IDEAS home Printed from https://ideas.repec.org/a/wsi/ijfexx/v04y2017i02n03ns2424786317500359.html
   My bibliography  Save this article

Revenue-based lending for SMEs

Author

Listed:
  • Hassan Mazengera

    (Department of Statistics, Rhodes University, Grahamstown, South Africa)

Abstract

Most small businesses face uncertain demand for their products and services. The revenue they earn is most likely to be of stochastic nature. They face difficulties in making a fixed loan repayment throughout the life of the loan as they earn stochastic revenues. If banks are to lend to this market using the fixed loan repayment schedule/regime, it is highly likely that these businesses will default on their repayments several times in period n. If default rate is high in a loan portfolio, it means that the bank has to set up a higher bad loan provision, thereby tying up its capital. This reduces the lending business, profitability and growth of the financial institution. This is one of the reasons why financial institutions perceive these small businesses as a high risk market. Only financial institutions with a very high risk appetite will tap into this market. We are proposing revenue-based lending as a solution to the problem. Stochastic repayments will reduce periodic defaults. This reduction in periodic defaults will reduce the bad loan provision thereby making more funds available for lending. We want to show that the bad loan provision for the bank will be higher for a fixed loan repayment compared to the stochastic loan repayment.

Suggested Citation

  • Hassan Mazengera, 2017. "Revenue-based lending for SMEs," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-20, June.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500359
    DOI: 10.1142/S2424786317500359
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2424786317500359
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2424786317500359?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rob Kaas & Marc Goovaerts & Jan Dhaene & Michel Denuit, 2008. "Modern Actuarial Risk Theory," Springer Books, Springer, edition 2, number 978-3-540-70998-5, December.
    2. Vincent Goulet & Christophe Dutang & Mathieu Pigeon, 2008. "actuar : An R Package for Actuarial Science," Post-Print hal-01616144, HAL.
    3. Dutang, Christophe & Goulet, Vincent & Pigeon, Mathieu, 2008. "actuar: An R Package for Actuarial Science," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 25(i07).
    4. Gerber, Hans U. & Shiu, Elias S. W., 1997. "The joint distribution of the time of ruin, the surplus immediately before ruin, and the deficit at ruin," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 129-137, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li-Fei Huang, 2018. "Using App Inventor to provide the amortization schedule and the sinking fund schedule," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-9, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jelena Kočović & Marija Koprivica, 2018. "Internal Model For Measuring Premium Risk In Determining Solvency Of Non-Life Insurers," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 63(217), pages 99-128, April – J.
    2. repec:jss:jstsof:35:i10 is not listed on IDEAS
    3. Avanzi, Benjamin & Taylor, Greg & Wang, Melantha & Wong, Bernard, 2021. "SynthETIC: An individual insurance claim simulator with feature control," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 296-308.
    4. Anna Castañer & M.Mercè Claramunt & Maite Mármol, 2014. "Some optimization and decision problems in proportional reinsurance," UB School of Economics Working Papers 2014/310, University of Barcelona School of Economics.
    5. K. G. Reddy & M. G. M. Khan, 2020. "stratifyR: An R Package for optimal stratification and sample allocation for univariate populations," Australian & New Zealand Journal of Statistics, Australian Statistical Publishing Association Inc., vol. 62(3), pages 383-405, September.
    6. Denuit, Michel, 2019. "Size-biased transform and conditional mean risk sharing, with application to P2P insurance and tontines," LIDAM Discussion Papers ISBA 2019010, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    7. Michael Grabchak, 2022. "Discrete Tempered Stable Distributions," Methodology and Computing in Applied Probability, Springer, vol. 24(3), pages 1877-1890, September.
    8. Jian Wang & Cielito C. Reyes-Gibby & Sanjay Shete, 2021. "An Approach to Analyze Longitudinal Zero-Inflated Microbiome Count Data Using Two-Stage Mixed Effects Models," Statistics in Biosciences, Springer;International Chinese Statistical Association, vol. 13(2), pages 267-290, July.
    9. Denuit, Michel, 2019. "Investing in your own and peers' risks: The simple analytics of p2p insurance," LIDAM Discussion Papers ISBA 2019028, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    10. Ekaterina Bulinskaya & Boris Shigida, 2021. "Discrete-Time Model of Company Capital Dynamics with Investment of a Certain Part of Surplus in a Non-Risky Asset for a Fixed Period," Methodology and Computing in Applied Probability, Springer, vol. 23(1), pages 103-121, March.
    11. Adele H. Marshall & Mariangela Zenga, 2012. "Experimenting with the Coxian Phase-Type Distribution to Uncover Suitable Fits," Methodology and Computing in Applied Probability, Springer, vol. 14(1), pages 71-86, March.
    12. Ozkok, Erengul & Streftaris, George & Waters, Howard R. & Wilkie, A. David, 2012. "Bayesian modelling of the time delay between diagnosis and settlement for Critical Illness Insurance using a Burr generalised-linear-type model," Insurance: Mathematics and Economics, Elsevier, vol. 50(2), pages 266-279.
    13. Abu Bakar, S.A. & Hamzah, N.A. & Maghsoudi, M. & Nadarajah, S., 2015. "Modeling loss data using composite models," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 146-154.
    14. Emanuele Taufer & Flavio Santi & Pier Luigi Novi Inverardi & Giuseppe Espa & Maria Michela Dickson, 2020. "Extreme Value Index Estimation by Means of an Inequality Curve," Mathematics, MDPI, vol. 8(10), pages 1-17, October.
    15. Kobus, Paweł, 2013. "Modelling joint distribution of crop plant yields and prices with use of a copula function," Problems of World Agriculture / Problemy Rolnictwa Światowego, Warsaw University of Life Sciences, vol. 13(28), pages 1-10, December.
    16. Alexandru Amărioarei & Frankie Spencer & Gefry Barad & Ana-Maria Gheorghe & Corina Iţcuş & Iris Tuşa & Ana-Maria Prelipcean & Andrei Păun & Mihaela Păun & Alfonso Rodriguez-Paton & Romică Trandafir & , 2021. "DNA-Guided Assembly for Fibril Proteins," Mathematics, MDPI, vol. 9(4), pages 1-17, February.
    17. Devolder, Pierre, 2019. "Une alternative a la pension a points : le compte individuel pension en euros," LIDAM Discussion Papers ISBA 2019011, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    18. Zhi Chen & Melvyn Sim & Huan Xu, 2019. "Distributionally Robust Optimization with Infinitely Constrained Ambiguity Sets," Operations Research, INFORMS, vol. 67(5), pages 1328-1344, September.
    19. Härdle, Wolfgang Karl & Burnecki, Krzysztof & Weron, Rafał, 2004. "Simulation of risk processes," Papers 2004,01, Humboldt University of Berlin, Center for Applied Statistics and Economics (CASE).
    20. Kume, Alfred & Hashorva, Enkelejd, 2012. "Calculation of Bayes premium for conditional elliptical risks," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 632-635.
    21. Keita, Moussa, 2017. "Traitement et Analyse de Données avec le Langage R [Data Processing and Analysis with R Language]," MPRA Paper 77718, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500359. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/worldscinet/ijfe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.