Henry Obiekea, Managing director of FairMoney Nigeria, a financial technology company and credit-led digital bank, in this interview with BusinessDay’s Frank Eleanya, speaks on the objectives of the N2.5bn commercial paper issuance program. He also speaks about the decisions that FairMoney has to make to survive macro shocks like higher interest rates and record inflation.
Talk to us about the N2.5 billion commercial paper issuance, the whole idea behind it and what you are looking to achieve.
The commercial paper and the first issuance are part of our underlying funding strategy to help drive the business. When we started this business about 6 years ago, one of the things that was critical and a key pillar for growth was to ensure that the business consistently has adequate capital and funding to grow. To achieve this sustainably, it is important to tap into the local market. We also have the opportunity to tap into the international market but we wanted to be able to tap into the local market and create strong access for FairMoney in the capital market in Nigeria. For us, this commercial paper is the first major step in trying to realise that strategy of accessing local capital to drive the business.
We set up the N2.5 billion commercial paper program which has been approved by the FMDQ and will be listed on the FMDQ exchange. For us, it is something that we are proud of because as you may be aware, this is not prominent among fintech players. We happen to be among the first few Fintech companies to achieve this. Hopefully, this paves the way for others to join. We also want to continue to leverage this program and increase it to issue more securities under the program as time goes on.
Do you see an appetite for this type of funding?
From what we have seen, investors are always looking for new avenues to place funds. In terms of investment, your PFAs, other institutions and banks, most of the funds they have invested sit within government instruments, bonds and treasury bills. These groups of people are looking for the right investments and products for them to be able to diversify their investments and get adequate returns on those investments. What we have done with this commercial paper is to put something like that in front of them. And knowing that these investors have certain requirements for what they can invest in, you need to have your investment grade ratings, you must have operated for a few years, and have strong operational performance and history. It is our responsibility to create products that meet the needs of these investors. If you ask any investor, one of the things they want is to be able to diversify their portfolio. The need for a VC and PE-type capital that comes in from the international market is still needed. However, for you to drive the business in Nigeria it is important for you to diversify and raise funds from the local market.
What are the upsides of this type of funding? What can go wrong?
First, you attract a broad range of investors. These are investors that have deep pockets; the PFAs for example have asset size in excess of 15 (fifteen) trillion naira and this continues to grow. It gives you the ability to tap into that broad investor base.
Secondly, this type of investment provides companies with the ability to raise funding at reduced rates. This is something that fintech players need whilst trying to solve the microfinance problems in Nigeria given that getting funding can be quite expensive. Going through a CP for instance helps you reduce that exposure. We closed out commercial paper at a yield of 16 percent. If you were to go into the market and try to raise money for your business, it would most likely be at a slightly higher rate using the traditional means that we use as fintech players. The third one is the reputation that comes along with your ability to attract local funding and get these partners to back you.
What are you doing about low credit penetration in Nigeria which exacerbates financial inclusion?
It speaks to the core essence of FairMoney. When we started, the overall objective was to be a financial service home for our customers. Our market strategy was to look at a vertical where we see a major pain point in Nigeria. If you look at different studies by EFiNA and some other bodies, something that keeps popping up is the access to credit for both individuals and businesses. We took that up and tried to solve this. Credit penetration in Nigeria is less than 5 percent. We really do not have a consumer credit sector and the sub-sector is just growing in Nigeria. We saw this as a challenge and an opportunity.
FairMoney delved into this business amidst huge challenges. For example, one of the key issues that people speak about is the lack of data. And because you do not have that data, it’s challenging to assess the credit risk of an individual. At FairMoney, we saw this as a challenge and we immediately created our underwriting system which is backed by machine learning and our proprietary algorithm that helps us assess the credit risk individuals that come into our system. What that has done is create a platform that lets us say that we can lend to this customer versus that customer. And also on top of that, clearly state what risks are associated with a particular customer. We have done that over the past 5 or 6 years and we have seen significant progress doing this. This is also something that we have also done to develop the market. An example is, when we started doing this not a lot of the customers that came into our system had credit bureau data because they obviously did not have any loans from any formal organisation. But in using our credit system to score, we are able to accept these customers into the ecosystem. And because we submit information to credit bureau companies we are automatically building data for other creditors or lenders as well as for the market in general. That is why we see this as an opportunity to help develop the market in Nigeria, whilst also serving the numerous customers that we have across the country.
Have you had to review your interest rate in light of the current spike in benchmark rates in Nigeria? And how do you compare your rate with the competitors?
The first thing to point out is that, overall at FairMoney, our philosophy is to become competitive with our rates, and competitive across the segments where we play. I think that is very critical for us. Yes, we are not immune to macro-shocks. What we have seen is, the increase in interest rates also leads to an increase in the cost of funding. This is something that we have to grapple with and manage. But how are we trying to go about it? As cost increases generally, it is now very important to look at other avenues to firstly, improve the cost of funding and an example of this is the commercial paper that we issued. Raising this commercial paper helps us do this. Let me also mention that the commercial paper was oversubscribed which is good for us. Secondly, we are trying to raise retail deposits to manage that challenge. We are trying to mirror the strategy of the traditional banks. For example, they are able to fund their books primarily from low-cost retail deposits where they pay interest rates of 3 percent or even less in some cases. It is something that we have to continuously manage for us to be able to be in business.
How has inflation impacted your books and the decisions you have to make towards lending?
Again, just like every business in Nigeria, we are not immune to the impact of macro-conditions. You are right that in the past few weeks, since the new government has come in, we have seen prices of petroleum products go up significantly, plus the floating of the naira which lead to a devaluation of the naira. We see these things, and the way we look at it as a business is, it will get a bit tough for a lot of individuals. We need to incorporate these factors into our underwriting process. We will also be taking a closer look at the people that come into the ecosystem and ensure that we are giving them what they need and what is appropriate for that particular person. This is while keeping in mind the fact that we expect to see disposable income reduce in the short term. Overall, we need to tighten the ship a bit because of this and see how it evolves. We at FairMoney pride ourselves on the ability to make tactical changes where necessary. We have gone through COVID and did well during the period. We have gone through the macro shocks of last year which were really tough for businesses, especially lending and credit businesses. We have confidence in our ability to manage the outcomes of these macro shocks.
In the event that the rates stay high, what are the trends that you see shaping the market?
In an era of high rates, we will see inflation continue to go up. However, people still need funding. It now becomes a situation of creating sufficient economic activity to still be able to cover the high interest that we have seen. But if we look at the economic plan of the new government, one of the plans they have is to try to reduce the interest rate across the board. So we will be looking at that very closely because it will have an impact on our business. It will also affect the ability of our customers to transact and take loans, pay bills, and transfer funds to parents and children.