April 16, 2017
By Roshan Mall, Senior Associate, Qarar
It has been well documented over recent years, that retail banks should be prepared for adverse market events and as such ‘stress’ all financial portfolios in the event of an economic or financial downturn. To date there is little information that has been shared on the impact of an economic slowdown on consumer lending in Saudi Arabia and the Middle East specifically.
The following article describes the causal factors of a downturn, the subsequent impact on the Kingdom of Saudi Arabia, and the retail bank lending market and suggested actions to mitigate consumer lending related exposures and losses.
Causes of the slowdown
There are a number of macro level indicators that can trigger an economic downturn:
Impact on Saudi Arabia
Oil price fluctuations have had a direct impact on the Middle East, specifically in Saudi Arabia, as the world’s largest producer and exporter of oil. The country has been able to scale up its production because of its high spare capacity of around 2 million barrels a day.
SAUDI ARABIA’s continued dependence on oil [as its primary source of revenue] in the short term is potentially problematic. In the short-term, Saudi economy is vulnerable to shifts in oil prices, lowered demand, or disrupted production due to a number of possible factors, including regional [political] conflicts and the OPEC rebalancing oil-production quotas.
Impact on Industry
During an economic downturn, one may observe industries suffering from a number of potential factors. In essence, this would include:
Impact on Consumer Lending
During an economic downturn, there are a number of specific changes that would likely occur within consumer lending, this would include:
And the Impact on Consumers?
Economic downturns directly impact consumers on a day-to-day level through factors which may include:
Summary – Downturn Chain of Events:
These events, which are not exhaustive, start at a macro level flow through to the consumer. Note that the time from the “Causal Factors” to the “Consumer Impact” is often quite lengthy, as such this lagged affect can sometimes lead to a false sense of how bad the downturn actually.
Many consumers will only reduce spending as a direct result on their disposable income; however this often leads to over-indebtedness and an increased appetite for credit to maintain existing expenditure and lifestyles.
Figure 1 below summarises the points discussed and shows how each event triggers the next.
How should Banks Prepare?
The main objective for banks during a downturn is to minimise the impact on losses. Banks should quickly and carefully review and enhance strategies to prepare well in advance of such events and the end-to-end process must be well-thought out, managed, tested and revisited regularly:
The Downturn Integrated Credit Risk Framework
The key management of risk in a downturn is for an action plan to be holistic and integrated. For example, behavioural scorecard re-alignment will impact collections directly (specifically pre-delinquent actions) and a strong understanding of the downward impact is necessary to allow collections to plan capacity (potential higher inflow).
Solutions for Retail Banks in the region
There are a number of solutions available for clients that can be considered in an economic downturn. These actions should be taken to constrain exposure and losses, whilst carefully considering the impact on customers.
Essentially, there are three factors clients need to consider to ensure they are well prepared to weather the effects of a downturn:
In summary, it is imperative for banks to identify its key success factors in preparing for a downturn. In general, these will include:
It is important, whatever ‘solutions’ are recognised and implemented by the bank, that they utilise high quality internal and external data. This ensures a full and complete picture of a customer’s exposure and behaviours, and more importantly the associated impact that these strategic changes will have on the bank’s performance.