Nigeria Archives - Page 2 of 25

Without access to credit for everyone, Nigeria can’t hit the growth it wants

Credit changes lives. Access to credit boosts education, entrepreneurship, and economic growth. To unlock Nigeria’s potential, the government must protect lenders and borrowers alike.

Let’s start with a story about Bimpe and Uche. Bimpe, a graduate of Sociology from the University of Lagos, is working an underpaying job with no growth prospects. With a salary of N100,000 and more mouths to feed than she could afford, Bimpe was miserable. She couldn’t continue living that way and she decided to start a business. The thing is, Bimpe is a very talented seamstress with a flair for sassy African fashion you see on Instagram, and you go like “whoa!” She could easily earn a lot focusing on couture full time, but she needs about N800,000 to start. She barely had N5,000 at the end of the month after all necessary expenses. Where would she get N800,000 from?!

She tried to save aggressively but life kept getting in the way and it was nearly impossible. She had nowhere to turn to get a loan that size either. Her numerous but failed efforts to gather the funds she needed made her burnout and less focused at work. She lost her job and had to resort to petty trading, barely making ends meet.

Uche’s story is a little different. Uche didn’t have the opportunity of attending university like Bimpe. However, he did have the opportunity of an apprenticeship with his uncle who owns a logistics business and all Uche wanted was to start his own logistics company after his ‘freedom’. After a couple of years Uche was finally free and then his eyes cleared when he realized he was so focused on learning how to grow his own business that he forgot the ‘seed’ he needs to grow his business isn’t the kind you find easily.

Well, Uche’s seed came in the form of a loan from his cooperative and he bought his first two dispatch bikes for his logistics business. Within 10 years, Uche’s business grew exponentially and he’s now a big man with many delivery bikes, buses and even trucks for nationwide delivery.

Credit saves.

A loan saved Uche. And most likely many others who could only afford to build good lives through the thousands of jobs Uche created through his business. Now imagine if a million Uches got loans like that and built a million successful businesses. Imagine if some other Uches didn’t even have to wait and could get loans to go to school and get good jobs. Enough with the daydreaming, back to reality: Bimpe. Bimpe whose promising life was completely derailed because she couldn’t access a loan or any line of credit.

The fact remains credit completely transforms anything it touches and it’s essential to grow any economy. Without credit, growth is limited; stifled even. Every N1 injected into the economy has the potential to create 10x value. This phenomenon is known as the ‘multiplier effect’.

What is the multiplier effect?

I won’t bore you with the technical jargons; let’s leave that for the economists. For the purpose of my crusade for credit, the gist of it is that for every injection (investments, capital expenditure, etc) into the economy, there’s an amplified ripple effect on the value and income generated within that economy.

Think about this: you’re on your way back home after a long day at work and hunger pangs are flogging you worse than your primary school teacher! A woman selling roasted plantain by the roadside comes to your rescue (not all heroes wear capes, some tie wrapper) and you pay for the goods. You have not only put money in the hands of the roasted plantain seller, you have also put money in the hands of her plantain supplier, who in turn puts money in the hands of the farmer and even the delivery truck driver and offloaders. The list goes on. Everyone makes money. That’s what the multiplier effect is.

So should Nigeria miss out on this potential for prosperity because people don’t have money right away? That’s absurd.

Give them money to build their dreams!

Let’s pump credit into education and reap prosperity for everyone

Only about 1% of Nigerians are in the universities. I’m sure if we were to conduct a study to find out the relationship between the level of education of Nigerians and the poverty rate, we’d discover they are married with three children.

There are a few barriers to getting a quality tertiary education in Nigeria but the highest barrier of all is simply that people can’t afford it so they don’t bother. They focus on providing for themselves and their families instead. The sad truth is that this deprives them, and even their generations to come, of the chance to ever make it out of poverty. The poverty trap didn’t come here to play with anybody.

There’s no denying that the student loan scheme in the US comes with its own wahala. Student loans in the US allow people who would never even have dreamed of a university education to attend some of the best schools in the world. The US’ global leadership is directly correlated to the quality of its education. Go figure!

Nigeria has now followed suit and introduced the Student Loan (Access to Higher Education) Act, 2023. Whether this is practical and sustainable remains to be seen but the idea is definitely welcome. With this, Nigerians can access quality education previously out of reach for so many. This could be pivotal to the quality of life for the beneficiaries’ generations to come.

With these loans, students get access to a good education; if they are focused and graduate with a good grade, they greatly increase their chances of landing a good paying job and living a productive and prosperous life. And guess what? The ability to earn the income they do over their lifetime can be directly traced to their access to credit.

The logic applies too even if the student chooses to start a business after graduating. They create jobs for others, they pay taxes and they have more money for consumption. Those who benefit from the jobs they create also pay taxes and increase their consumption. Rinse. Repeat.

The deal gets even sweeter. Why? Because people with better lives are able to give their children better lives too. The value generated just keeps multiplying. Did I just solve the poverty trap or what??

The simple fact is, no great country has ever emerged without educated minds and the US leads the pack with robust financial support and credit for students. Without Nigerian funding education like our lives depends on it, we wouldn’t get anywhere.

Don’t turn off the money gun just yet: entrepreneurs need loans even more

It just makes sense to give money to people who have the capacity to grow it, doesn’t it?

Say an entrepreneur starts a business with a loan of N5 million. You know what this means for the economy? Jackpot. They create jobs. They purchase materials from suppliers. They pay consumption and corporate taxes.

It doesn’t stop there. The suppliers are also able to create even more jobs with their increased income and every single one of them has to pay taxes to the government too. This same value chain is created even in small businesses. Remember the roasted plantain seller who saved you in traffic earlier? Take even the Uber drivers who take loans or take advantage of hire purchase options to buy a car and pay it off over some time. They’re big boys now o!

The fact is, everytime you give someone money, you empower them to create value. Cash injections end up becoming a powerful creative force to drive value creation in an economy many times over.

Credit. The gift that just keeps on giving.

If credit is so great, who’s hoarding it and why?

The value the economy stands to benefit from accessible and affordable credit is apparent so where’s all the good credit? It’s there but lenders aren’t lending. Why? Because no one is protecting them. We talk so much about borrower protection but if you hear the terrible things borrowers are doing to lenders on a daily basis, you’d quickly offer lenders a box of tissues for their hot tears.

Nigerians take loans and don’t pay back. This discourages lenders and forces them to limit the credit they offer to small ticket loans and high interest rates to account for their risk exposure. The problem here is that these kinds of loans are utterly useless to people who need a substantial cash injection to create significant value.

The government needs to protect lenders too. They can’t expect to be able to meet the credit needs of over 200 million Nigerians alone. Or do they think they can?

Nigeria isn’t the guinea pig and this isn’t an experiment. China did it already

If you want to know how effective credit is in transforming economies, just look at China. Their state-owned enterprises (SEOs) received low interest loans and the economic benefit was massive. With these loans, the SEOs were able to ensure economic stability, trigger substantial economic growth, reduce their unemployment rate and commit to undertaking large-scale infrastructure projects.

These loans came with their own challenges too but answer me this: Is China a superpower or no?

Then that’s that about that.

Let’s even come back home to Nigeria. We’ve had economic miracles borne out of credit as well. Take Dangote and Otedola whom all the kids look up to. Despite hailing from wealth, Dangote took out a loan of N63 billion, inclusive of $75m from IFC, to build the Obajana cement factory. Otedola did the same with a much larger syndicated loan towards Zenon Petroleum and Gas in 2007. Even the telecoms giant, MTN, signed a loan deal for N200 billion just four years ago when it floated its shares on the stock market.

Dear Nigeria, think smart and think fast!

The case is clear for Nigeria.The Government needs to think smart and think fast.

For the Government to take heed and jumpstart the economy, here are a few no-nonsense but simple things they can do immediately:

The government should step in beyond borrower protection and protect lenders as well and encourage them to lend more. Of course, this should be done with recourse to checks that guide lending: ethical interest rates, due process, etc.

The government can create a set of rules, regulated by the CBN that explicitly protects lenders without bureaucratic red tape: instead of lenders and borrowers dragging each other to court, lenders can report defaulters and get cooperation from defaulters’ banks to settle the loan. They should consider giving lenders access to use the global standing instruction (GSI) and putting it to much better use.

For the suggestion above to work, loans can be registered by lenders with a regulatory body and perhaps be given a limit to what can be recovered on loans in default e.g lenders can only recover their principal, with no penalties or interest when a loan goes into default. In the same attitude of transparency, an increase in the interest rate must also be communicated to borrowers and the authorities ahead of time before implementation.This process should be seamless and possibly electronic.

In summary, if the government doesn’t use credit to leverage the economy, the exponential growth we so desperately need will never happen. The best time to start was years ago. The next best time is now.

If CBN wants cashless, it should #maketransferfree

The Central Bank of Nigeria’s (CBN) directive on cashless is necessary and beneficial in the long run but success depends on CBN’s actions to support and secure the system.

The Central Bank of Nigeria’s (CBN) directive on cashless is a direction the country needs, which I support 100%. Some may argue that this impacts the poor and the bottom of the pyramid negatively – yes, it does, at first, but in the long run, this is significantly superior to cash and would benefit everyone.

But why would I support an approach many have termed poorly thought through and echoes a military approach that sets many ordinary Nigerians on edge? It’s because sometimes you cannot fling out the baby with the bath water.

Because of the impact on many Nigerians and the poorly received approach by the CBN, several Nigerians are pushing that CBN should suspend the new cashless policy. This is a poor thought, and it’s as flawed as asking Nigerians to stop making phone calls and start shouting to get the attention of their neighbors.

To make cashless successful and for everyone to reap the benefits and growth potential, sacrifices are expected of everyone. And we know that these sacrifices are not trivial.

Of course, the CBN is asking everyone to sacrifice a lot, but what are the CBN and the bankers giving in return?

This is where it gets sketchy and unfairly lopsided. It’s also where the success of cashless is in doubt. If the poor feel taken for a ride and disadvantaged, everyone will find a way to sabotage the cashless policy.

When you consider the CBN’s argument that this would curb kidnapping (a rich man’s problem) and vote buying (a poor man’s opportunity), the chance of success for CBN is severely curtailed.

Cashless would never curb kidnapping – if my loved one were kidnapped, I’m not sure I’m ready to lose them because I don’t want to pay the 5% extra charge on the cash ransom. A politician doesn’t care about the 10% on the N1b he will use to buy votes. The original N1b wasn’t his to start with.

After all, when the Naira fell badly to the USD, the poorer exchange rate was never a problem when politicians bought USD to get votes.

So what exactly can the CBN do? There are three immediate solutions.

CBN should make the electronic transfer free for everyone. But to block abuse, there should be a limit and a monthly cap. Why would this work? It’s simple – the poor, most affected by the cashless, and the elites (the CBN and bank executives), think about money and value differently. Time is expensive for the executives, so paying N50 for the transfer is nothing to them. But for the poor, every kobo counts. They cannot understand why they must pay N50 for a transfer when they can walk to the market and use cash without spending extra.

The CBN should go on a massive campaign to woo Nigerians and not talk down on them. Many Nigerians don’t trust the financial system. They think it’s rigged against them for the benefit of bankers. Many Nigerians are also scared of going to the banks because banks are formal and bankers look scary sometimes.

To make this work, the CBN should create relatable ads and public service announcements using influencers that can cut through the noise and let everyone know the CBN means good.

The CBN should also enforce liability shifts to the banks. Why would this work? Most Nigerians that would be forced to go cashless are digital neophytes, which means the bad actors will take advantage of them. The bankers are the ones that control digital payment services, and it’s their sole responsibility to make it safe and secure for all their customers. Maybe when bankers start paying for these frauds, they will put in more effort to keep everyone safer.

In conclusion, the new cashless policy by the CBN and bankers is a rare opportunity for the Nigerian financial ecosystem to grow and for financial inclusion to bring benefits to Nigerians. But without the bankers and CBN making transactions free (and cheaper) for Nigerians and taking other measures to assuage Nigerians about the benefits of this initiative, it would fail.

This chance is too good to be lost. Let CBN #maketransferfree.

Making GSI available to every lender would be the CBN’s smartest decision

The CBN’s Global Standing Instruction (GSI) is a potent but underutilized tool aimed at recovering loans, hampered by restrictions on non-CBN licensed lenders. Despite its potential to boost credit access, challenges persist due to lenders’ reluctance and regulatory barriers.

The biggest mistake CBN has made, despite its commendable and spirited efforts to get credit into the hands of every Nigerian, was to lock out non-CBN licensed lenders from accessing the global standing instruction (GSI) to recover loans.

GSI is one of the most powerful and currently impotent tools ever created by CBN to support the credit industry.

Here it is; no country can grow without credit. Credit grew the leading global economies. For instance, when China set out to transform its economy, introducing credit to stimulate the manufacturing and tech industries was one of the most brilliant things they did. Funding their export was probably the smartest thing ever.

The reality is that Nigeria and other underdeveloped countries are doing poorly because there is no credit, and there is a massive credit gap, even at the consumer and SME levels.

If there’s such a massive credit gap lenders can make money from, why aren’t traditional and digital lenders tripping over themselves to avail credit to the over 100m adults? The simple answer is that Nigerians won’t pay back, and there is nothing any lender can do about it. You can jump, shout, scream, etc., but nothing will happen.

Nobody needed to tell lenders to go super risk averse, which has led to stunted economic growth.

It means a young mother can’t quickly pay school fees, forever conscripting her kids to a cycle of poverty powered by illiteracy. It means the young man with a medical emergency can’t get the treatment he needs, cutting short a life of fulfillment and glory. It also means SMEs that needed short-term finance never reached them; all the value they could have created was never realized.

Then came along the CBN with the GSI to address this problem. But so far, D- in scoring.

How does the GSI work?

The GSI is a CBN-led initiative created to help banks and other financial organizations recover unpaid loans from persistent debtors, but only as a last resort. The core of the GSI proposition is one of the smartest things the CBN and banks have ever pulled off.

Despite having the means to repay their debt, we can’t ignore the reality that many borrowers refuse to do so and choose to evade their obligations. GSI allows a lender (a bank) to request for a borrower’s accounts in other banks to be debited when the borrower has defaulted, but the lender suspects that the borrower has funds elsewhere.

It requires that all bank accounts be linked to the borrower’s bank verification number (BVN). The borrower issues a mandate during the loan application process that authorizes the bank to activate the GSI in the case of default. This mandate is valid for as long as the loan remains unpaid, so the banks can keep debiting the defaulting borrower until their loan obligation is fully met.

Given this tool’s power to protect borrowers and abuse, there are strong penalties for misusing the GSI.

Why hasn’t GSI fixed the problem?

Would introducing the GSI would have been the secret ingredient to make credit blow in Nigeria, finally? Nah. Banks are too shy to use this for reasons I’m not ready to air here. Besides, bankers are not used to consumer loans, so they don’t care.

The small credit Nigeria has is driven by money lenders and other digital initiatives. 99% of them are outside of CBN’s purview. Of course, getting licensed by the CBN is so hard that most people with common sense won’t even attempt it. It’s harder than getting a seat to go to Mars. Hello Elon?

So we’re at an impasse.

But let’s take a step back. CBN should be more interested in the growth of loans and the economy, irrespective of who gives the loan.

Here’s what the CBN can do

The GSI is too impressive a creation to let it go to waste. There are a few things CBN can do to increase its effectiveness exponentially.

Opening up the GSI to everyone, whether licensed by CBN or not, would be a big step in the right direction. If possible, it could even be opened up to individual lenders.

Before you scream “abuse by lenders”; the penalties for misusing the GSI offer protection to borrowers who are targeted unjustly.

An immediate benefit is that to use the GSI, loans have to be registered on the Credit Risk Management System (CRMS) when a loan is granted. The CRMS is a central database that contains consolidated credit information on borrowers and their debt obligations across banks and other financial institutions. It’s almost a Credit Bureau. The CBN mandates financial institutions to enter all outstanding debts with a minimum value of ₦1 million and update the status of these debts every month. Before extending credit facilities to any borrower, the financial institution must also conduct a status inquiry on the borrower’s existing debt obligations in other financial institutions via the CRMS to ensure they can repay and have not abandoned their obligations elsewhere.

Additionally, CBN could make a few more adjustments that help everyone. They could allow GSI as a primary payment method; there’s no need to wait until the loan defaults. CBN could also charge a token for lenders to pay when they use the service since it creates value for everyone on the chain.

CBN has all to gain and nothing to lose. They get to see all the loans via the CRMS. That data helps the CBN, regulators, and other stakeholders make better-informed macro decisions and strategies. This way, the CBN helps enforce consequences. Nigerians who choose not to pay back loans do so because there is little to no enforceable consequence for their harmful behavior. A loss reduction for lenders will follow; this will also crash the interest rate since the risk premium will also reduce. All these will make for a healthier credit market, hopefully stimulating economic growth. This is something I’d like to believe the CBN can get behind.

However, this may also backfire: if too much cash is suddenly available, it could lead to severe inflation.

Considering how much there is to gain from these adjustments, it makes sense for CBN to pursue this line of action, and it’s ultimately beneficial to everyone except those who don’t want to repay their loans. And why should we decide based on what’s good for the bad guys anyway?

Is proof of funds a fraud?

The proof of funds loans has allowed over 100,000 Nigerians to travel abroad for schools or immigration without having the funds demanded by the embassies. This is a fraud but even then, what are the implications for Nigerians?

The proof of funds loan is the most important financial product to have impacted almost 100,000 middle-class Nigerians over the last two years. It has been the foundation to enable most Nigerians that have achieved the “Nigerian dream” to japa.

But could this be the biggest fraud of all time?

What is proof of funds?

This is a signed official statement of a bank account that a student or an immigrant has the funds to settle or take care of themselves in a foreign country. Embassies have been demanding this for centuries, especially the UK, Canadian and Australian embassies.

What’s the genesis?

Let’s understand that to say our economy is battered and the country itself is messed up is an understatement. It’s expected for anyone with a shred of sense to run for their lives. Maybe if I didn’t think staying in cold weather too long would kill me, I would be running too.

The hitch is with a bad economy; people don’t have the money to provide proof of funds. Let’s think about it; If they had thousands of pounds stashed away somewhere, they might not be so desperate to run off to a foreign land in search of milk and honey.

This is where the smart lenders entered the game.

How does it work?

Lenders saw an opportunity to provide those with migration plans with a profitable loan product. Tons of lenders do this. They give individuals the large loan needed to show proof of funds to the embassies.

You’re probably wondering what’s stopping Nigerians from simply taking this loan and using the money to japa, never to be seen again, the same way they treat other loans. Well, the bank account containing the loan is controlled by an internal bank friend collaborating with the lender. The account is locked, so the borrower has no access to the funds. The money only belongs to you on paper.

If you take out a loan like this, you pay monthly interest in the region of 3%. So proof of funds of £20,000 means ₦20 million (yeah, a pound is about ₦1,000) and ₦600 thousand per month for six months. Good luck to all who set out on this journey.

Is proof of fund fraud?

Now let’s do a quick English language class. What exactly is fraud? The answer: a false representation of facts. The embassy has requested confirmation that you have funds to support yourself when you make the big move to their country. But you borrowed money that you definitely don’t have to prove, deceiving the authorities.

It’s a fraud. No two names.

Take it easy; I’m not here to judge. I, too, did this when a family member was going for a post-graduate program. I used my boss’ account as a guarantee of funds. Don’t quote me; I will deny you.

What would probably happen?

As everything is abused by Nigerians, this would probably unravel soon. The outcry has already begun. Nigerians have started arriving in these countries with only little to their name and may soon become destitute. Many have already found themselves in less-than-ideal conditions; some have been asked to withdraw from universities because they couldn’t pay the balance of their fees. Others are homeless and forced just to lay their heads anywhere they find.

These countries will soon find out that these guys never had the money in the first place.

Would they ban us as the UAE did? Maybe not. But they could start doing what CBN did to those who asked for licenses (that’s a story for another day) by forcing them to either open an account in a foreign country or pay school fees and accommodation costs 100% ahead of visa application.
Although things are undeniably tough in Nigeria and many of us understand and maybe even sympathize with the japa craze, the sad reality about cutting corners like this is that those coming behind you will probably have to pay for your sins too.

It’s destructive for lenders to punish good borrowers

Loans in Nigeria are usually expensive due to high default rates and lenders’ flawed business practices. Lenders need to focus on the right things and create a sustainable lending model.

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?