The Default Of A Borrower Essay

1177 Words5 Pages
The default dilemma. The uncertain recourse upon default severely undermines the altruistic aspect of non-interest lending. Collecting defaulted funds can prove to be time-consuming and difficult for creditors, as there exists an industry built upon the evasion of creditors. The stifling of funds to lend, due to the default risk, could be circumvented in real estate transactions by securing the loans against real estate. Loan terms, such as lower loan-to-value ratios, could help further protect the lenders, in the event of default, with market price shifting.
Inadequate underwriting. Often contributing to the default dilemma has been insufficient underwriting of the borrower. Establishing adequate assessment of a borrower, coupled with focusing on borrowers with very good credit history, has been shown to lower default rates (Bhardwaj and Sengupta, 2001). Crowdfunding sites, such as Lendingclub.com, periodically change their underwriting standards to remove the highest risk borrowers.
Revenue focus. Any lending model can only succeed with the injection of adequate capital. The focusing of stagnant funds on revenue effectively removes funds that could be used for lending. The challenge will be to have the lender forego a profit yielding investment. Islamic scholars have identified this predicament as a negative attribute associated with interest; it prevents the creation of interest-free loans as the lender expects to realize a gain (Al-Fawzan, 2005). The
Get Access