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Putting a premium on risk

I HAVE come to the conclusion that banks needs to come up with some form of insurance for entrepreneurs for the sake of innovation in the country.
 
A question we often hear is: what needs to be done to stimulate entrepreneurship in South Africa?
 
Answers vary from person to person, but typically they will include "more capital", "more mentoring", "more cartel busting" or "more skills".

I'd like to argue that maybe our financial services providers need to become a little less punitive and do a bit more to create a culture of "trying to grow" rather than "scared to fail".
 
I am not a bank basher, but history has shown we have a super profitable banking system in South Africa. For all the criticism, banks are  well managed, well capitalised and in many ways the envy of their peers in more established markets.

In the last financial year, the Big Four raked in very generous headline profits. In a "challenging year", Standard Bank earned R11bn, Absa R7.6bn, FirstRand R9.4bn and Nedbank R4.2bn.
 
So hypothetically, I come to Standard Bank as an entrepreneur and say I am looking for R200 000 to start a business. The bank will apply a scoring system to me as an individual, and it will probably assess me to work out how risky I am. If I fall into its parameters of "acceptable risk", the loan will be granted.
 
According to the World Dictionary, the word risk means "the possibility of incurring misfortune or loss".
 
I agree that the entrepreneur takes some risk, but I am not totally sure I understand where the risk lies for banks. If my business crashes tomorrow and I'm like many other small business owners out there who have had to take some kind of personal liability to secure a loan, I am as good as finished.

The chances of me looking at trying to start another business are minimal. Instead, I am going to spend the next 10 years trying to pay back the money I borrowed because I took a risk.

Reward the small firm owner for trying
 
For sure, banks take a bad debt charge, but a big portion of those bad debts or provisions are accounts sitting with law firms now hounding their clients for breach of contract.
 
The client who comes to Standard for a R200 000 loan is not going to be the golden goose for the small and medium enterprise division of the bank.

With any luck, this is going to be the entrepreneur who creates three jobs so three families can pay off the R500 000 home loan with the bank. But if you don't have that innovator to create the three jobs in the first place, you don't have something to credit score your clients against.
 
My theory is that it should work like this: if I come to the bank for the R200 000 loan to create a business, I am scored on general creditworthiness, but also on the potential knock-on impact my business is going to create.

Sure, it's a moving target but if the funding means I create three jobs or 30 jobs, this should count in my favour. After all, I am contributing to the baseline the banks need to measure risk.
 
On top of that, the bank will then build in a small premium for my so-called entrepreneurs' insurance underwritten by one of their insurance partners - after all, don't all the top brass love to talk about "cross-selling"?
 
It works something like this: if I fail, the bank says "I recognise you tried and we reward people who try. This is going to hurt your personal credit score briefly, but we are not going to hold it against you for the next 10 years hoping you will repay it.

"We also have no intention of sending a lawyer coming after you."
 
Unlike the three employees who are simply takers, the entrepreneur is a creator and should be rewarded for stimulating economic or entrepreneurial activity.

I think I am on to a winner here - if the banks are man enough to step up to the plate.
 
 - Fin24

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