Nigeria’s problems will be solved by access to credit

Access to credit in Nigeria has historically favored large corporations and the wealthy, leaving millions excluded. Credit access is crucial for economic growth, especially in times of high inflation and rising living costs. While digital lenders have made strides, there’s still a long way to go.

Access to credit has historically been difficult in Nigeria. This is because, for years, big banks were the sole providers of financial services and those banks didn’t care too much for retail banking. 

Between thinking about the risk profile of individuals and smaller business players and the absence of real disincentives against failing to repay loans, banks mainly provided credit facilities to large companies and the rich. It has robbed Nigeria of a unique opportunity to grow its middle class or lift over 100 million of us out of chronic and crushing poverty. 

Credit is a global conversation because it has the potential to be a growth driver for economies. Credit is how people can fund their small business idea, deal with the economic shocks of job losses, or acquire assets. 

In Nigeria where the inflation rate is at a record high of 16.47%, credit maybe even more than a means to grow businesses; it is a tool to manage daily challenges. Food prices are up, fuel prices are up and civil servants who are often routinely owed salaries for months always need to borrow money. 

Many cannot access small loans from the banks they use mainly because the process of getting a bank loan can be complex. Know Your Customer (KYC) procedures and the need to fill numerous forms often means that people do not consider banks as a source of credit.

Instead, many rely on shylock money lenders in their network who charge high-interest rates, so high they are just a shade better than armed robbers. It puts many ordinary people in bad spots. Thankfully, digital lenders are changing situations like this, by giving people access to quick and easy unsecured loans. 

In 2020, FairMoney said it lent $93 million in loans to Nigerians while Carbon said it disbursed N25 billion. Those are impressive figures when you consider that many of those loans are likely under N200,000 ($484). 

Yet, despite the strides, digital lenders are making and the Central Bank of Nigeria’s loan to deposit ratio which is forcing banks to give more loans, we still have some way to go. A few people contend that less than 2% of Nigerians still have access to any type of credit. 

The majority of the world’s 1.7 billion unbanked people live in just five countries; Bangladesh, China, India, Mexico, Nigeria, and Pakistan. How can credit change the lives of people in these countries?

Personal loans for the vulnerable 

In a country like Nigeria where unemployment and underemployment are high, people often need personal loans to feed their families. According to SBM Intelligence, a consulting company in Nigeria, at least 63% of people spend the majority of their income on food. 

Those stark figures explain why people often say that every product in Nigeria competes against food. But it also shows something more important; that a large percentage of people will not be able to meet other needs like rent, healthcare, and entertainment. 

Most of these people who are often underbanked and financially underserved often have no recourse to credit facilities. Many of these people do not even have functional identification so there’s no hope that they can scale the stringent Know Your Customer (KYC) requirements of financial institutions. 

According to the Director-General of the NIMC, Aliyu Aziz, only 38% of Nigerians have any form of identification. It shows you the scale of the problem and it lets you know that despite the big amounts digital lenders are disbursing every year, there’s still a huge unaddressed market. 

Beyond this, when people meet their immediate needs, there’s still a need for credit, but for a different kind; small and medium business financing. 

The SME financing gap

Small and medium businesses account for 96% of businesses and 84% of employment. There are different types of small business owners in Nigeria but a good part of those are people whose businesses often need steady cashflow. 

Many are traders who need working loans to restock their goods or to buy items in anticipation of festive periods. Their loan requirements range from daily loans which they can pay back by the end of the business day to short-term loans.

Right now, there are not a lot of credit options for the informal small or medium business owner save for loans from family, friends or cooperatives of some sort. This is one reason why it is difficult for small businesses to scale in Nigeria; working capital is hard to come by. 

As we move further up the socioeconomic ladder, there are also all sorts of credit gaps that can need to be filled. 

Asset financing for the salaried worker 

Nigerians often need to pay in full whenever they need to buy phones, laptops, televisions, or any other type of asset. It’s often a strain on salaried workers who sometimes are doing just enough to get by.

Sometimes people need to buy some of these gadgets without planning such as when they lose their phones or when their laptops go bad unexpectedly. Asset financing can make situations like this easier.

There have been several attempts to solve this problem by financial institutions but many of the solutions have been criticized for having expensive markups. It has prevented buy now pay later companies from scaling in Nigeria. 

Whenever the financing for these sort of light assets is sorted, the problems get even bigger down the road. 

Car policies vs auto loans 

Nigeria has enacted several policies to encourage car manufacturers to manufacture cars within the country. Some of those policies, like the ban introduced on the import of second-hand cars older than 10 years into the country did not produce the desired results. 

Instead of spurring production, the ban merely made smuggling more profitable and consequently, it drove up the prices of secondhand cars. There have been more auto policies, but nothing has significantly moved the needle. 

In discussing Nigeria’s Finance bill last year, Vice-President Osibanjo said that while Nigeria’s annual vehicle demand was around 720,000, local production currently stands at 14,000. The answer to the problem isn’t more auto-policies.

This is because only a handful of Nigerians can afford brand new cars. In fact, very few Nigerians can afford cars at all. According to 2017 data by the National Bureau of Statistics (NBS), “on the basis of private vehicles only, vehicles per 1000 Nigerians comes to about 24. It is also about 41 Nigerians to one private vehicle– one of the lowest among its emerging market peers.”

One way to look at this problem is that most Nigerians have to pay cash and pay in full for vehicles. Auto-loans and car financing are difficult to come by and where food is competing for people’s paychecks, it is difficult to ask them to put down millions to buy a car. 

It is pretty much the same situation when you look at homeownership and mortgages in Nigeria. These are sectors and situations where access to credit can provide the much-needed quick wins. 

Using credit to improve homeownership 

In developed countries, mortgages allow millions of people to buy and own homes with affordable payments stretched over several years. In Africa, the mortgage market remains thin. 

Here’s data from one publication; “In Uganda, there are an estimated 5,000 mortgages for a population of 41 million while in Tanzania, there are only 3,500 mortgages in a country with a population of 55 million.”

It’s not much better in Nigeria where even the wealthy do not often opt for mortgages. Jason Njoku’s famous thread about trying to secure a mortgage a few years ago is a stark reminder. It means that homeownership rates in Nigeria very low. 

While homeownership in Kenya is 75% and 56% in South Africa, in Nigeria, it is estimated to be around 25%. Ten more homeownership policies will not change this. 

In the end, across many sectors, Nigerians need a way to finance asset acquisition without putting down years of their savings. Why pay N40 million upfront for a house when you can spread the payments over 20 years while using the rest of your money to invest in other ventures?

Without credit, we’re going nowhere

The real game-changer for Nigeria won’t be more policies, but a more conscious drive towards expanding access to credit to every single Nigerian and creating a framework that makes eligibility a right instead of a privilege.

Nigeria is Africa’s open banking pioneer

In 2021, Nigeria’s banking sector witnessed the advent of Open Banking, aligning with a global shift towards sharing transaction data. This move holds promise for innovation and financial inclusion, particularly in credit access and streamlining KYC processes.

One of the predictions for Nigeria’s banking sector in 2021 was that Open Banking would finally make some headway. It was an important prediction when you consider that for years, quite a lot of global industry players have said that open banking is the future. 

Open banking is the idea that established banks should share the transaction data of customers with other financial service providers (FSPs), challenger banks and other third-parties recipients. For such a simple idea, its implications for banking are huge. 

One way to look at it is that some of Nigeria’s biggest banks have been around for years and have millions of customers. Despite their market dominance, they have often been criticised for not providing retail banking or innovative products. 

Most of that innovation has been left to the newer fintech players who have unbundled traditional banking services. PiggyVest and Cowrywise help you save money, Eversend helps you with cross-border transactions and over 30 digital lenders provide unsecured loans. Challenger banks like Sparkle, Kuda and Rubies also tout new ways of banking. 

While these startups have made significant progress, they still get smashed by banks. For instance, last year, Fairmoney, a digital lender in Nigeria, disbursed a total loan value of $93 million, a 128% increase compared to 2019. While that figure makes it one of the biggest digital lenders in Nigeria, when compared to traditional banks, it falls all the way to seventh place. 

Central Bank’s regulation on Open banking

One of the most important issues with the regulation of open banking is data and how the data of customers will be handled. According to the CBN, the open exchange of data and services through APIs will be divided into four categories. 

Each category contains a specific set of information with a particular risk level. For instance, Market Insight Transactions (moderate risk level), include statistical data aggregated on the basis of products, services and segments used by customers. But it will not be associated with any individual customer or account.

Access to these categories of information will be open to four participants as well; on one end are participants that do not need to have a regulatory licence. Participants like this will not be able to access information that is high risk.

The participants in CBN’s regulatory sandbox will have access to some low and high-risk data like Personal Information and Financial data (PIF). Only players with regulatory licences will have access to the most sensitive information like personal information and financial transactions or data. 

The participants that will access this kind of information are mostly deposit money banks. It is a sign that the CBN is aware of what the attendant risks are as it also goes on to state the requirements for every participant level. 

APIs and Common Standard 

One of the key issues in open banking is also the creation of a common standard for APIs and most of the work in this area has been led by private organizations like Open Banking Nigeria (OBN), which I founded with other stakeholders in June 2017

I founded OBN to drive the advocacy for open APIs, define an open set of APIs needed for a common API standard, as well as provide a sandbox and other testing tools for certification.

In 2018, we published our first set of API standards, and today it has members like Paystack, Interswitch, Flutterwave, Teamapt, Wallet Africa, among others. While this initiative is great, regulation is necessary for a space like this, and CBN’s regulations are a step in the right direction. 

What’s likely to happen next? The ball has been set in motion and the guidelines say that a common standard as well as an open banking registry will be created in the next 12 months.

Using Open banking to drive financial inclusion

By sharing customer data, fintechs can create products and services that work for financially underserved and excluded individuals. One of the areas where there’s a lot of promise is access to credit, which I’m extremely passionate about.

Although digital lenders are getting even more popular in Nigeria, only a handful of people have real access to credit. One limitation digital lenders face is access to data points that help them score credit risk for individuals. 

Many lenders use workarounds like giving small amounts to customers and gradually increasing the loan amounts. This strategy discourages people who want to afford bigger loan sums, and customer transaction data can solve this problem. 

There’s also the issue of how the need for extensive documentation excludes low-income customers from banking access. If open banking is expanded to telecoms for instance that registers customers for SIM cards, they can share these registration details with fintechs and eliminate the need for more KYC forms. 

When KYC is sorted, it will help the millions of gig workers in Nigeria. In Lagos for instance, it isn’t uncommon to meet carpenters and mechanics without bank accounts. Open banking can help workers like this access more personalised services and eliminate the obstacles to accessing financial services. 

It will get a mind-boggling level of integration to make this happen and this is where Application Programming Interfaces (API) come in. 

What have APIs Got To Do With It? 

One of the easiest ways to understand APIs according to one writer is that “it helps let companies leverage years of other companies’ work in seconds.” APIs let programs talk to each other and most times, we see them used extensively for internal purposes. 

Internal APIs are used to do complex things within a company while public APIs open up datasets so that other people can build on top of them. Consider the amount of integration that will be required for all of Nigeria’s banks to share information and you’ll start to see why APIs are the easiest way to make it happen.