Nigeria’s credit push to consumers presents opportunities backed by reform

Nigeria’s central bank wants to wean lenders off high-yielding government securities by compelling them to give out more loans from their deposits, or earn zero interest on them in form of higher cash reserve requirements. As the central bank tweaks monetary policy to boost consumer lending, traditional banks are responding with new methods proven viable by fintech firms and supported by recent improvements in the credit system. 

Situation Report

Last month the Central Bank of Nigeria (CBN) directed commercial banks to raise their minimum loan-to-deposit ratio target from 60% to 65%—the second time it has ordered the target raised since July. The lenders have also been ordered to prioritize SME and personal loans as the central bank looks to spur the economy, which slowed to 1.94% in the last quarter. Of the 23 commercial banks, only one of the top five met that 60% lending target when it was first set in July.

Nigerian lenders recoiled when oil prices fell in 2015 and a foreign exchange crisis resulted in a recession. The banks reduced private lending to minimize credit risk and switched to buying up government securities that yielded more than 14% interest. Between 2016 and 2018, banks’ credit to the private sector dropped from 16% to 11% of GDP. It was around that time that fintech firms such as OneFi emerged to fill the credit supply gap.

OneFi launched its digital lending app Paylater in 2016 offering unsecured loans from as low as USD30. Customers received loans in minutes without any paperwork or collateral—a novelty in the country at the time. Within two years it had processed 500,000 unique transactions and recorded one million app downloads. Traditional banks noticed how the fintech firms were performing and also began to think digital-first. In 2018, Sterling Bank launched Specta, its own digital loan programme providing unsecured SME and consumer loans up to USD14,000.

The rise in digital lending activity is partly because of recent changes in the credit system, which now allow lenders to determine the identity and creditworthiness of prospective borrowers more reliably than before. For instance, in 2014 the CBN created a biometric ID programme in which bank account holders are issued a unique Bank Verification Number that is linked to all their bank accounts. 

To smoothen credit applications, the Nigerian Interbank Settlement System also began a service that lets lenders securely access a borrower’s bank statement with the borrower’s permission. Finally, a Credit Reporting Act was enacted in 2017 to regulate credit bureaus and set the statutory framework for credit reporting in the country. The Collateral Registry Act was also made in the same year to allow the use of ‘moveable assets’ as security and make lending more secure.

However, the justice system has not matched reforms in the financial services. Nigeria only has about 1,000 federal and state judges combined—for a population of 180 million. 82 federal judges had more than 200,000 cases pending before them as of July,[1] and a recent feature in one local paper suggests that a judge in Lagos hears only three out of 26 cases on their daily schedule.[2] This difficult legal environment heightens the credit risk to lenders seeking protection in the courts for timely loan recovery and dispute resolution. 

Outlook

The CBN will achieve some success in weaning lenders off government bonds, but lenders will not be rushed into risking their assets with subprime borrowers and will take the option to park more deposits with the central bank at zero interest in the short term. Already, 12 banks took this option last month. We expect the risk appetite to grow gradually in the medium and long term as improvements in the credit system make lending more viable. 

Regulation and credit assessment will further develop at a significant pace based on the changes described above over the last four years. CRC, one of the three domestic credit bureaus, is currently promoting a credit score it has developed, and some lenders are already incorporating credit reports into their processing. 

As borrowers build credit and bureaus collect more history, lenders will get more flexible with requirements and try to stay competitive with the latest innovation. Regulators can use that market behaviour to fine-tune existing legislation to improve consumer protection and grow access to credit. There is broad room for this growth: as of 2017, only 30% of Nigerians had made or received digital payments the past year, compared to 38% in Ivory Coast and 49% in Ghana.

The drawback in the meantime will be the justice system, where reforms have been mostly slow. Capital investments (e.g. building new courts or hiring more judges) will not likely materialize in the foreseeable term as they carry little political weight, and credit risk mitigation will continue to include high interest rates among others.

To discuss further with the team, please do drop us a line: questions@songhaiadvisory.com

[1]https://punchng.com/justice-suffers-as-82-judges-handle-over-200000-cases-in-federal-high-courts/

[2]https://www.premiumtimesng.com/news/headlines/348468-special-report-case-congestion-in-lagos-courts-hinder-access-to-justice.html