Loans in Nigerians are quite expensive and it’s due in one part to the high-default rate but also because of what I would describe as lenders destroying their chances of developing a good business. You’re probably wondering why I would say this, so if you would be so kind as to allow me do you a favor and relieve you of your rose-tinted lenses ..
This is how lending in Nigeria typically goes…
Lenders know how profitable solving the credit problem can be but they also know a significant portion of their borrowers won’t pay back. Oh please there’s no surprise here anymore, Nigerians have taken it upon themselves to always treat loans like an inheritance from their grandparents. At this point, you might be tempted to play the devil’s advocate and argue that the poverty level and weak economic conditions pose a significant hurdle to repaying loans for the average Nigerian, I won’t argue with you but I will say this; beyond the financial factors that may affect loan repayment, at the core of default is generally Nigerians questionable demeanor towards loans – zero character! The causal relationship between hardship and defaulting on loans is not as airtight as one might like *chuckling in AMCON seizures*.
So what happens? Lenders increase the interest rate on the loans to cover these losses they envisage because of these bad actors and the income to cover these defaults would be paid by those who are “foolish” enough to pay back. Ohooo!
Here’s the fallout
Lenders might believe this manner of conducting business is foolproof in that as long as it takes care of the bottom line, nothing else matters but instead of solving the problem, it makes it so much worse.You see, those who are good for the money and actually intend to do business in good faith, see the crazy interest rate, say “your fada!” and just forgo the loan. Guess who’s left to do business with?
The desperate and the wicked.
Those who are desperate have no option but to take the loan but we all know where desperation takes anyone and then you have the wicked who have no intention of paying anyway and so don’t even mind the interest rate and proceed to take the loans (Lagbaja, nothing for youuu).
Where does this leave lenders?
So after all is said and done, the reality for lenders is that:
High interest rates push away those most likely to repay their loans (because they care the most about what to pay back).
And
High interest rates mean nothing to those who won’t pay back anyway (talk about a double-edged sword).
It’s pretty obvious the tactics have to change, if not these lenders have no way of succeeding. The only way that a lender would do well is with an appropriately priced interest rate
What happens to the risk of default?
Wouldn’t the lender be wiped out?
The best way to build a sustainable lending business is in the Risk Acceptance Criteria (RAC), the technology, and the loads of data to go with it; that’s how to really address the pain points associated with lending.
Anything else, such as raising interest rates, is completely destructive and there is no way out of it; it’s like a cobra eating its tail.
In what world does one put a band-aid over a headache and wait for relief?