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Understanding Bank Lending

Understanding Bank Lending is inspired by a conversation/chat I had yesterday with a friend. It might benefit the general public so I thought to share. 

More to come... 
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Some minutes past 10am yesterday, a friend from school who studied Theatre Arts and is currently in the movie industry featuring in epic films and slowly rising as an upcoming star actor called me to request for my bank's partnership with him for a movie he's planning on shooting. 

Bank, partner with an individual ? An individual who hasn't registered his company name with Corporate Affairs Commission (CAC). A young graduate in his 20s who is still trying to find his feet in the entertainment industry wants us to fully sponsor his film project. That's funny. I told him to chat me up as the conversation was going to be a long one. Then we began. 

I decided to share the history of that chat here because there are a lot of people complaining that Banks don't encourage SMEs, banks don't encourage entrepreneurs, banks don't give loans to retail customers and so on. Not quite true. I'll explain why. 

When you accost your account officer or walk into any of your bank's branches on a beautiful day after returning from your dreamworld, you are full of ideas, so much fire in your bones, very optimistic about your dream of being your own boss and an employer of labour but you need to understand what we see when we listen to your big dreams. 

The loan/overdraft/import financing/LPO or whatever it is you're requesting for when you approach your bank will come at a cost. Why? Because banks don't print money. We take from areas of surplus (depositors) and give to areas of deficit/want/need (borrowers). This is a huge risk. A very risky business for banks because anything can happen to the individual borrower the next minute. He might die. His warehouse might be razed down after financing the stock in his warehouse. Or on the brighter side, he can go on a vacation to an island with his family and enjoy there till eternity. 

Depositors money comes at a cost (interest accrual) to the bank. When we take Kabiru's savings and give to Michael for business and Kabiru walks into the bank the next day to request for his money, what do we do? Tell him we don't have his money anymore? If we try that there will be a run on our banks across all states. People trooping into our banking halls or using their mobile phones from the comfort of their homes to transfer their funds and we don't want that. 

Yet, we are in business to serve customers. To offer financial intermediary services so we have no excuse you'll say. I agree with you but overtime banks have had their hands badly burnt therefore we need to apply caution as we discharge one of our primary responsibilities to our customers.

And what is that? 

COMFORT 

What comfort or collateral have you when you approach your bank. Please don't tell me you have a ready market with buyers waiting in line for your product like my friend told me. If it be so, why don't you leverage on spontaneous financing? The proposed buyers can actually pay in advance as they eagerly await your production. That way, you have money to produce or you can approach the bank with that deposit and it can be accepted as collaterized deposit. That is one form of comfort for the bank. At least, the facility will be cash-backed. No shaking. 

Again, we ask to see previous works you've done in the past and you tell us you haven't done anything before but you believe so much in yourself that you want the bank to use your confession as bond. It doesn't work that way. No track record. No past successes to reference and you want your first project to be a block buster. Things don't work that way. Start with the little you have. Do small things first and show us the results. From the antecedents, we can be better prepared to offer financial assistance with your promise to pay back. 

I asked my friend who is requesting for bank loan how he intends to pay back and his response was as expected, filled with high hopes. "Local movie houses will buy the movie once it's out. In fact, marketers in Alaba and Onitsha are already on ground. I've spoken with them".

Can you see the dilemma we find ourselves? I'm happy he has their commitments but is there a legal agreement, a partnership deed to close this deal? None! How sure are we that after producing a high budget movie it will not be underpriced? Have you taken into cognizance the commercial side of this project? He responded in the negative but insisted that he has it all figured out! 

If it doesn't go as planned, what should the bank fall back on? 

He said it will go as planned. 

Sometimes, your optimism is not what makes a project work, your understanding and preparedness for failure produces success. 

Questions and Reactions are welcome 
My friend is like the hundreds of thousands of youths out there looking for a way to hit it big from the start. 

Take it slow guys... 

Your bank is here to serve you. Trust us to deliver.

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