Nigeria’s problems will be solved by access to credit

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

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

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 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.

10 Predictions for Digital Payments in 2021

Now for the fourth year, here are my predictions for digital payments in 2021 with the hope that it offers a better time for everyone than 2020. You probably have heard it a thousand times; 2020 was a shitty year for almost everyone except for technology and especially payments.

Those worst hit by 2020, apart from the folks who lost their lives (may their soul rest in peace even if I don’t believe in the afterlife), are pundits like me whose predictions were thoroughly trashed.

But despite this, we all still look forward to these fintech predictions for 2021; who am I not to serve you a hot dose of fiction wrapped as facts?

Let’s do it!

#1 Visa buys Interswitch for $800m

Earlier last year, before Covid spanked everyone, I laid out an argument that Visa could buy Interswitch. Despite the global pandemic and its attendant economic fallouts in Nigeria, the thought has only become stronger in my head. The reason is that Interswitch has a knack for announcing its massive valuation, just as Naira wants to go bananas. Unlike what everyone believes, Mitchell Elegbe doesn’t own Interswitch; the real owners, knowing that the Switch is hooked to a downward sliding Naira, would be hitching for a payday. Visa, forever married to Nigerian transactions, already owns 20% of the Switch; Naira is now so cheap (if you earn in USD). Plus, the fundamentals of Interswitch are still pretty strong, while not buy it on promo?

#2 Mastercard buys Etranzact

Only a fool would let its most significant competitor decide its fate. If Visa bought Interswitch, and Interswitch runs nearly 100% of Mastercard’s transactions in Nigeria. You can be sure the not-so-foolish humans of Mastercard would probably take their traffic somewhere else. Only Etranzact fits the profile of a replacement due to its basket of licenses.

Disclosure: I own a bunch of Etranzact shares. If this pans out, I’m gonna buy a Maserati.

#3 CBN caves in as MTN gets a PSB license

I made this call last year and I will make it again as part of my predictions for digital payments in 2021. This is a carryover prediction from last year. With Karl Toriola running MTN from March 1, 2021, you can be sure as hell that he will do something as he has a track record of performance, and banking has a track record of minting cash. Marry performance to sashe, and you can be sure as hell that MTN won’t give up until they get this license.

#4 Agent locations surpass 1m

I made the right call last year that agency banking will explode. Despite the Covid pandemic, agency banking grew like wildfire. Opay, which ran into a brick wall with all the other tech services, finally hit paydirt with agency banking doing $1.4b worth of transactions a month. Teamapt is almost pivoting to this as well; fancy fintech be damned. Unofficial numbers of locations hit 530K last year;. At the same time, SANEF seems a bit quiet about a target; I’m sure the market will drag this over to 1m locations before the end of the year.

#5 Interbank transactions cross half a billion a month

I made the call for our Nigerian faster payments to hit 300m per month. I don’t yet know (as of this writing) the number for December, but sweet November saw the industry moving N17t worth of cash over 224m transactions. The pace will continue, and it will cross the 500m transactions per month around August 2021.

#6 Free interbank transfers go mainstream

Kuda made noise about this (and it seems to be working), and Sparkle is now leading the charge. But guess what, a major bank (think Access, GTBank, or Sterling but not UBA) will decide that, hey, let’s blow this sh*t out of the water and make interbank transfers below a certain amount, say N5K, free. Such a move has excellent optics, and most importantly, it’s the singularly free feature nobody can abuse. Think!

#7 Agency banking becomes the last mile for fintechs

Agency banking is messy as hell; you don’t even find them on Twitter or the ‘gram. But who cares? Once the boys of Opay, Capricorn Digital, Teamapt, and others found success, the next is for them to layer a patina of APIs on these connections, and it becomes the real last mile for digital payments. If agents are fully KYCed and have constant location-aware devices, then the physical can meet online for loans, KYC verification-as-a-service, e-commerce deliveries, transfers-to-cash from banks, etc.

#8 Virtual accounts come of age

Some people I know have been cooking virtual accounts for years, but Teamapt, ever the innovation and executioner, quickly brought Providus to the limelight. Now others like Rubies, Zenith, Sterling, Wema, and our Woven + Sparkle are now on the game. Virtual account (vNUBAN) is a little clunky but significantly superior and a more inclusive payment within the Nigerian context than cards. It’s the only payment method that works across all channels. I expect this to blow cards out of the water, although I said the same thing last year, and it didn’t happen.🙈

Disclosure: My company, Trium, owns Woven and a significant investor in Sparkle.

#9 Local investors step to the plate

With practically everyone I know beating themselves up for missing out on the Paystack investment train when it came calling years ago, those with some cash are now seeking out future Shola Akinlades to invests in. The percentage of investment by local investors will grow to be at least 30% this year. But please be warned, dear investor, angel investment is not for the impatient and the weak of heart. Dear founder, not every cash you see is good for your cap table.

Disclosure: I’m a director at Paystack, and nope, my call last year wasn’t a piece of insider information; and thanks, Shola, for making a good example of Nigerians

#10 WhatsApp makes a payment play in Nigeria

With Stripe leading the charge to dip a toe in Nigeria, and it counts Facebook as part of its customers, WhatsApp could expedite its move into payments in Nigeria. All it needs to do is slap a virtual account behind every WhatsApp profile, and the rest is history.

#11 The one prediction 100% to come true

I always say this, and I would say it again: All of these predictions for digital payments in 2021, are at best, educated guesses at what could happen, which isn’t better than a bunch of bananas trying to eat a monkey.