Why Nigeria needs robust credit assessment infrastructure

Tunji is a 25-year-old gainfully employed Nigerian who wants to buy a car. He earns N250,000 per month, and the car he wants to buy is N3.5million.

He lives in Nigeria where the inflation rate is double-digit, so he has to save a chunk of his salary every month for two years to buy his first car.

Now, he is ready to buy the car. But it is now N4.5m as a result of inflation and foreign exchange fluctuations. He borrows from his friends to cover up the difference. Even though Tunji eventually buys his car after two years, and can claim to own it, he has also tied down a huge chunk of his two-year salary and has a loan to pay off.

Unlike Tunji, Peter is a 20-year-old gainfully employed British and desires to have a car. He approaches a bank, submits his national insurance number, and gets a car finance loan. Every month, He uses a fraction of his salary to service his car finance loan and uses the rest to pursue other financial desires.

Strong economies are built on credit, weak economies are built on cash. The Nigerian economy is largely cash-driven, and credit averse. Credit is access to money, goods, and services that an individual or company cannot pay for in the present but will ultimately pay for.

It is cash in liquid form, flowing to resources when needed, unhindered. It is a contractual agreement in which a borrower receives a sum of money or an equivalent in value and repays the lender at a later date, usually with interest.

In Nigeria, all-inclusive access to affordable finance and credit is a challenge. According to a survey by BusinessDay, seven in 10 customers of Nigerian banks do not have access to credit as only 1.89 million of the total 47.66 million Bank Verification Number holders got loans in the first quarter of 2019.

The small and Medium-Sized enterprises which contribute 48 percent to GDP and account for 96 percent of businesses and 84 percent of employment in Nigeria are the most affected. While they play a crucial role in the health and development of the economy, only 49.5 percent of them have access to bank credit.

48 percent of these businesses rely on family and friends for credit. The World Bank defines financial inclusion to mean individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit, and insurance.

According to the global bank, the high financial exclusion rate in Nigeria means more people will be trapped in the poverty net as a lack of access to credit and insurance puts individuals at an economic disadvantage.

As of 2020, 38 million Nigerian adults were still financially excluded. These individuals lack access to financial services such as credit for themselves and businesses. Without access to affordable credit, an individual is constantly on the cusp of financial disaster as one emergency can send them and their family into a debt trap that can take years to emerge from.

Most people in developing economies cannot access credit because of a lack of credit infrastructure in these economies. These economies lack proper systems to determine if an individual is creditworthy, disenfranchising them from access to credit.

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Credit infrastructure involves a set of laws and institutions that facilities efficient and effective access to finance, financial stability, and socially responsible economic growth through credit reporting, secured transactions and collateral registries; and insolvency and debt resolution.

Credit infrastructure is an enabler of financial services and lending, the building blocks of the modern economy. Without this infrastructure, banks and lending institutions are largely constrained when assessing credit applications, as they are unable to effectively consider all the risk factors involved. Meaning access to credit for individuals and businesses in developing economies will continue to be limited.

Individuals and businesses in emerging economies are suffering the consequence of a frail legal and institutional framework for lending and debt resolution because of the lack of predictability for lenders, the inability to leverage productive assets, and the absence of credit information.

These constraints ensure that businesses will struggle to scale, and individuals will remain susceptible to debt traps. Access to credit for individuals and SMEs is imperative if they are to scale and grow and improve the economic status of the nation. But a functional credit infrastructure system is needed to access credit, especially in its affordable form.

To compensate for a lack of credit infrastructure, banks and lending facilities resort to high-interest rates, to deter borrowing, and stall growth. Small businesses in Nigeria complain that they eventually turn down bank loans over high interest. Less than 5 percent of small businesses have used credit to stimulate business growth as interest rates of upwards of 20 percent continue to deter the rest.

This inevitably makes it hard for them to meet immediate demand, let alone future demand, constricting their growth. This financial exclusion has significant outcomes for the real sector as lack of access to credit can be a disincentive to entrepreneurship, investment, and economic growth.

Companies like Periculum, a Canadian fintech startup and credit assessment company, are addressing the challenge of domestic credit to the underserved markets.

Focused on improving financial inclusion in emerging markets through automated credit assessment tools that close the consumer credit gap and help financial institutions provide credit facilities to the financially excluded while making smarter decisions, Periculum helps financial services operators identify fraud risk, assess creditworthiness, and analyze existing data.

Periculum offers real-time decision-making, analysis, and credit underwriting solutions to financial institutions including banks, non-banking financial companies, and fintech companies.

By providing information on the financial worthiness of customers and automating the loan decision process, Periculum’s customers can gather and analyze borrower information and assign a credit score faster, with real outcomes on financial inclusion in Nigeria and other markets.”

Corroborating the need for credit infrastructure, Michael Temitope Collins, Periculum’s founder and chief executive officer, said “Africa needs domestic credit to stimulate real economic growth. And this is not only bank-to-business credit; it can also be digital lending for short-term credit as well as “buy now, pay later” schemes. The absence of tech-enabled credit assessment infrastructure has limited the quality and quantity of lending and may be behind the risk premiums borrowers have to pay, and the harassment practised by predatory lenders in countries like Nigeria. Periculum will change that.”

According to him, “we are a top provider of data analytics and credit assessment services targeted explicitly to underserved markets. We help our customers to reduce their lengthy loan application processing times and loan default rates and offer loans to the underbanked and unbanked consumers as well as micro, small and medium-scale enterprises. With reliable, tech-enabled, credit assessment services, financial institutions can increase lending to those that need credit.”

The International Finance Corporation says about 40 percent of formal MSMEs in developing countries, have a finance shortage of $5.2trillion every year. In Nigeria, small businesses have a funding gap of N617billion.

It is necessary for developing economies to adopt proper credit policies to address credit infrastructure gaps and kickstart economic growth. In 2019, the CBN mandated all deposit money banks to maintain a loan to deposit ratio of 65 percent, in an attempt to improve lending to the real sector of the economy.

According to the CBN, the policy has resulted in loans and advances rising by over N1.1tn between June to October 2019, and a 4 percent drop in interest rates. In a five year-strategy document (2019-2024), the CBN prioritized access to finance and financial inclusion as the main thrust of its activities over the next five years.

Industry experts believe credit bureaus have a significant role to play in improving credit infrastructure in Nigeria as they provide support to banks in terms of providing information and assessment of the creditworthiness of SMEs for loan applications and disbursement.

A World Bank finding revealed that the introduction of credit bureaus reduces financing constraints for small businesses from 49 percent to 27 percent, and the probability of obtaining a bank loan from 28 percent to 40 percent.

The finding added that there was a 1,098 percent (60,000 to 719,000) loan access increase in five years for SMEs in Ecuador. With only three licensed national credit bureaus in Nigeria, there is still a huge gap for SMEs and individuals.

The availability of domestic credit is a key requirement for consistent economic growth in developing countries. The vitality of financial services such as banking, savings, debt and equity financing, investment management, and point-of-sale lending is largely dependent on the maturity of its domestic credit industry.

Nigeria’s domestic credit market pales in comparison to similar countries of the same size. For instance, credit to the private sector in Nigeria is about 12 percent of GDP, lower than South Africa’s 129 percent and Malaysia’s 134 percent. High ratios of credit to the private sector in these countries have helped to ramp up real sector growth, create innovative innovation possibilities for technology-enabled businesses, accelerate financial development, ensure the efficient functioning of the economy and guarantee the prosperity of the private sector.

Recently, many lending applications have sprouted to fill the credit access gap for individuals and SMEs in the nation. While they promise easy access to finance, they also come bearing new problems such as unreasonably interest rates and crude loan retrieval methods.

Strong infrastructures allow for economic growth. When a new road is built in a community, more homes will sprout. As more homes sprout, there will be demand for increased production, driving the establishment of new businesses. Infrastructures are bridges; they open up new frontiers for development, expansion, and possibility.

Building a robust credit infrastructure in Nigeria is the bridge to creating new financial and scale possibilities (option) for businesses, and individuals.