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Seven in 10 bank customers lack access to credit. Can Fintech save the day?

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 (BVN) holders got loans in the first quarter of 2019.

This means that only 3.78 percent of banks’ customers were able to access loans in the three months to March 2019, as analysed from the Selected Banking Report by the National Bureau of Statistics (NBS). The Q1 2019 report is the most recent with a breakdown of the number of borrowers from Nigeria’s deposit money banks.

Even though banks’ loans to customers have been on the rise, analysis of the NBS report showed that number of customers that accessed the loans have been trending downward in the last five years. From giving loans to 3.03million customers in 2015, banks reduced the number to 2.48 million in 2016 and down to 2.33 million the following year.

With over 45 million banks’ customers outside the credit space, it is safe to say that, though many Nigerians have access to a basic bank account, many more are financially underserved.

The World Bank defined financial inclusion to mean that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance.

A higher exclusion rate in Nigeria could lead to a poorer population as lack of access to credit and insurance puts them at an economic disadvantage.

“The knock-on effects mean people without access to affordable credit are at greater risk of debt, mental health issues and can pay a poverty premium of £485 (N256,550) a year for basic everyday essentials like energy bills, food and transport,” Tony Craddock, Director General, Emerging Payments Association (EPA) said.

According to EPA, without access to affordable credit, one event can send a person and their family into a spiral of debt that can take years to recover from.

Read Also: Fintechs in Nigeria: The role of regulation

The London-based association, a community of payments professionals whose goals are to strengthen and expand the payments industry believes the reasons why people cannot access affordable credit is because of the fundamentals upon which credit works- is priced, how providers operate and design products and services around their business model.

“High prices mean credit products are less useful and more harmful, causing consumers to avoid credit, relying instead – if possible – on meagre savings, insurance and loans from friends and families.”

Poor quality data and customer insight is another factor cited by the association. It said this means that firms are unable to effectively assess applications and control the risk of default for their entire loan portfolio.

“On average, high-cost lenders reject around 50 percent of loan applications,” EPA said adding it suggests they are not managing to reach their ‘target’ consumers. “This is an expensive deficiency for lenders, as the costs of each rejected loan are ultimately passed on in the form of interest charges within each loan that is approved.”

High cost of credit, collateral and documentation which most of the times the informal and economically vulnerable segment of the Nigerian economy lack are some of the key barriers to accessing credits from the banks.

“To cut cost and lower their risks, banks prefer to loan huge sum to wealthy individuals and big companies because they believe they can easily recoup the loans. To the banks, lending to small businesses and households is too much stress,” a Lagos based financial analyst who pleaded anonymity said.

Can Fintech save the day?

Fintech lending can help more people access affordable credit and avoid financial exclusion, research by EPA with the title ‘Low Cost, High-Tech Credit: Solving financial inclusion through innovation’ found.

According to the paper, as the Fintech market continues to develop with increasingly scalable, powerful backend services and white label technologies, it has unlocked a new wave of Fintech firms that are well-placed to shake up the market and make affordable credit available to millions of more people.

“The birth of Fintech lenders has been of great help. I have borrowed money several times on some of the new platforms and in few minutes I have the funds deposited in my account,” one of Fintech borrowers in Nigeria said on the condition of anonymity.

Nigerian consumer Fintech company, Carbon, which has about 659,000 customers, said it processed transactions worth N96.54 billion (~$241.35 million) in 2020. This was up 89percent compared to the same period a year ago.

For its lending arm, disbursement volume was N25.21 billion (~$63 million), up 9.1 percent from FY2019. Also, N13.02 billion (~$32.55 million) worth of investments was made on the platform, representing a 365 percent increase from the previous year.

The lending rate at over 10 percent per month and at least 120 percent per annum is still a challenge for many that rely on Nigerian Fintech lenders for loans.

Investors’ appetite for Nigeria’s growing Fintech industry, following the huge opportunities in the space, forced them to inject more money in the industry in March 2021 than they did in the whole of 2020.

“We have already seen many turning to short-term credit sources to make ends meet through the pandemic. However, whilst the demand for affordable credit has increased, supply has diminished,” Chris Pond, Chair, Financial Inclusion Commission, Chairman Lending Standards Board said.

According to EPA, the financial services industry must adapt its products to fit in with people’s lives rather than having products that leave many behind.

These include understanding why people use credit and how a lack of tailored credit products can be a definitive cause of financial exclusion.

The report by EPA explained that Fintechs can change this pattern, by using improved customer data, new means of assessing and decreasing risk, inclusive product design and alternative business models.

To develop accurate automated, data-driven credit scoring algorithms that can significantly reduce both the cost of credit for low-income customers as well as overall levels of financial exclusion, EPA report stated that it is necessary not just to improve existing credit scoring algorithms, which were developed in the 1950s, but to fundamentally change the types of data collected about customers and understand their use of credit over time to create different, more accurate predictors of ‘good’ and ‘bad’ credit risk profiles.

This type of ‘alternative credit scoring’ according to the paper provides an entirely different customer insight and firms in the UK, for example, are building successfully off a range of innovations and international examples from countries where credit scoring and credit reference agencies are not well established, which facilitated rapid innovation.

According to EPA, over 10 million UK adults can’t access affordable credit in 2021. This is much worse in Nigeria, Africa’s largest economy, EFInA, an organisation that collates Nigeria’s biennial financial inclusion/exclusion report put the country’s financially excluded adult population at 40 million Nigerian in 2018.

Nigeria’s bank-led financial inclusion model is one of the primary reasons why the country with the most population in Africa is behind its peers who 10 years allowed non-financial organisations like Telco to help in the financial inclusion drive.

Before August 2020, only banks and licensed financial institutions were allowed to provide these services. Although telecom operators and other Fintech companies indicated interests to operate in the market, the CBN policy would not allow them.

The regulator eventually shifted because of the increasing rate of financially excluded people in Nigeria and the lack of progress in getting banks to provide financial services to people living in areas that lack access.

But more than two years after the apex bank gave an official node to non-financial companies to apply for mobile banking licences to assist in deepening access to financial services, not much has changed.

While two smaller Telcos and a payments company have been given mobile money licences, the country’s largest mobile operators, MTN and Airtel are yet to receive the licence.

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