Credit Infrastructure: Is Consumer Lending Dead in Nigeria?
Credit penetration in Nigeria is among the lowest globally, consequently leading to the slow pace of economic development as many businesses and consumers operate with limited or no access to credit facilities.
The World Economic Forum reports that almost one in every two persons in sub-Saharan Africa is impoverished. The analysis further shows that only seven African countries have a minimum wage equal to or more than $200, while for the majority, including Nigeria, it's below $100.
Consequently, African consumers cannot afford to pay outright for essential items such as mobile phones or generator sets, which power their livelihoods as much as it aids improved living standards. This has pronounced the need for consumer credit, as a means to expand purchasing power in a market rife with low and fluctuating incomes.
Beyond doubt, traditional banks have over the years provided financial solutions to a large population. However, their operations have not fully catered to significant segments of consumers who are underserved, unbanked, or not served at all.
When it comes to consumer lending, traditional banks are at a disadvantage, because consumer loans are not cost-effective for their operations. This can be justified by the huge losses from the digital banking fintech in Nigeria as we have seen recently.
While traditional banks are not built for small service loans to retail customers and individuals who require personal loans, the absence of viable financial solutions in the lending space leaves a huge gap in the financial market.
Macroeconomic conditions, the inability of multiple identity systems to communicate, and a credit reporting infrastructure that doesn’t cater to the mass populace are core reasons for the death of traditional consumer lending as we know it.
Subsequently, the alternatives to traditional banking are fast-growing startups in the fintech sub-sector that have identified existing fundamental gaps in the market. They have bridged them with innovative credit infrastructure for underserved consumers. This is the responsibility digital lending startups are currently bearing while continually exploring market possibilities.
With an effective system that allows access to funds through borrowing with affordable interest rates, households would be able to thrive financially. For families, there will be readily available shock absorbers for unprecedented situations, which could naturally lead to financial downturns such as job losses and ill health among others.
Furthermore, it can potentially help scale micro, small and medium enterprises, (MSMEs) and boost the confidence of entrepreneurs to take chances on low-risk business ideas.
But, what do the data and statistics say?
Despite the debates on the viability of consumer lending in Nigeria, statistics have indicated a steady progression in consumer loans. Consumer lending in the country totalled N758.6 billion, N758.9 billion, N1.11 trillion, and N1.42 trillion in 2017, 2018, 2019, and 2020 respectively.
According to data from the Central Bank of Nigeria, October 2021 witnessed an increase in consumer loans by 37 per cent, year-on-year, hitting N2 trillion.
This is against the volume of consumer loans in October 2020 which was N1.42 trillion. The upward surge in consumer loans has been driven by improved credit appraisal and product diversifications offered by banks and other lenders.
A quick throwback: At the climax of COVID-19 in Nigeria, leading to the subsequent lockdown measures introduced by the government to mitigate the spread, the macroeconomy suffered greatly. There were increased unemployment rates, decreasing disposable incomes, currency inflation, and increased interest rates among many others.
The Euromonitor 2021 study reports that many financially restricted Nigerians started to apply for consumer credit, mostly in the form of personal loans to address their needs and support their households, thus boosting current value growth for gross lending.
Additionally, various marketing efforts which have resulted in massive product adoption, user acquisition and retention from top credit infrastructure companies such as Aella with 2 million plus downloads among others with millions of dollars in loan transactions speaks volume of the potential of the credit market.
CBN’s October 2021 monthly economic report revealed that the shares of personal loans in the total consumer loans skyrocketed to 78 percent from 70.4 percent in October 2020.
Meanwhile, it is worthy of note that the current breakthrough which is merely scratching the surface of the micro-lending sub-sector has seen some banks respond to the competition from fintech, by developing and deploying digital lending apps.
With this development, bank customers enjoyed a 43 per cent increase in consumer loans in two years—between the first half of 2019 and the first half of 2021. The consumer loans rose to N1.84 trillion in the first half of 2021, from N1.21 trillion in the first half of 2021, representing an N630 billion increase, according to CBN data.
From the aforementioned, can we infer that consumer lending is far from dead?
Maybe, maybe not. Like every other sector, consumer lending as a financial service has its challenges.
Perhaps the biggest problems facing the sub-sector are fraud attempts, default risk concerns, as consumers who are unwilling to repay often believe they can get away with it and a lack of credit registry for digital lenders. Also, the recent FCPC regulation that reduces the ability of digital lenders to collect defaults is also a major concern.
On the fraud network which is huge. With smart technology from AI to Amazon Facial Recognition Technology, companies detect thousands of fraud cases a day. However, there are multiple layers of fraud such that people organise to find a way to beat the system.
Another issue is in agency banking, where there has been a track record of people collecting POS with fake identification, taking loans and then discharging the POS. This type of fraudulent activity is only tracked by the system when companies look into how long 'a supposed POS agent' has been active.
The culture of withholding credit information among industry players puts the industry at risk as people take advantage of the system. Although there is a traditional registry for banks, digital loans still need a different type of credit registry. This is because they are much smaller amounts and have different types of individual credit profiles.
While the government and other regulatory bodies have their roles to play, digital lenders need to realise that the key to growth lies in partnerships and infrastructure to build a viable credit registry.
A centralised registry, if built, can help industry players to identify defaulters and easily block them from borrowing from other institutions until they pay their defaults.
Considering these challenges, digital lenders need to find less risky ways to lend for them to stay afloat and also diversify their products. Also, it is essential to continually develop capabilities in lending infrastructure, credit-risk models, and reference data. This will help industry players to have a structured approach to managing business risk.
As stand-alone digital lenders realise that just pure retail play can’t do it alone, they are starting to morph into digital banks. On the positive side, this will enable them to provide robust infrastructure and access cheaper capital while diversifying products, and building loyalty structures to incentivize customers.
But, what is next for consumer lending?
Despite the industry challenges and the rough patches caused by the current economy, Euromonitor in their report indicated that consumer lending, which is largely driven by digital lending with quick access to credit from banks and fintech companies, is expected to grow.
As mainstream financial service providers venture into consumer lending, there will be more competition and innovation in how they serve customers. An increasing number of customers continue to turn to alternative lenders and fintech players.
Also, the market success of a digital lending platform would be driven by mining consumer insights, understanding current market trends, and playing to them. The existence of credit companies at the forefront of innovation in the market such as Credit-led Fintech, Aella attest to this.
Tell us, what do think the future holds for consumer lending in Nigeria?