him? Risk management practices vary from bank to bank depending on their policies on granting credit. Poor credit risk management can lead to institutional failure. This, in turn, can reduce financial inclusion.

In 2016, FSD Africa commissioned a market study to assess demand for, and supply of, risk management training for the financial sector. The study looked at three markets: DRC, Ghana and Kenya.

It found that in most institutions, after a brief orientation or introductory course, new staff members are put into operations without appropriate skills training. In a majority of institutions surveyed, no risk management training is provided to entry-level staff (those in their first or second year at the institution).

Not surprisingly, most institutions cited poor portfolio performance as a symptom of poorly trained staff.  But the importance of entry-level training is still underestimated. Entry-level staff are the foundation of any financial sector. Without strong skills at the foot of the staff pyramid, middle managers struggle to control risk in daily operations. And in addition to strengthening risk management, better entry-level staff training can lead to an improvement in the quality of customer service.

How, then, can such training be improved? Above all, the study recommends the development of a comprehensive risk management training programme. This would address risk management training needs, particularly for entry-level staff, and help them to stem the rising tide of bad loans.

Written by Dr. Moses Ochieng, Consultant-Professional Skills Development, FSD Africa


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  • Dr. Ochieng thanks for case which highlights lenders’ approach to consumer credit. I read the 2016 survey which broadly addressed risk management and inadequately covered credit risk management.

    In my view (based on empirical assessments and industry experience), the theme of your case (bad loans) is mainly caused by ineffective strategic approach by the lenders and over-reliance on ancient customer on-boarding criteria. The case of Alex demonstrates an element of a lender failing vehemently to correctly advise an applicant of which product to secure. Alex in fact is overburdened by fashionable loan products.

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