Whenever the conversation turns to people who do not repay loans in Africa, the answer most people reach for first is poverty, followed by the idea that the loan was too large for the borrower to carry in the first instance, and after a while someone suggests the borrower was taken advantage of by a lender with harsh terms.
I understand why these explanations are popular, because each of them comes with a story one can easily picture themselves in considering the economic reality of the average African. I’m not too far gone to admit that indeed some of these claims truthfully apply to a number of borrowers, and I would never wave those cases away.
Be that as it may, my polarizing view comes from years and years sitting on loan data from many lenders, daily interaction with these lenders and borrowers alike. In the last decade I have had the privilege of supporting thousands of credit providers with technology to power their lending which means I have watched repayment behavior across a very large number of portfolios and over a long stretch of time.
Having seen it first hand, I can say that practically 95% of the defaults I have come across have nothing to do with a borrower being taken advantage of or having no money. Most people who default don’t want to repay the loan at all, and once you accept this, a lot of the behavior lenders complain about starts to make sense.
A bad credit score costs more in some countries
The reason unwillingness works so well for borrowers in emerging markets is that there is very little consequence for not paying a loan. In the US and in most developed countries, a person who stops repaying a loan watches their credit take a beating, and the damage follows them into ordinary parts of life. Renting a house becomes a problem because whoever is financing it will check your credit history. Forget about even purchasing a house; the banks will nicely usher you out of their offices. Buying a car runs into the same wall, and a whole list of other things you would like to do becomes harder or impossible until the record improves. Those societies are built on credit, so once your credit record is in bad shape, a large part of your ability to function goes with it.
Africa and other emerging markets are a different situation entirely. We have credit bureaus, and lenders can report to them, but the foundation of the society itself was never laid on verifiable credit, so a damaged record seldom stands between a person and whatever they want to do next. Where consequences are this thin, people test the limit, and this has nothing to do with whether someone is poor, middle class, or rich. Every single person, at every income level, is always looking for how far they can push a situation before it pushes back, and a lending system with no memory gives them a lot of room to push.
Ask the people making the collection calls
I know all this because I work with lenders who sell loans to many people, and when repayment time arrives those lenders are on the phone chasing money. Borrowers get called repeatedly, tempers flare on both sides, and plenty of them shrug it off with the observation that everybody owes somebody, since even the government is owing money. If someone with an outstanding loan goes to apply for another one somewhere else, very little stops them, and that says a lot about how the system treats a person who has already walked away from a debt. What finally gets a borrower to pay tends to show up when it is time to travel.
A friend of mine works in a commercial bank, and he told me about something interesting he found when he moved into a senior role at the bank. As part of his new role, protocols existed that meant he had to interact with records of people who owed the bank money and on one of those interactions, he came across a familiar name of a man whom he knew personally who had a flamboyant or as Lagosians would call it jaiye-jaiye lifestyle, but owed the bank an unspeakable sum of money. The bank of course had reached out to him on different occasions, but he showed no interest in paying, so the debt sat on the books for years. Until the japa wave hit him and he had to move his family to Canada, unfortunately for him this meant credit history issues AKA ghosts from the past had come to visit. It came as no surprise to no one when the man who barely returned the bank’s calls suddenly paid off his loan in one go.
I have watched this pattern repeat again and again and again. Many people who plan to go back to school for a master’s degree get told by friends and colleagues to go and pull their credit report first, and within days a good number of them develop a strong interest in settling loans they had ignored for years. Their income was the same the week before as the week after, so the money to pay was always somewhere within reach, and the thing that brought about the sudden change was a consequence with a date attached to it.
Fixing it starts with the bureaus
So the foundation of this problem is the absence of consequence, and my answer to it goes back to the credit policy I mentioned earlier. At a minimum, the country needs to enforce that lenders must report to credit bureaus; Transunion, Creditinfo, Xdr, Experian, CRC, FirstCentral and the likes. This is the first step, and what it does is bring us to a level where a person can default only once before it holds them back.
Today people take money from one lender after another, knowing that even if they fail to pay the current one, somebody else will hand them cash next month. That bad behavior sits at the bottom of the whole thing, and every lender who extends credit into it pays for the ones who came before.
If we manage to put reporting in place and build a credit-driven society, whatever default remains will be left to inability, and I have good reason to think this portion is smaller than most people expect. Lenders can seem very high-handed, yet most of them are able to restructure loans, and many borrowers with a genuine repayment struggle never go to their lender at all.
When people do speak to lenders about their situation, restructuring happens, which tells me a good share of the inability problem can be handled with a conversation that many borrowers avoid. There is also a second effect worth mentioning; someone who has taken a loan before and has not paid will have that history sitting with the credit bureau, and they will struggle to get a loan somewhere else. That means many of these borrowers would never end up holding a pile of loans they cannot pay back in the first place.
Consumer loan default in Nigeria, and in Africa generally, comes from a combination of unwillingness and inability, and I can say this with confidence after everything I have seen. Inability exists and deserves a proper response from lenders, yes. But unwillingness is so pervasive that it makes up the bigger problem.
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