Category: General

Read about Adedeji’s take on technology, payments, financial inclusion, career, and credit.

Nigeria’s problems will be solved by access to credit

Access to credit in Nigeria has historically favored large corporations and the wealthy, leaving millions excluded. Credit access is crucial for economic growth, especially in times of high inflation and rising living costs. While digital lenders have made strides, there’s still a long way to go.

Access to credit has historically been difficult in Nigeria. This is because, for years, big banks were the sole providers of financial services and those banks didn’t care too much for retail banking. 

Between thinking about the risk profile of individuals and smaller business players and the absence of real disincentives against failing to repay loans, banks mainly provided credit facilities to large companies and the rich. It has robbed Nigeria of a unique opportunity to grow its middle class or lift over 100 million of us out of chronic and crushing poverty. 

Credit is a global conversation because it has the potential to be a growth driver for economies. Credit is how people can fund their small business idea, deal with the economic shocks of job losses, or acquire assets. 

In Nigeria where the inflation rate is at a record high of 16.47%, credit maybe even more than a means to grow businesses; it is a tool to manage daily challenges. Food prices are up, fuel prices are up and civil servants who are often routinely owed salaries for months always need to borrow money. 

Many cannot access small loans from the banks they use mainly because the process of getting a bank loan can be complex. Know Your Customer (KYC) procedures and the need to fill numerous forms often means that people do not consider banks as a source of credit.

Instead, many rely on shylock money lenders in their network who charge high-interest rates, so high they are just a shade better than armed robbers. It puts many ordinary people in bad spots. Thankfully, digital lenders are changing situations like this, by giving people access to quick and easy unsecured loans. 

In 2020, FairMoney said it lent $93 million in loans to Nigerians while Carbon said it disbursed N25 billion. Those are impressive figures when you consider that many of those loans are likely under N200,000 ($484). 

Yet, despite the strides, digital lenders are making and the Central Bank of Nigeria’s loan to deposit ratio which is forcing banks to give more loans, we still have some way to go. A few people contend that less than 2% of Nigerians still have access to any type of credit. 

The majority of the world’s 1.7 billion unbanked people live in just five countries; Bangladesh, China, India, Mexico, Nigeria, and Pakistan. How can credit change the lives of people in these countries?

Personal loans for the vulnerable 

In a country like Nigeria where unemployment and underemployment are high, people often need personal loans to feed their families. According to SBM Intelligence, a consulting company in Nigeria, at least 63% of people spend the majority of their income on food. 

Those stark figures explain why people often say that every product in Nigeria competes against food. But it also shows something more important; that a large percentage of people will not be able to meet other needs like rent, healthcare, and entertainment. 

Most of these people who are often underbanked and financially underserved often have no recourse to credit facilities. Many of these people do not even have functional identification so there’s no hope that they can scale the stringent Know Your Customer (KYC) requirements of financial institutions. 

According to the Director-General of the NIMC, Aliyu Aziz, only 38% of Nigerians have any form of identification. It shows you the scale of the problem and it lets you know that despite the big amounts digital lenders are disbursing every year, there’s still a huge unaddressed market. 

Beyond this, when people meet their immediate needs, there’s still a need for credit, but for a different kind; small and medium business financing. 

The SME financing gap

Small and medium businesses account for 96% of businesses and 84% of employment. There are different types of small business owners in Nigeria but a good part of those are people whose businesses often need steady cashflow. 

Many are traders who need working loans to restock their goods or to buy items in anticipation of festive periods. Their loan requirements range from daily loans which they can pay back by the end of the business day to short-term loans.

Right now, there are not a lot of credit options for the informal small or medium business owner save for loans from family, friends or cooperatives of some sort. This is one reason why it is difficult for small businesses to scale in Nigeria; working capital is hard to come by. 

As we move further up the socioeconomic ladder, there are also all sorts of credit gaps that can need to be filled. 

Asset financing for the salaried worker 

Nigerians often need to pay in full whenever they need to buy phones, laptops, televisions, or any other type of asset. It’s often a strain on salaried workers who sometimes are doing just enough to get by.

Sometimes people need to buy some of these gadgets without planning such as when they lose their phones or when their laptops go bad unexpectedly. Asset financing can make situations like this easier.

There have been several attempts to solve this problem by financial institutions but many of the solutions have been criticized for having expensive markups. It has prevented buy now pay later companies from scaling in Nigeria. 

Whenever the financing for these sort of light assets is sorted, the problems get even bigger down the road. 

Car policies vs auto loans 

Nigeria has enacted several policies to encourage car manufacturers to manufacture cars within the country. Some of those policies, like the ban introduced on the import of second-hand cars older than 10 years into the country did not produce the desired results. 

Instead of spurring production, the ban merely made smuggling more profitable and consequently, it drove up the prices of secondhand cars. There have been more auto policies, but nothing has significantly moved the needle. 

In discussing Nigeria’s Finance bill last year, Vice-President Osibanjo said that while Nigeria’s annual vehicle demand was around 720,000, local production currently stands at 14,000. The answer to the problem isn’t more auto-policies.

This is because only a handful of Nigerians can afford brand new cars. In fact, very few Nigerians can afford cars at all. According to 2017 data by the National Bureau of Statistics (NBS), “on the basis of private vehicles only, vehicles per 1000 Nigerians comes to about 24. It is also about 41 Nigerians to one private vehicle– one of the lowest among its emerging market peers.”

One way to look at this problem is that most Nigerians have to pay cash and pay in full for vehicles. Auto-loans and car financing are difficult to come by and where food is competing for people’s paychecks, it is difficult to ask them to put down millions to buy a car. 

It is pretty much the same situation when you look at homeownership and mortgages in Nigeria. These are sectors and situations where access to credit can provide the much-needed quick wins. 

Using credit to improve homeownership 

In developed countries, mortgages allow millions of people to buy and own homes with affordable payments stretched over several years. In Africa, the mortgage market remains thin. 

Here’s data from one publication; “In Uganda, there are an estimated 5,000 mortgages for a population of 41 million while in Tanzania, there are only 3,500 mortgages in a country with a population of 55 million.”

It’s not much better in Nigeria where even the wealthy do not often opt for mortgages. Jason Njoku’s famous thread about trying to secure a mortgage a few years ago is a stark reminder. It means that homeownership rates in Nigeria very low. 

While homeownership in Kenya is 75% and 56% in South Africa, in Nigeria, it is estimated to be around 25%. Ten more homeownership policies will not change this. 

In the end, across many sectors, Nigerians need a way to finance asset acquisition without putting down years of their savings. Why pay N40 million upfront for a house when you can spread the payments over 20 years while using the rest of your money to invest in other ventures?

Without credit, we’re going nowhere

The real game-changer for Nigeria won’t be more policies, but a more conscious drive towards expanding access to credit to every single Nigerian and creating a framework that makes eligibility a right instead of a privilege.

Nigeria is Africa’s open banking pioneer

In 2021, Nigeria’s banking sector witnessed the advent of Open Banking, aligning with a global shift towards sharing transaction data. This move holds promise for innovation and financial inclusion, particularly in credit access and streamlining KYC processes.

One of the predictions for Nigeria’s banking sector in 2021 was that Open Banking would finally make some headway. It was an important prediction when you consider that for years, quite a lot of global industry players have said that open banking is the future. 

Open banking is the idea that established banks should share the transaction data of customers with other financial service providers (FSPs), challenger banks and other third-parties recipients. For such a simple idea, its implications for banking are huge. 

One way to look at it is that some of Nigeria’s biggest banks have been around for years and have millions of customers. Despite their market dominance, they have often been criticised for not providing retail banking or innovative products. 

Most of that innovation has been left to the newer fintech players who have unbundled traditional banking services. PiggyVest and Cowrywise help you save money, Eversend helps you with cross-border transactions and over 30 digital lenders provide unsecured loans. Challenger banks like Sparkle, Kuda and Rubies also tout new ways of banking. 

While these startups have made significant progress, they still get smashed by banks. For instance, last year, Fairmoney, a digital lender in Nigeria, disbursed a total loan value of $93 million, a 128% increase compared to 2019. While that figure makes it one of the biggest digital lenders in Nigeria, when compared to traditional banks, it falls all the way to seventh place. 

Central Bank’s regulation on Open banking

One of the most important issues with the regulation of open banking is data and how the data of customers will be handled. According to the CBN, the open exchange of data and services through APIs will be divided into four categories. 

Each category contains a specific set of information with a particular risk level. For instance, Market Insight Transactions (moderate risk level), include statistical data aggregated on the basis of products, services and segments used by customers. But it will not be associated with any individual customer or account.

Access to these categories of information will be open to four participants as well; on one end are participants that do not need to have a regulatory licence. Participants like this will not be able to access information that is high risk.

The participants in CBN’s regulatory sandbox will have access to some low and high-risk data like Personal Information and Financial data (PIF). Only players with regulatory licences will have access to the most sensitive information like personal information and financial transactions or data. 

The participants that will access this kind of information are mostly deposit money banks. It is a sign that the CBN is aware of what the attendant risks are as it also goes on to state the requirements for every participant level. 

APIs and Common Standard 

One of the key issues in open banking is also the creation of a common standard for APIs and most of the work in this area has been led by private organizations like Open Banking Nigeria (OBN), which I founded with other stakeholders in June 2017. 

I founded OBN to drive the advocacy for open APIs, define an open set of APIs needed for a common API standard, as well as provide a sandbox and other testing tools for certification.

In 2018, we published our first set of API standards, and today it has members like Paystack, Interswitch, Flutterwave, Teamapt, Wallet Africa, among others. While this initiative is great, regulation is necessary for a space like this, and CBN’s regulations are a step in the right direction. 

What’s likely to happen next? The ball has been set in motion and the guidelines say that a common standard as well as an open banking registry will be created in the next 12 months.

Using Open banking to drive financial inclusion

By sharing customer data, fintechs can create products and services that work for financially underserved and excluded individuals. One of the areas where there’s a lot of promise is access to credit, which I’m extremely passionate about.

Although digital lenders are getting even more popular in Nigeria, only a handful of people have real access to credit. One limitation digital lenders face is access to data points that help them score credit risk for individuals. 

Many lenders use workarounds like giving small amounts to customers and gradually increasing the loan amounts. This strategy discourages people who want to afford bigger loan sums, and customer transaction data can solve this problem. 

There’s also the issue of how the need for extensive documentation excludes low-income customers from banking access. If open banking is expanded to telecoms for instance that registers customers for SIM cards, they can share these registration details with fintechs and eliminate the need for more KYC forms. 

When KYC is sorted, it will help the millions of gig workers in Nigeria. In Lagos for instance, it isn’t uncommon to meet carpenters and mechanics without bank accounts. Open banking can help workers like this access more personalised services and eliminate the obstacles to accessing financial services. 

It will get a mind-boggling level of integration to make this happen and this is where Application Programming Interfaces (API) come in. 

What have APIs Got To Do With It? 

One of the easiest ways to understand APIs according to one writer is that “it helps let companies leverage years of other companies’ work in seconds.” APIs let programs talk to each other and most times, we see them used extensively for internal purposes. 

Internal APIs are used to do complex things within a company while public APIs open up datasets so that other people can build on top of them. Consider the amount of integration that will be required for all of Nigeria’s banks to share information and you’ll start to see why APIs are the easiest way to make it happen.

Despite stringent regulations on crypto, the show will go on

Following the Central Bank’s ban on crypto exchanges, ironically, CBN policies has made crypto popular as a workaround for FX restrictions. The ban raises questions about its effectiveness and the missed opportunity for control and revenue.

This week, two Nigerian banks began blocking the accounts of individuals trading crypto and the accounts of cryptocurrency exchanges. It followed regulation from the Central Bank of Nigeria banning the activity of cryptocurrency exchanges in the country.

It sent crypto exchanges like BuyCoins, Luno, Quidax, etc., which have become immensely popular in Nigeria, into a frenzy; the task before them was to move their money from Nigerian banks before the freezes went into place. It was a curious move by CBN in a week where Bitcoin had hit record highs and coins like DOGE were gaining value.

Ironically, the CBN had some part to play in making crypto so popular. Whatever the intentions, the CBN’s persistence in maintaining an exchange rate for the Naira at N360 to the Dollar for years has led to confusing FX policies. There is a list of items for which importers cannot source FX, and in December, another policy on International Money Transfer Organisations (IMTO) sent Nigeria to the dark ages.

The Nigerian market and the numerous smart players in it are not strangers to the regulators’ heavy hand, and they have some experience working around it. For FX restrictions, importers simply turned to cryptocurrency to buy and pay for items.

The use of cryptos cut the CBN out of the process, and last year, Nigeria traded a little over 60,000 Bitcoins, the second-highest transaction volume globally. If there was any doubt about the veracity of those trades, exchanges like BuyCoins released their reports for 2020, showing massive trade volumes, up from a year before.

Yet, despite the rising popularity of crypto exchanges, the question of regulation remained the elephant in the room. To be fair, it is a conversation that is happening globally. A currency outside the government’s control and has shown such volatility will give regulators pause.

There are two initial questions around the regulation of crypto. The first is who should regulate cryptocurrencies? In Nigeria, the answer falls somewhere between the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). The SEC has long been skeptical, warning investors off cryptocurrencies in 2017.

Remarkably, the Commission made a turnaround in 2019, stating that it now considers crypto as a legitimate investment class.  The CBN, for its part, has always taken a less enthusiastic view. In January 2017, it issued a circular warning to banks against any transactions in virtual currencies. In 2018, the CBN doubled down and reiterated its warning against digital currencies.

What are the real issues with crypto?

One of the most significant issues around crypto is its semi-anonymous nature. By their very creation, they are designed to operate without an overlord, sovereign, or whatnot. While this is interesting in theory, in practice, it can become a powerful tool in the hands of bad actors; this is the CBN’s argument.

Another issue that builds from the anonymity of digital assets is that it makes it a domain for bad actors to commit fraud. Through fake crypto exchanges, pump and dump scams, Ponzi schemes, and malware attacks, prospective investors can lose money trying to invest in crypto.

In countries where crypto regulations are in place, such as the United States, one workaround reduces some of the anonymity around digital assets. In December 2020, the U.S proposed new regulations requiring crypto exchanges to report anyone’s personal information with transaction values of above $10,000 daily.

This sort of Know Your Customer (KYC) requirement, which some may argue defeats some of the purposes of digital assets, may make crypto exchanges function a bit like banks, which is anathema to the proponents of digital currencies. This could have been one approach that the CBN could have taken, given that it has hinged its concerns on fraudulent transactions and the possibility of using these semi-anonymous assets to finance terrorism.

There are also proposals for crypto assets crossing borders to be reported by exchanges. In some of the regulatory conversations in the U.S, the most significant change would be more KYC requirements. Some may argue that exchanges in Nigeria, some of whom have berated regulators, should have engaged them instead. Others argue that despite the ban, there is still some sense in engaging the regulator now that public opinion is on the side of the exchanges. 

Of course, the ready answer to this would be that when ride-hailing operators in Lagos state engaged the government and relevant regulators for over a year, it yielded no results. It may not be a perfect analogy, but a healthy fear of regulation is a feature of African markets.

How are other African governments approaching regulation?

In at least six African countries, cryptocurrencies are banned. There are bans on all digital assets in Algeria and Morocco with fines that break the existing rules. On the flip side, South Africa, Senegal, and four other African countries have shown progressing thinking in regulating crypto.

In 2016, Senegal launched the eCFA, a digital currency built on blockchain that can be stored on mobile wallets, while Sierra Leone is vocal about its plan to be Africa’s first “smart country.” In South Africa, while crypto is not recognized as a legal tender, the South African Revenue Service (SARS) considers it an asset.

It means that SARS will be open to collecting taxes on crypto, as evidenced by some recent reports that the tax authority asks individuals to disclose crypto purchases in their tax filings. It is an exciting approach that signifies that there will be more regulation.

Regardless of what the regulators in Africa do, crypto has become attractive for regulation to kill it off effectively. What is more likely to happen is that companies and individuals will circumvent these regulations.

A missed opportunity for real control and revenue?

This week, BuyCoins announced that it is back to taking deposits from customers, two days after the CBN threw the exchange an unexpected blow. Early observers pointed out quickly that the CBN’s policy was unlikely to stop crypto trading; instead, it would introduce friction.

If anything, Nigerian founders and companies are familiar with working around infrastructure and policy challenges. In this specific instance, peer to peer trading, which is harder to regulate or control, will become popular.

In the end, it appears that the CBN may have shot itself in the foot, missing a significant opportunity to collect tax revenues or implement KYC measures to have some measure of control. One thing is clear. This is a pyrrhic victory for the regulator, but for the crypto exchanges, the show will go on.

Using Open APIs To Drive Financial Inclusion via Credit Scoring Built on Telecoms Data

Financial exclusion remains a significant hurdle in developing economies, where access to credit facilities is key. Discover our proposed model for a more inclusive financial future.

Financial exclusion remains a significant challenge in developing economies. It has been shown that access to credit facilities is a strong predictor of financial inclusion. Credit reporting and scoring remain effective tools for both traditional and alternative lenders, however, access to credible credit data and scoring mechanisms is one of the biggest roadblocks that alternative lenders in developing economies face. While some lenders have developed systems that leverage social media analytics and data harvested from smartphones in order to create a scoring system, the poor and vulnerable are still excluded from such scoring systems. There have been significant advances in the use of telecoms data for credit scoring, making it a promising alternative to credit bureau data. However, readily available data is still an issue. With the increase in the development and use of open APIs, telecoms data could be made readily available for credit scoring, while addressing privacy and other issues. This paper is a conceptual paper that proposes a model for the use of Open APIs from telco data for credit scoring that will ultimately increase access to credit, and ultimately financial inclusion in Africa.

Read and download the full paper here.

The futility of utility bills for address verifications

What impact do utility bills actually have when verifying customer’s address and what methods are most effective. Let’s explore this together.

I was recently working with a traditional financial service provider to launch a product online. And they insisted on applicants providing utility bills. Then the trouble started! Even though argued strenuously against this, but they also brought valid arguments. So, I had to take a step back to ask; why the hell do we need utility bills to start with?

I’m sure you’ve all experienced this at different times – your bank tells you a sexy story about applying for something, and bam, they hit you with a request for a utility bill. To make it worse, the strident officer across the desk or on the phone doesn’t even know why a utility bill was required.

Before you start cursing at them or berating their bosses, let’s ask – why does anyone need utility bills? Forget about the fact that the officers that ask for these may not know their left hands from their right nostrils; the truth is, there are legal requirements for, not for utility bills, a verifiable address of every customer within the financial services industry.

Thou shalt know your customers

There is an arcane financial rule called Know Your Customer (KYC), which is the same thing your mum does when your sister drags in that funny looking boyfriend of hers. She goes, “Who is your dad? Where’s your family from?”. After taking loans sending her to school, she ain’t gonna risk that for some supposed slimeball.

OK, that’s a little bit over the top.

The rules of financial services require that banks, insurers, brokers, etc., should know their customers well enough. I have previously written a playbook for digital KYC here, so if you like to bore yourself to death, you can read more.

A critical element of KYC is verifying that the customer lives where they say they do. And how do you go about that? Require that they produce a utility bill, issue in their name against the address where they purportedly live.

Like everything Nigerian, we have forgotten the spirit and just tack ourselves to the letter. KYC never require that utility bill must be produced; the utility bill is a means to an end. If you get on the CBN rules for KYC and the SEC rules for the same, there is a gazillion way for a customer to prove the veracity of their address.

What the hell are utility bills?

And what are utility bills to start with? These are receipts from the likes of PHCN, water corporation, etc., that show they deliver some modicum of services to you.

And that’s where all the problems start.

Using utility bills to prove the veracity of addresses in Nigeria is just plain dumb. And there are a gazillion reasons for that:

Most people don’t have utility bills because they don’t even get served any services to start with. Only a few Nigerians have services from recognized billers: Over 100m Nigerians don’t have water delivered to them; 43% of those who have electricity don’t have meters which means no proper bills, And nobody has landlines anymore. After all, NITEL has gone to be with the lord. So, what then do they use?

Many people live in places they don’t have access to the PHCN bills. At best, they know the meter number and use that to buy electricity tokens. As long as the tokens power the meters, who cares if it’s the name of a dog that’s on the utility bill?

Worse still, utility bills can’t be validated, and nobody validates them. Any idiot can just clone a bill, and that’s it. That part is what pains me; why go through the hassles of asking for a utility bill, creating a donnybrook in the process, and you can’t even confirm if that important utility bill is legit or not?

But but but, dearest fintech, before you join me on a foolish quest to bash utility bills, watch your back; you could find out the expensive way when fraud happens on your platform, and the Government asks for your KYC. Kirikiri doesn’t have Gucci uniforms!

How then can one solve the problems of address verifications to meet the requirements of verifiable addresses for customers?

KYC as a service

Over the last few years, a flurry of digital KYC companies, such as VerifyMe and YouVerify, has cropped up in Nigeria. They have pretty solved a few of the problems, but gaps and challenges exist.

First, they are not cheap to start with; the cost ranges from N750 per check and above. Scale that on thousands of customers, and your cost of customer acquisition starts to look like a nightmare. Attempts by a few brave fintechs to have customers to pay for this haven’t gone well. Customers don’t find that cost funny at all!

Secondly, these guys have also not put in the best of names to do the verification for them. I’ve personally seen these guys not able to verify clear addresses that Google, far away in the US, can find with a single click. Addresses that the likes of DHL and UPS can deliver to become impossible unless someone adds “Nearest bus stop or landmark.” Obviously, they use poorly trained officers who can’t find their own names on large billboards.

Thirdly, verifying addresses within gated estates is a challenge. They require that your customers are around or call the gates ahead. And if they can’t get them on the phone (most people don’t pick unknown numbers), then they mark the addresses as unverified, and there goes the N750 verification cost. That’s it!

Lastly, they also save previous addresses, which means even when the addresses ain’t valid anymore, they still validate it, giving those who rely on this feedback a false sense of hope.

Paper OTP as an alternative

Interestingly, while I haven’t tried this directly, I find the methods that Google for Business use for address verification ingenious. They simply post a paper OTP to you, and then if, and a big if, you receive it, you come to enter the code into your app, and we can all rest assured that someone got to your house.

While this sounds nice and interesting, the jury is out on first, the cost-effectiveness of this and the ability to scale it out.