How big is the addressable market for consumer loans in Nigeria?

Nigeria’s 200 million-strong population is often the ultimate proof that the giant of Africa has a large market for just about anything. The belief is that as long as you make anything, you can sell it here.

But our economic realities have helped us adjust those mythic expectations and what we now talk a lot about is Nigeria’s total addressable market (TAM). TAM has become a contentious term, mainly because there’s not much data to give you a clear picture of the Nigerian market.

Instead, you have pieces of data to patch together to make some assumptions. So right off the bat, we know that in 2020, the size of Nigeria’s working population is 62.2 million and that we have around 99 million unique mobile subscribers as well.   

It paints a picture of a vast market, but this population has limitations such as record unemployment and a high poverty rate. Agriculture, one of the sectors that employ many people, is essentially subsistence farming at an almost primordial level.

One of the historical hurdles to Agriculture and many other sectors is access to consumer credit. As I’ve said in other articles, there’s a strong link between access to credit and economic growth, and now we know that the opportunities are there in Nigeria. And the opportunities are massive. 

But how massive?

How big is the Nigerian market in itself?

One easy proxy for how the consumer credit market can be is Nigeria’s telecoms market. There are many similarities in there, such as how, when mobile telephony was introduced, it was not easy to access for the middle-class and poor Nigerians.

SIM cards sold anywhere from N15,000 to N20,000, and basic phones were even more expensive. Today, SIM cards cost next to nothing, and anyone without a phone is seen as a psychopath. 

Credit is just as crucial to the everyday Nigerians and the economy. Suppose the bottlenecks to accessible credit are removed. In that case, access to credit can do even more significant numbers than telecoms and have a 10x impact on the economy than what GSM contributed. Mobile phones are essential, but credit is the lifeblood of any economy.

The credit helps people tide over unexpected expenses or even shocks such as sudden job losses. And it provides the opportunity for people to start businesses or expand existing ventures. In many instances,  access to credit is the difference between life and death. 

Lenders already know this, and we’ve seen a lot of growth in digital lending in recent years. Five to seven years ago, it was impossible to get a loan from the comfort of your house using your mobile phone, but now it is standard fare. Three years ago, it was almost impossible to get a loan from a bank that you didn’t have an account with.

Evolve Credit, a loan marketplace in Nigeria, lists well over 30 lenders offering various loan types, from consumer loans to SME loans. 

A basket of offerings 

So far, payday lenders seem to be leading the consumer credit market. Fairmoney and Carbon, two lenders who share their numbers, boast a combined loan disbursement of over N70 billion in 2020 alone. We can hang a conservative size of N200b for the non-bank retail credit in 2020 if we factor in other large lenders who didn’t report their numbers. 

Many other lenders in the market follow the same format; two-week loans typically start from N10,000 to N30,000 at 15% flat interest rates. Most people who take these loans know that they will qualify for more significant loan amounts if they are faithful with their repayments. 

The big banks offer more long-term loans, with GTBank’s QuickCredit, for instance, offering year-long loans at 1.33% per month, one of the industry’s lowest rates. It’s a format most banks also copy, with differing interest rates. 

But there are still many gaps in the market; SME financing remains pretty tricky to access, mainly because those require more complex loan decisions. With personal loans, you can check if the individual has a steady job, loan history, and the percentage of the loan amount to earnings. 

SME lenders like OZE first need businesses to establish a history and keep records before loan offers can be made. On its part, Lidya says it takes 24 hours to make loan decisions to SMEs, which is longer than the instant decisions made by payday lenders. 24-hour approval isn’t a bad deal for SMEs who wouldn’t have gotten any loans from traditional banks in the first instance. 

But the availability of SME loans is so poor we can argue they don’t exist; with things like asset financing or vehicle financing, there are almost no offerings available. 

How big is the credit gap?

There are significant credit gaps across all sections of the credit market. For example, let’s take payday loans; some back of the envelope research has shown that salaried workers take an average of N23,000 6 times a year. If 50% of our 62 million-strong labor force takes an average of about N23,000 loan six times a year, that’s a N4.3trillion loan segment. 

Away from payday loans, let’s talk about smartphone financing. The average person gets a shiny new toy every couple of years; on credit from their telcos. But the case is different here; we all save to buy phones that we use for three years or more. Because the $150 for a new phone is a barrier to most Nigerians struggling with minimum wage, what if 70% could buy smartphones on credit with a replacement life span of 3 years and an average cost of $150. At N480 per USD, that’s 23.3m Nigerians (assuming one this of 69.3 buys every year) borrowing N72,000 to get a smartphone each. That’s an annual N1.7 trillion market. 

Laptop financing is also a big market given that we are in a digital age and computers are super important. With Nigeria’s young population estimated to be around 100 million, laptops are a significant need. If only 20% of young people have access to laptop financing every year for laptops that cost $500, that will be a market size of N3 trillion every year. 

Rent is something most Nigerians struggle with as it has to be paid in bulk, sometimes 2 years’ worth of rent at once. And if you have to move to a new place, the cost of sprucing up can be high. What if 40% of the 99m Nigerian adults could take a rent loan to spread the burden? At about N350,000 (not everyone lives in Lekki), that’s a N10.3 trillion rent financing market.

There are even more opportunities in vehicle financing when you consider that there are only 11m cars in Nigeria which is 57 cars per 1000 Nigerians. If we’re to match the South African ratio of 174 cars per 1000, that’s an extra 23m cars to clog the few roads in Nigeria. Let’s assume that they would be primarily used vehicles at a low end of N2m per car, changed every 4 years, and are looking at a N43 trillion market spread over the 4 years. 

Asset finance could be a very massive market. After all, every house, and especially our dear madams, need white goods such as air conditioners, fridge, deep-freezers, etc. to live a good life. An average home could spend up to 500K every couple of years to buy these assets or replace older ones. If 50% of the 42m Nigerian households could find a way to finance these assets, then that’s a N10 trillion market every 2 years. 

In Nigeria, half of the population is under the age of 19, which means that parents and households have to worry about education financing. Good schools cost money from the primary until the tertiary level; we know that chickens will grow teeth waiting for the Government to turn the educational system around. What if 40% of parents can have access to credit of N300,000 per year to fund private education for their kids? That would be a massive N12 trillion education funding every year. Think of the impact of that on schools, teachers, and Nigerian development.

The dream of every Nigerian, man and woman alike, is to live in their own homes. But the housing gap is so massive, it required 17 million units to bridge that gap as of 2012, which would come to 700,000 houses yearly; since 2021, the gap has widened. To make any dent in the market, around 1 million people should have access to mortgage financing every year. If you want to provide mortgage access to 1 million Nigerians yearly for low-cost housing that costs N10 million Naira per unit,  that’s an N10 trillion market. 

In every economy, the SME sector is always the driver of growth. But for the Nigerian SMEs, it’s like everyone for themself. SME capital and overdrafts aren’t left out as well, with 41.5 million SMEs in the country. Most of these SMEs have a difficult time accessing microcredit. For many of these businesses, a loan of N600,000 every year will go a long way in helping with cash flow. If 50% of these 41.5m SMEs get this N50k per month credit, you are looking at a total of N12 trillion in SME loans per year. 

We have a massive N74 trillion credit gap!

If we tally the different sectors begging for credit, we would see a N74 trillion chasm of credit gap each year, which are mainly unfinanced. That’s a third of our current GDP. With technology and data, banks, and even much more, fintechs can start to attack these gaps to provide succor. 

And the benefits to the economy would be massive; taking the multiplier effect, we expect a 10x impact, which could add N740 trillion to our GDP, which would effectively triple our economy. Millions of jobs would be created, companies would make massive profits from loans, and trust the Government to get taxes from sales and corporate income.

Lenders battle against fraudsters; a case for an industry blacklist

Blacklists offer a tool for deterring loan defaulters in Nigeria, fostering better credit behavior, and potentially lowering loan costs, although adoption among lenders remains tepid. We definitely need one.

In Kenya, an estimated 3.2 million people – 6% of the population – have been blacklisted on Kenya’s TransUnion credit reference bureau for non-repayment of digital credit loans. Being placed on a blacklist like this means that you won’t take loans from any other lender.

It would also mean that you will be ineligible for post-paid services like pay TV. While there’s a lot of debate as to whether blacklists promote financial exclusion, I believe that it is a useful tool in shaping people’s credit behavior.

Take Nigeria, for instance, where it is taken for granted by prospective lenders that there are no real consequences when you don’t repay a loan. You can draw a straight line from that thought process to why Nigerians often think they don’t have to repay loans. 

Yet, it’s not only that people simply don’t repay loans; the rot goes deeper than an industrial borehole, with people formulating complex schemes to defraud lenders. Even as banks and fintech startups make their security processes and RAC more complex, bad actors are usually a few steps ahead. 

The scale of the problem is massive. In 2018 alone, the Nigeria Deposit Insurance Commission (NDIC) stated that Nigerian banks lost over ₦15.5 billion ($41.6 million)* to fraud. Most companies choose not to publicize these incidents to scare the investing public or even embarrass themselves. The Nigeria Inter-Bank Settlement System (NIBSS) also reported that the banking industry lost ₦2 billion ($5.5 million) to electronic fraud in 2018.

It is not unusual to hear of customers who take loans from 3 to 5 lenders simultaneously and then disappear into thin air. Recently, we all heard about fraudsters who use stolen identities to get phones with the details of their victims. 

The victims often remained blissfully unaware until they were contacted by the lender to repay those bad loans. While we’re still guessing badly hit banks are, it’s difficult to know how much the alternative and fintech lenders also have to contend with.

But here’s something to speak to just how ingenious bad actors are; this report from WeeTracker shows how a small shadowy organization fleeced money from thousands of people using what seemed to be a legitimate Paystack storefront. 

These sorts of audacious schemes and a general unwillingness of customers to pay loans have drawn the attention of regulators. 

Global Standing Instruction tightens the noose on bad actors. 

On July 13, 2020, Nigeria’s Central Bank published the guidelines for Global Standing Instructions (GSI). 

In a nutshell, the Global Standing Instruction (GSI) creates a contractual mandate from an individual borrower, in favor of a creditor bank, to apply funds standing to the credit of the borrower in a third-party financial institution or electronic wallet to offset the debt obligations of the borrower.

In Nigeria, the GSI can be easily executed because every bank user has a unique Bank Verification Number (BVN), which is linked to all your accounts. Default on loan will mean that the bank can take the amount owed from any of your other accounts. 

While GSI is an important step in introducing real consequences to people who don’t pay loans, there’s no doubt that introducing blacklists is also a necessary second step. It is more important when you consider the amount of non-performing loans lenders have to deal with. 

In 2018, the NDIC reported that commercial banks gave out ₦15.29 trillion ($44.16 billion)* in loans to the domestic economy, and by the year’s end, non-performing loans stood at ₦1.79 trillion ($4.9 billion)*.

In spite of the pros of GSI, it has not exactly addressed the problems. For one, GSI is only available to banks, leaving out the digital lenders who also give large loan volumes. This means that while the banks are afforded some protection, digital lenders are not.

Yet, even the banks aren’t falling over themselves to use GSI because to use the mechanism; you must first prove that the loan has gone bad. That caveat has reporting implications for the banks, and we already know that banks and provisions are like oil and water. 

It’s time to consider a blacklist.

How blacklists could work

In Kenya, for instance, a credit information sharing (CIS) mechanism helps lenders share information about lenders with each other. When defaults happen, the names of those lenders are shared with the Credit reference bureaus (CRBs).

But this process is tied to credit history and could become somewhat complex. Blacklists are more straightforward because they block bad actors who have committed acts of fraud or identity theft.  When this happens, it becomes impossible for the blacklisted person to take a loan from other lenders. 

This distinction is important because while credit bureaus have their uses, they don’t exactly provide consequences for bad behavior. In Nigeria, there are only three national credit bureaus licensed by the Central Bank of Nigeria: CreditRegistry, FirstCentral Credit Bureau, and CRC Credit Bureau.
These bureaus check for lending history and calculate credit scores using their proprietary scoring algorithms, which lenders then use to determine the customer’s capacity to take loans and willingness to repay. While it is useful, it creates no disincentives and consequences for people who deliberately game the system.

The issue with credit bureaus is an unfortunate one for Nigeria, though. The reason is that over 90% of individual borrowers don’t have a credit history. You would then ask why the lenders don’t give their data to the credit bureaus. The biggest drag has always been that credit bureaus collect data from lenders for free and turn around to sell it to them as rates not sustainable for micro and nano loans. In the end, everyone loses, Nigerians being the biggest loser of all as most of us never get access to affordable credit when we need it.

These attempts to game the system through illegal can, at best, make lenders wary of giving loans to customers and, at worst, can put some lenders out of business. So the primary argument for blacklists is that they can help shape behavior by showing that illegal behavior will not be rewarded. 

Changing the mindset around repaying loans is important. When you consider that there have been no significant consequences for failing to repay for years, it is clear that it will take a while as well as disincentives to get defaulters and bad actors to fall in line. 

One other big advantage to blacklists is that they will lead to cheaper loans because lenders will no longer have a need to factor in expensive risk premiums in their risk models for the increased risk levels. All of these benefits from a simple solution feel like a bargain. Furthermore, we can see lenders tweaking their Risk Acceptance Criteria (RAC) to be less onerous.

There are already existing frameworks for blacklists, such as Karma.ng from Lendsqr, and it will help keep the bad guys out. But so far, the willingness of lenders to embrace these means of protection has been lukewarm at best. However, as the market evolves, blacklists will provide more competitive advantages to lenders than even the best of algorithms; while guess, no matter how sophisticated it is, when you can use actual data to bar the bad actors.

Why Nigerian banks will never win the consumer credit game

Consumer lending in Nigeria faces challenges due to low credit access, legacy risk aversion, and institutional barriers, leaving room for alternative lenders to dominate retail lending.

Consumer lending is basically loans to  individuals, like me and you, to purchase goods and services. Of the forms of consumer lending, credit cards are perhaps the most popular. 

Yet, if you’re a Nigerian reading this, that last sentence is not very relatable, mostly because not only is consumer lending uncommon in Nigeria, credit card penetration is so low you have probably never seen a Nigerian with a credit card before. Given the massive size of the Nigerian economy, our stats on personal loans and credit cards is very shocking. 

There are even more. In 2020, lending to consumers fell by 11% over two months, primarily driven by the pressure to curtail bad loans.  While this can be explained away by the COVID-19 pandemic, there is a lot we can draw from this. 

The first is that banks’ legacy credit risk approach has made it averse to improving consumer lending for years even though the CBN is forcing them to lend more. There’s also the fact that for the banks, there are easier ways to make money than consumer credit. 

Consumer credit is a tough bull to ride 

Today, trying to buy a phone or any accessory in Nigeria will require you to put down the full payment in cash. It is difficult to find deals that help you spread the payments in installments. And if you could find one, they will scalp you with an ungodly interest rate.

In 2017, a CBN report showed that only 5.4% of Nigeria’s adult population had access to credit. Despite the financial inclusion strategy the CBN is implementing, that number has grown at such a slow pace it makes a crawling snail look like a speeding demon. 

In 2018, it was 5.5% and in 2019, that figure was 6.2%; the credit gap in the country is astounding and it is at odds with the fact that Nigeria has big banks with impressive coverage. 

For banks with millions of customers, solving this problem seems like a low-hanging fruit. They have a massive heap of  transaction data, it should theoretically mean that banks can partner with Original Equipment Manufacturers (OEMs) to provide payment deals on phones for instance. 

That hasn’t happened yet and it is not for lack of trying in some quarters. While a few banks have attempted to provide consumer credit, the pricing and interest rates often discourage people. To be fair to them, these banks take risk of default into consideration before they give these loans. 

Where the rates are reasonable, the problem may then become access. For instance, one of the reasons credit card penetration is low is because the banks don’t provide access to it. For years, credit cards were only available to certain classes of working people. 

To be fair to the banks, their reluctance to ride the bull that is consumer credit is based on the fear of bad loans. Yet, their reluctance has real economic consequences. When consumer credit isn’t growing, it impacts economic growth because consumption reduces. Infact, there’s a direct correlation between consumer credit and gross domestic product (GDP). 

Now that we know how important consumer credit is and why it is an important problem, why are banks ill-qualified to solve the problem? 

Institutional barriers to lending

Like everywhere else in the world, there are a lot of institutional rails that guide retail lending. One of those rails is using credit history to determine credit worthiness. In Nigeria where credit bureaus were first set up in 2003, there is still a paucity of data that means that banks cannot make lending decisions, effectively shutting millions of people out. 

According to Tunde Popoola, CEO at CRC Credit Bureau Limited, “From just over 1000 customer base in 2009, repository records show that it has grown to about 17 million in Nigeria.”

17 million records means that the majority of the population can not hope to get a bank loan in the near future. Another institutional barrier borne out of the need to manage risk is our supposedly tough Know Your Customer (KYC) procedures as well as the need to collateralize loans. 

The truth remains that only a handful of Nigerians can put up the kind of collateral that will give them access to bank loans. The banks will insist that they cannot take away these requirements because they are already dealing with fairly high non performing loans. 

But that refusal to make changes is symptomatic of the inflexible structure of the banks and is a pointer to why they cannot solve the consumer credit problem. 

Legacy structure of banks make innovation difficult 

Nigerian banks report huge profits every year and most of this is down to the fact that they’ve become pretty good at doing a narrow set of things very well: They lend to mostly large corporates and commercial companies. If you are rich, they could throw you some loans as well. But if you are the average man on the street, then .

A few years ago, they took advantage of high interest rates and focused on buying treasury bills. Yet what they have not done in all those years is figure out how to crack the riddle of consumer lending.

Despite the fact that the Central Bank of Nigeria has increased the lending to deposit ratio to 65%, innovation hasn’t come easily to the lending efforts of many banks. While digital lenders are constantly trying to improve the data that underpins their lending decisions, banks sit on large troves of data that they arguably could use better. 

One of the reasons why digital innovation has been so difficult for banks is their structure. A rule change by the CBN forced banks to focus on risk management thanks to the 2009 financial crisis. 

The institutional response to the crisis was to ask banks to narrow their focus. Although they are now breaking out of that mould by forming holding companies, their thinking hasn’t changed much. 

They still retain many of the old rules with stringent conditions for loans that favor elite customers, ignoring the vast size of Nigeria’s informal market. Without recognising the huge size of the informal market, the banks are not only leaving money on the table, they are showing they don’t understand the problem. 

Alternative lenders show that banks don’t care about retail lending

Despite the excuses banks give, the approach of digital lenders show that the banks are simply taking the easy way out. Their lending to corporates as well as their large loan sizes to companies they think are too big to fail reflects their thinking. 

They also lean heavily on tactile lending which is pretty difficult to scale. If you need to meet everyone you want to lend to, you cannot realistically fill the massive gap in the Nigerian market. 

Instead, leaning on machine learning and algorithms like the digital lenders are doing is what will make the difference. In fact, lenders like Migos are selling products to banks to help them make better lending decisions. 

That’s just how much of a headstart that the lenders have, with many of them having their own proprietary algorithms and being at a point where they make dizzyingly fast lending decisions. 

For instance, in the same year 2020 when consumer lending by Nigerian banks fell, digital lenders like Fair Money and Carbon reported their highest ever loan disbursements. Basically, while banks and digital lenders faced the same problem – a pandemic – only the digital players were nimble enough to still work around that challenge. 

The digital players are also talking a lot about providing access to informal markets, proving that they understand where huge markets lie. This is not to say that digital players are also without their own struggles.

But they are in a better position than the banks because they have been iterating their solutions for the last five years. Realistically, it could take another 5-10 years for even the smartest of banks to catch up. 

Until they change their core DNA, which is inflexible, they will keep playing catch up even if they launch shiny new products every year.

Banks will lose the retail lending space to fintech lenders

Despite all of this, one thing is clear, that lending will continue to grow massively, because more alternative lenders will join the fray and innovation will force players deeper into the market. Some of these lenders will be powered by cloud platforms such as Lendsqr which removes the technology barrier to lending at scale. 

So here is how it is all likely to play out; banks would own the corporate and large commercial loans while alternative lenders will grow the retail lending space. 

This bifurcation will result in a larger retail lending space and in a few years, the banks may start to feel green with envy about the big chance they missed with retail lending. 

It will be interesting to see if the CBN, which has historically protected the banks, would produce some regulation to help them when it happens but one thing is clear, banks have lost the retail lending game and not even regulations can change the trajectory of the market.