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Being poor doesn’t make you a bad borrower

In Nigeria, stereotypes about the poor not repaying loans overlook their productive potential. Initiatives by banks and fintechs are challenging these biases with scalable lending solutions.

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 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?

The devalued Naira is a blessing for Nigerians

A devalued Naira can be beneficial by making Nigerian services cheaper globally, leveraging the internet for opportunities in writing, development, and more, boosting earnings in foreign currency.

If I said to you that a devalued Naira is a blessing, you’d probably turn towards me yelling “your fada” with as much venom as a village cobra. But if you think about it deeply and understand a few things, this tough pill might be a lot easier to swallow.

Since time immemorial, Nigerians have always valued a strong Naira. My mum regaled me with stories of N1 getting $2 on the streets of Lagos; those were the days chicken went for dentals. However, the Naira has been on a free fall since; plummeting faster than a falling rock. Because we import everything, the fall means life is difficult for the average Nigerian Joe.

So, it’s almost foolhardy convincing Nigerians that a devalued Naira can be a good thing.

How can a weak Naira even be a good thing?

Let’s start with the internet.

The internet aids the average Nigerian’s discoverability

It’s one of those things that our politicians and money bags haven’t been able to ruin, per se. With the internet, every Nigerian has a chance to sell their services and even goods across the globe without leaving their homes in Ilorin or Kaura Namoda. As long as you have something to sell.

The internet makes every one of us discoverable – competing with everyone in the world, irrespective of the corner of the earth where they are holed up. All you have to do is be on the right platform and showcase your quality. With the right keywords, your services could be found by anyone in any country.

Being found is one thing, after all, others are being found in other countries as well. But with our weak Naira, converted to USD, suddenly, your services and goods can now be found at a bargain.

The opportunities exist …

If you think you have to export something physical, you are missing the point of globalization. Every soft skill can be sold as a service online.

As a writer, you could get access to tons of writing gigs online. Software developers are in high demand especially when you share the same time zone as Europe where the demand for engineers is so hot it could melt a stone; content creators are being sought after from every part of the globe. Global firms are in need of designers, virtual assistants, analysts, etc. The world is quite literally your playground.

Slow your roll …

Granted, these opportunities exist and are ripe for the taking but only those who are ready to put in the work and understand the right kind of work to put in will go home smiling; tapping into these openings won’t be a piece of cake. A lot is required, the stakes are higher and the competition pool is deeper.

Let’s start with the basic requirement being a constant access to good internet (our service providers are chuckling at this one). In this Digital Age, internet access has rightly established itself as a need but we haven’t quite hacked the model for providing good and affordable unlimited internet services just yet. Perhaps, internet connectivity should get in line for a fix behind it’s older brother, electricity. But that’s not to say we don’t have a couple of reliable providers keeping Nigerians connected to the global village.

It goes without saying (but I’ll still say it) that when trying to tap into the global market, lowering the communication barrier is important; your command of English, the global lingua franca, must be impeccable. proper articulation can be quite advantageous – whether in your speech or writing. Speak well, speak clearly and apply the same to your writing. People recognizing your genius rests heavily on you being able to communicate it.

Beyond the basic requirements or the skills you have, being professional, responsible and having a keen eye for quality can really put you over the top. Resist that urge to tell your clients to “manage it” when you have produced subpar work; the global market is not as forgiving of mediocrity as we have somehow learnt to tolerate as Nigerians. Be open and flexible; continuous improvement should be your holy grail.

And my personal favorite, being accountable makes you even more attractive in the market; don’t disappear on your clients or give excuses after the fact; instead, let them know ahead of time if there will be any deviations or if you will be unavailable for a while; trust is everything, especially when building a borderless proposition.

What’s in it for you? Money.. And that’s just the start

In some twisted way, this is perhaps one of the few times a devalued currency can serve its intended purpose; the foremost economic logic behind a weaker currency is that it makes a country’s exports cheaper and more competitive in the foreign market – this is supposed to serve as an incentive that boosts exports. The economic quagmire we seem to have found ourselves in is: a weaker currency, a struggling commodity exports economy which is also highly import-dependent (shedding premium tears).

The silver lining here is that our human capital exports seem to be thriving and this is perhaps the loophole with which Nigerians are taking advantage of a weaker Naira whilst they patiently wait for the country to heal itself.

The pay from working abroad can be amazing. N200,000 here as a writer, could seamlessly be $2,000 net from working remotely; N400,000 as a developer could be $5,000 and a designer could knock off about $500 per good design, and that’s about one every couple of days… do the math.

And my grandma said

Bi a gun iyan ninu ewe; ti a se’be ninu epo epa. Eni to ma yo ma yo.

(cha ching!)

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.

Fintech growth hindered by inability to collaborate

Nigerian Fintechs have grown on the back of bank-built infrastructure but struggle with collaboration, hindering growth potential in a competitive landscape.

By Adedeji Olowe and Ifunanya Ezeani

Confidence in the Nigerian digital payments and Fintech industry is rising. And this is best exemplified by the rise of the African Fintech unicorns, three of which are based in Lagos. Their rapid rise is so unprecedented within the African context that It’s not uncommon to hear whispers about how Nigerian banks would be obliterated in a flash because they are slow and antediluvian.

Ironically, these Fintechs have leveraged their very existence on the core infrastructure built by these banks. Furthermore, most Fintechs continue to exist and attract investors anchored on the assurance of access to these payments infrastructure.

Even more ironic is the fact that while banks have collaborated in ensuring interoperability and fostering collaborations, Fintechs struggle to collaborate and build any enduring artifacts beyond a smattering of commercial partnerships.

Built by Banks. Used by all.

Take the Bank Verification Number (BVN) for example. Faced with a perennial lack of credible foundational identity systems and the inability of the Nigerian Government to build one, the Central Bank of Nigeria, in collaboration with all Nigerian banks launched BVN, a centralized biometric identification system. The BVN gives each customer a unique identity across the Nigerian banking industry that can be used for easy identification and verification. The BVN consequently enabled seamless verifications that allowed Fintech to get millions of customers at scale. Who built the BVN? The Nigerian banks.

Nigeria Interbank Bank Settlement System (NIBSS) drives more than 90% of all interbank transfers through the NIBSS Instant Payment (NIP) network. (NIBSS) was founded and owned by all licensed banks including the Central Bank of Nigeria (CBN). Every Fintech offering account transfer service routes that through NIP directly or indirectly through a bank who then routes that through NIP. Who built the NIBSS and the NIP? The Nigerian banks.

Super agents and mobile money agents have found success with last-mile agency networks that are powered by NIBSS and SANEF networks. Super agents are driving almost N100b a day in transaction value. Who built the SANEF? The Nigerian banks.

To avert the risks of systemic failure in the financial system, nine Nigerian banks in partnership with Dun & Bradstreet, a global provider of credit information products and services, and IFC formed Nigeria’s Credit Reference Company in 2007. The largest Nigerian digital lenders desperately depend on the data from these credit bureaus to guide the underwriting of the multi-billion loan portfolios. Who built the credit bureaus? The Nigerian banks.

Interswitch was founded as a national ISO switch for cards and ATM switching. Interswitch consequently grew into bills payments and a mass of various API services. The company routes a significant portion of traffic for super agents and web payments companies. Who funded Interswitch at creation? The Nigerian banks.

Banks compete. Banks collaborate. Banks win.

There are twenty-two (22) commercial banks in Nigeria that serve the 70m Nigerians with financial access. The sheer size of the Nigerian banking industry is partly attributable to the mad pressure it places on its employees to open and drive deposits in their bank accounts. Yet, Nigerian banks are experts in collaborative competition. They go aggressively after the same customers but understand the power of an ecosystem play. They have learned that collaboration creates a multiplier effect and allows everyone to reach their destination faster. Their collaboration reinforces users’ trust in the financial system, discouraging fraudsters from exploiting the system.

Distrustful competition. Negative synergy.

The Nigerian Fintechs industry is young and growing. Being in the early growth phase, there is this tendency to compete rather than to collaborate. Yet, it makes more sense to collaborate; your competitor isn’t your enemy.

Take digital lenders, most of whom get shafted every day by bad borrowers but never share data or with credit bureaus. They are so bitter about their losses they would rather other lenders suffer the same fate. But guess what, the bad borrowers continue to rampage them while the market struggles to grow. Increasing interest rates to cover the losses only exacerbates the vicious cycle of adverse selection.

Web payments collections are another example. Nigeria is rife with fraud of bad actors using stolen identities to raid victims’ accounts and subsequently have the funds usually moved through Fintech digital wallets. While banks typically have a BVN blacklist and actively help each other with account blockage and funds recovery, Fintechs don’t work with each other. Subsequently, the same gangs of fraudsters go around marauding the Fintechs while life-threatening chargebacks are levied against them.

Lastly, while banks routinely band together for collective bargaining of common services or products (POS, ATMs, etc.), the Fintechs continue to undermine each other with pricing. Subsequently, every time there is a downward trend in pricing, the Fintech partner to banks takes most of the commercial haircut. Why are they not able to agree on a common industry price and hold their own?

I’m smarter than you. I can do it alone.

There is this tendency for the Fintechs to want to go alone, each trying to outshine the next rather than share data and lessons to aid one another to succeed. This could be due to the developing market and the fact that the success of one or two Fintechs naturally leads to the creation of tens of similar Fintech, subsequently competing for the same market share. In Paytech, there are three popular players but their successes have led to over 30 businesses getting approval or approval in principle to operate similar businesses. So, it’s conceivable for the few that have succeeded to refuse any collaboration.

Rethink the game. Collaborate.

Collaboration creates synergies that are hard to individually pull off and this should be obvious to the Fintechs within the Nigerian and African ecosystem. Fintechs could learn from established markets like the US where Paypal’s success was due to its widespread adoption and partnership with eBay.

The time has also come for the emergence of big-picture and open-minded thinking among Fintechs.