In today’s rapidly evolving financial landscape, lending institutions—especially microfinance banks and commercial lenders—face a critical strategic choice: grow fast or grow sustainably.
For years, many institutions pursued volume-driven lending, focusing on expanding their loan books as quickly as possible. However, increasing default rates, economic volatility, and tightening regulations are forcing a shift toward a more disciplined approach—risk-adjusted lending.
This blog explores the differences between these two models, their implications, and why forward-looking institutions and others in emerging markets must rethink their lending strategies.
Also read: Africa’s MSME Survival Gap: Trends, Insights, and Strategic Solutions
What is Volume-Driven Lending?
Volume-driven lending prioritizes loan disbursement growth as the primary success metric.
Key Characteristics:
- Aggressive loan disbursement targets
- Focus on customer acquisition
- Minimal emphasis on borrower risk profiling
- Staff incentives tied heavily to loan volumes
Objective:
Maximize market share and revenue growth
The Hidden Risks
While this approach can deliver rapid expansion, it often comes with significant downsides:
- Rising Portfolio at Risk (PAR)
- Increased loan defaults
- Weak portfolio quality
- Short-term profitability masking long-term losses
In many cases, institutions realize too late that not all growth is good growth.
What is Risk-Adjusted Lending?
Risk-adjusted lending focuses on balancing growth with credit quality, ensuring that every loan issued aligns with the borrower’s repayment capacity and risk profile.
Key Characteristics:
- Strong credit appraisal systems
- Use of risk scoring models
- Pricing loans based on risk
- Continuous monitoring of borrower performance
Objective:
Maximize risk-adjusted returns, not just volume
Core Differences
|
Factor |
Volume-Driven Lending |
Risk-Adjusted Lending |
|
Primary Goal |
Loan growth |
Portfolio quality |
|
Risk Assessment |
Minimal |
Extensive |
|
Staff Incentives |
Disbursement-focused |
Balanced (disbursement + recovery) |
|
Default Rates |
High |
Controlled |
|
Sustainability |
Weak |
Strong |
Why Volume-Driven Lending Fails in Today’s Economy
Economic realities—especially in developing markets—make volume-driven strategies increasingly risky.
Key Challenges:
- Inflation reduces borrower repayment capacity
- Informal sector volatility increases default risk
- Currency fluctuations affect business stability
Institutions that ignore these factors often experience:
- Declining profitability
- Liquidity pressure
- Rising write-offs
The Case for Risk-Adjusted Lending
Global best practices from institutions supported by World Bank and International Monetary Fund consistently emphasize the importance of risk-based lending frameworks.
Key Benefits:
1. Improved Portfolio Quality
Better borrower selection reduces default rates.
2. Sustainable Profitability
Returns are stable and predictable over time.
Also read: Why 80% of Nigerian MSMEs Don’t Survive Past Five Years (And What It Means for Growth)
3. Enhanced Institutional Resilience
Stronger ability to withstand economic shocks.
4. Regulatory Compliance
Aligns with global risk management standards.
Practical Example: What Happens in Real Life
Let’s compare two lending approaches:
Scenario A: Volume-Driven
- 1,000 loans disbursed
- 20% default rate
- High operational stress
Scenario B: Risk-Adjusted
- 700 loans disbursed
- 5% default rate
- Higher net recovery and profitability
Even with fewer loans, Scenario B delivers better long-term outcomes.
Key Pillars of Risk-Adjusted Lending
1. Strong Credit Appraisal
- Assess borrower income, cash flow, and business viability
2. Risk-Based Pricing
- Higher-risk borrowers attract higher interest rates
3. Continuous Monitoring
- Track borrower behavior post-disbursement
4. Early Warning Systems
- Detect repayment issues early
5. Balanced KPIs
- Combine loan growth + recovery performance
Shifting the Mindset: From Growth to Quality
For institutions transitioning from volume-driven to risk-adjusted lending, the biggest change is cultural.
Key Shifts:
- From “How much did we lend?”
to “How well will it perform?” - From “Disbursement targets”
to “Portfolio quality targets”
Challenges in Transitioning
The shift is not without obstacles:
- Resistance from loan officers
- Short-term drop in disbursement numbers
- Need for investment in systems and training
However, the long-term gains far outweigh these challenges.
The Role of Technology
Digital tools are critical in enabling risk-adjusted lending:
- Credit scoring systems
- Data analytics platforms
- Automated monitoring dashboards
These tools reduce human bias and improve decision-making accuracy.
Conclusion
The future of lending—especially in emerging markets—is not about how much you lend, but how well those loans perform.
Volume-driven lending may deliver quick wins, but it often leads to long-term instability. In contrast, risk-adjusted lending ensures:
- Better credit quality
- Stronger financial performance
- Long-term sustainability
Institutions like Alert Microfinance Bank and others across the sector must embrace this shift to remain competitive and resilient.
Final Thought
“Growth without risk control is not progress—it is exposure.”
Dr. Godfrey Ajayi Sunday
Group Managing Director
G-consulting International Services Ltd