Credit Archives - Page 2 of 3 - Adédèjì Ọlọ́wẹ̀

Being poor doesn’t make you a bad borrower

There is a general belief among top bankers and armchair experts that the poor don’t pay back their loans, and therefore there isn’t any basis to even let them have access to credit.

The arguments are many, and having fought with unmatched vim in many of these arguments, and I wonder how I have escaped without a black eye most times.

In a country where over 90 million people are below the poverty line, and many just want a chance to move up the ladder (those who wait for the Government to move them shall wait forever), then it is elitist and dangerous to jump into these conclusions without an adequate assessment of the realities.

The poor don’t have money to pay back

Well, yes, this is true. One of the 4 Cs of credit is capacity, which is a core tenet of credit; it’s only sensible to never lend to anyone beyond what they can pay back and to structure it in a way that doesn’t keep them in a financial chokehold (na money dem dey find, no be say they kill person).

It is equally as important to note that loans should also be tied to productive activities that are sure to yield enough return to pay them back. Being poor does not disqualify one from being productive. Someone who hawks Gala on the streets of Lagos with N0 to his name, taking a N10,000 loan in the morning to sell in traffic, has a higher chance of paying it back than a fat banker who took a loan to buy business class tickets for himself and his side chick to Dubai (we know your stories).

The poor have a history of not paying back

Nigeria is replete with tons of stories of government interventions where nobody paid back their loans. It makes you wonder when loans and cash gifts became synonymous. One might think this to be true until you discover that most of these loans were run by syndicates who arranged for most loans to be disbursed within their networks. These people saw an opportunity to share the national moi moi and divide the national cake.

While this narrative seems to have taken over, on the flip side, I can point you to thousands of lenders who extend daily credit to market women around Nigeria. These market women pay back consistently and reliably. Chimamanda couldn’t have said it better; beware of the dangers of a single story.

The poor have no credibility

Everyone assumes the poor would lie to get a loan. Yes, Nigerians lie to get loans, but this isn’t a problem of poverty; it is a character problem. Poverty does not directly translate to a lack of credibility, and neither does the Nigerian elite starter pack come equipped with credibility (selective amnesia for AMCON defaults still?) The quantum of the bad loans in the Nigerian banking system, powered by borrowers with zero character, was for the rich and mighty.

The lack of character is a personal problem, and this is due to the torn national value fabric, which is on its knees begging for mend.

You can’t catch the poor if they don’t pay back

But are the rich not still running?

Someone owes you N20,000 in unpaid loan; you spend N10,000 in locating their place; what would you do when you get them? Nothing! In all honesty, I concur that pursuing a poor person who hasn’t paid is a waste of effort and resources.

Unfortunately, almost the same applies to everyone except the middle class. The rich guys owe banks trillions, but they are the ones suing their creditors. A tale of the tail wagging the dog.

The poor have no credit history

The poor indeed have no credit history. And they won’t have a credit history because of two critical reasons:

One, most Nigerians have never gotten a chance to get a loan before, and if you never had a loan, you can’t have a credit history … but you need history to qualify for most loans (which came first? The chicken or the egg?)

Two, the cost of access to a credit bureau for the small lenders that only do microloans and serve a small portion of the market is unbearable. Imagine racking up credit bureau costs for 1,000 loan requests when only about 100 would qualify for loans and even less will pay back (when next you see the owner of a small lending business, hug them and then squeeze 50k in their hand, those guys are trying).

Why do we need to kill these narratives?

It is dangerous to use intellectual laziness to block over 1 billion people in Africa and 90 million people in Nigeria from credit simply because we can.

Our inability to find a working model isn’t the fault of the poor but the fault of those who may not be putting enough effort into solving these problems. The truth is, if we don’t solve these credit problems, Africa won’t grow, and the poor will one day rise against the rich (#eattherich).

Previous narratives based on elitism have been proven to be false. They once said phones aren’t for the poor, but today, the same poor are the source of life for MTN and others. They once argued that the internet wouldn’t be affordable, and today, Africans are addicted to the internet. I wouldn’t even call it a lack of wisdom. They know the truth. But the gods forbid poor people to have access to the same things as them (gatekeeping 101).

Some banks and fintechs are already changing these narratives

Don’t be alarmed yet; all hope isn’t lost. We’re already seeing the rise of lending-as-a-service tech companies such as Lendsqr, Indicina, Evolve credit, etc., creating cheaper and scalable lending stacks for small-time lenders, which allows them to reach the mass market more cost-effectively.

Some banks, such as Sterling, Access, and FCMB, are at the forefront of mass-scale consumer lending. These banks are giving loans to Nigerians who are not their customers as they understand that consumer credit is the future.

Disclosures: I’m the founder of Lendsqr, and I work there.

It’s destructive for lenders to punish good borrowers

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?

Lendsqr is solving the African credit problems

My diverse experience in banking and technology led me to recognize Lendsqr’s potential to drive African economic growth. With millions seeking credit, our lending infrastructure aims to democratize access to finance, empowering dreams across the continent.

With years spent in banking, technology, and payments and a background in engineering, I’m able to understand how foundational systems become the catalyst for growth. This understanding of foundational systems gave me the belief that Lendsqr has a unique opportunity to spur the growth of the African economy by being a leading lending infrastructure provider across Africa.

With a population of 1.4b people, the majority born just after the Y2K bug, the demand for smartphones, internet, the good things of life, is growing at a rapid pace. Many of these, including education, health, etc. would need to be financed with credit. But access to credit continues to be a challenge which becomes a barrier for the young woman in Accra from realizing her dreams and the lad in Kampala from going to the school of his choice..

We have witnessed the rise of digital lenders in Africa, particularly Nigeria and Kenya. This is driven by the massive adoption of smartphones, the continual reduction in the cost of internet data, and the relentless push of financial inclusion by central banks and fintechs going to the last mile with agency networks. While some of this growth has been driven by COVID over the last two years, experts are unanimous in the belief that the changes are a signal of future growth for Africans.

What problems do we have?

Africans continue to struggle to get credit, often in life and death scenarios. And even when they do get it, the interest rates charged are usually so punitive; many have commited suicide due to the pressure from lenders and their inability to repay their loans. On the flip side, lenders continue to deal with high-default and zero consequences for serial defaulters.

While technology and access to data powering the underwriting process can solve these problems, lenders lack access to quality data and sustainable technology, and even when those are available, they are so expensive that even VC backed lenders can hardly afford them. The diverse integration needed by a lender to various KYC providers and payments systems also requires a level of expertise and focus that these lenders do not have.

Lenders just want to lend; not to become programmers.

How is Lendsqr solving this problem?

Lendsqr is building a cutting edge lending infrastructure powered by technology, data, integrations, and an ecosystem; providing lenders an easy way to digitize their lending in a scalable, sustainable, ethical, and most importantly, profitable way. Lendsqr has built integrations to some of the best payment processors, leading credit bureaus, and transactional data providers. These integrations and ecosystem play are often extremely difficult to pull off, providing Lendsqr with a unique opportunity to position itself at the confluence of credit and what people use credit for – shopping, health, cashflow, etc.

By enabling smaller lenders to scale up, Lendsqr is guaranteeing Africans, starting with Nigerians, access to credit that would create a powerful long-term, consequently expanding our economy significantly in the coming years.

And this approach isn’t strange. We’ve seen the humble WordPress power 37% of global web pages despite large content owners like CNN, WaPo, etc. Shopify and Etsy power global e-commerce despite the might of Amazon and eBay. Lendsqr will power thousands of lenders who want simple, affordable, and smart but invisible tech to lend to millions of Africans.

Over the last couple of years, Lendsqr has helped hundreds of thousands of Nigerians have access to credit while helping lenders reach at a scale that is unprecedented and with technology previously found with only the highest funded VC backed lenders. But starting from March 1, 2022, Lendsqr would be making the same technology available to lenders for free. Any lender can sign up and start disbursing loans to their first customers within 5 minutes. The team has done the magic of hiding all the madness of being a digitized lender behind a single click.

I’m excited to be part of this ecosystem of lenders, partners, data providers as we begin our journey to use technology, data, and partnerships to guarantee credit for every man and woman in Africa and beyond.

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

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.