Theory of an interest rate commission agent banking system

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An interest rate commission agent banking system is a system adopted by the bank to be an agent of investors loan funding to entrepreneurs getting the fund seller and buyer agreement to administer the loan after disbursement by retaining reasonable interest rate commission from the agreed investors loan funding credit price. An interest rate commission agent banking system (AIRCABS) transfers credit risk and liquidity crunch to investor and entrepreneur and thereby maximizes AIRCABS sustainability and profitability. Calculating discrete market deposit interest incentive into account of depositor who later shifted to an investor position to get proportionate credit price instead of deposit interest rate on the fund already invested by the bank which later shifted to an agent position found increasing stability of money deposited by depositors.
To adopt an interest rate commission agent banking system, banks should develop the following lending strategies:
1. 360-degree lending strategy:
The parties involved in this lending strategy are investor, entrepreneur and the agent bank. In this lending strategy investor and entrepreneur had strong acquaintance and the collateral that will be pledged by entrepreneur to get loan from investor is optional. Here the project to be financed would be selected by an investor. After the project selected by an investor, investor and entrepreneur presented at agent bank to finance the investor’s fund to an entrepreneur. The agent bank which administer the loan after disbursement to an entrepreneur on behalf of an investor assessed the feasibility study of an entrepreneur before the three parties got into loan contract. During the loan period the agent bank can transfer the loan to an investor who has a capacity to buy the loan many times if the existed investor failed to continue up to the loan has settled. If an entrepreneur failed to pay the loan during the loan period the agent bank rented the financed project to new entrepreneur till the loan has settled after which the project will be returned to original entrepreneur. The agent bank rent the project of an entrepreneur without ownership transfer, which can be made by ultimate decision of the investor and the agent bank. An entrepreneur who rented the project collects the business revenue excess above the set loan repayment in the loan contract.
2. 180-degree lending strategy
The parties involved in this lending strategy are investor, entrepreneur and the agent bank. Here investor and entrepreneur are unknown to each other. Investor and entrepreneur presented at agent bank at different time. An investor who is looking for a feasible project to finance consults the agent bank which searches later a feasible project among an entrepreneurs who have already applied to get loan through an agent bank. if an agent bank did not have a feasible project according to the investor application, it would search a feasible project from the market. While the agent bank select a feasible project on behalf of an investor, the agent bank collect project selection fee from an investor. Since investor and entrepreneur unknown to each other collateral pledging by an entrepreneur is mandatory. If an investor failed to continue in the loan period, the agent bank sold the loan to new investor in the market. If an entrepreneur failed to pay the loan, the agent bank rented the project to new entrepreneur who has same project interest in the market. Where there is no hope to collect the debt from an entrepreneur the agent bank sold the collateral to collect the remaining debt amount. The collateral may be the project under investment or another asset. The collateral pledged against the loan disbursed from an investor’s account should have a safe margin rate between 91% and 100% for a 90% loan on the collateral value, unless an entrepreneur covers the remaining more than or equal to 10% safe margin by buying insurance from an insurance company. The insurance company may cover the default amount beyond the original loan balance or according to the agreement between the entrepreneur and the insurance company. Here the agent bank may not advise the entrepreneur to buy insurance coverage for loan repayment rather it manages the loan to get paid in due time as specified in the loan contract. Otherwise, if an entrepreneur fails to pay the debt obligation above 100% of the collateral value, the agent bank would auction the collateral together with the project under investment and is obliged to collect the fund disbursed together with the interest accrued to reimburse the remaining unpaid balance to investor and its uncollected interest rate commission and additional administrative expense. The agent bank sells the pledged collateral when no alternative investment solution can be found. However, the main target of the agent bank is to benefit the investor and the entrepreneur by mitigating the risk related with the entrepreneur business. Therefore, the agent bank rents the project of entrepreneur to new entrant entrepreneur that has the same project interest till the loan is settled, holding the collateral and without ownership transfer. Here the benefit of the new entrant entrepreneur is that the business runs with the support of entrepreneur own fund paying rent, which is equal or greater than the current loan repayment, with full-fledged facility and collects business profit beyond loan repayment to investor. The exiting entrepreneur does not lose its property since the property will be returned after the loan has settled by the new entrant entrepreneur. The rent of the exiting entrepreneur project calculated based on loan to total asset of an entrepreneur. If the loan to total asset ratio calculated greater than 100%, the rent would be higher than the current loan repayment. If the loan to total asset ratio is less than 100%, the rent could be equal or greater than the loan repayment to settle the loan in due date. Here the agent bank transfers the credit risk of an investor and entrepreneurs to newly entrant entrepreneurs.
3. 90-degree lending strategy
The parties involved in this lending strategy are money depositor and the bank. To run this lending strategy the bank should adopt an interest rate commission agent bank as one unite of the bank. So that, the depositors of the bank can shift to investor position to collect credit price in terms of deposit interest rate on the fund already invested by the bank which later shifted to agent position for depositor who then after became an investor.
In 90 degree lending strategy, the depositor who wished to be an investor in the deposit periods consults with the bank that already invested the depositor’s fund on a selective project. The bank shifts to agent position after a formal agreement made between the investor and the agent bank for the portion of funds invested. The agent bank stops calculating deposit interest and the newly entrant investor benefits proportional credit price according to fund considered in the total fund that is already disbursed by the bank to the debtor and thereby the agent bank collects proportional interest rate commission from the investor credit price. This can be done because an interest rate commission agent banking system can be a unit of a bank that runs under conventional banking system. The loan already disbursed to a debtor is covered by insurance and pledged collateral. So when the depositor moves to an investor position in the deposit period the credit risk of an investor transfers to the fate of collateral pledged and insurance engaged by an entrepreneur.
These three lending strategies stood for transferring credit risk and liquidity crunch to investor and entrepreneur by increasing number of investors and entrepreneurs in the society. Since applying the model increases the types of investment in a country, it has higher contribution to the growth of GDP. It also helps to pool unbanked society into banking system and thereby enable to narrow the gap between informal and formal economy. If an entrepreneur found lacking knowledge an agent bank would design a business plane and follow up an entrepreneur’s business in order to mitigate the credit risk and operational risk of an entrepreneur. While an investor sold the loan to newly entrant investor the agent bank did not tell the situation to an entrepreneur. The entrepreneur would be told by an agent bank when there is a need to amend the loan contract without any change of terms and tariff which already existed in the previous loan contract.

Ameha Tefera Tessema (DBL) Doctor of Business Leadership is a Commercial Bank of Ethiopia staff. You can reach him via ambet22002@yahoo.com

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