Fintechs to rethink lending as petrol price shrinks pockets

The hike in the price of petrol at filling stations has reduced the purchasing and repayment power of many Nigerians and left many fintech lenders with the risk of high default rates and reduced profit margins.

The price hike is a result of the announcement by the Nigerian President to remove fuel subsidy which gulps a sizable chunk of the country’s revenue and for which is considered a conduit for the corrupt enrichment of a few people.

Following the announcement, the Nigerian National Petroleum Company Limited (NNPCL) which is the sole importer of the product in the country adjusted the pump price to N488 in Lagos and over N500 in other parts of the country. Private filling stations are selling the product between N600 to N700.

The price increase has reflected in the prices of goods in the market as retailers and manufacturers have to face the new reality with the consumers bearing the brunt of the adjustment.

Jide Adamolekun, chief finance officer of Autochek, a company that makes car ownership accessible and affordable by providing vehicle financing for potential owners, said the inflation has also led to price increases in the automotive industry. Autochek recently launched a fintech unit to support its Marketplace platform, which partners with car dealers and other service providers to make it easier for consumers and businesses to finance their vehicles.

It will also provide technology and advisory solutions to car dealers, financial institutions and other stakeholders in Africa’s automotive ecosystem, supporting them to improve credit decisions, collections, pricing, portfolio management and product development, as well as deliver an enhanced customer experience.

In the case of the automotive industry, price increases have been going on for the past three years and this is not exclusive to Nigeria but also across Africa.

“Furthermore, the inflationary pressures and economic hardships in the markets we traditionally import cars from have resulted in consumers holding onto their cars for longer periods of time. Instead of selling or upgrading their vehicles, people are opting to extend the lifespan of their cars. This shift in behaviour has created supply shocks, exacerbating car prices,” said Adamolekun.

Nigeria’s inflation rate rose to 22.22 percent in April from 22.04 percent in March, the fourth consecutive rise. The increases are attributed to the naira redesign policy of the Central Bank of Nigeria which led to the scarcity of the naira across the country and consequently affected millions of businesses. Experts project further increases in the coming months on the back of the fuel pump price hike.

With inflation surging, interest rates are also going up. In May, the Monetary Policy Committee (MPC) raised the benchmark lending rate to 18 percent in an aggressive push to contain the nation’s inflationary pressure. However, the more the CBN jerks up the rates, the more unattractive it becomes for borrowers.

Read also: Petrol import bill drops 4 percent in first three months of 2023

“Inflation affects everyone – from employees, to shop owners, to large corporations and startups like ours. As with every other business operating in this climate, our operating cost has gone up as inflation has risen, eating more and more into our bottom line,” said Adebola Adeniran, chief of staff, Moni, a digital lender. “Thankfully, we are able to manage the effects because we operate in multiple markets.

According to economists, the long-term effects of inflation depend on the money supply. This means that the volume of money in supply has a direct, proportional relationship with the price levels in the long term. In other words, if the currency in circulation increases, there is a proportional increase in the price of goods and services.

Borrowers would benefit from inflation if wages increase with inflation, and if the borrower already owed money before the inflation occurred. This is because the borrower still owes the same amount of money, but now they have more money in their paycheck to pay off the debt. The result is less interest for the lender if the borrower uses the extra money to pay off their debt early.

In the case of Nigeria, wages are not rising with inflation. If anything, more people are losing their jobs as a result of the impact of the rising cost on companies’ books.

KPMG in their latest forecast, International Global Economic Outlook, projected that the unemployment rate in Nigeria is expected to rise by 40.6 percent in 2023 due to the limited investment by the private sector, low industrialisation, and slower than required economic growth, and consequently the inability of the economy to absorb the 4-5 million new entrants into the Nigerian job market every year.

In the same vein, inflation could benefit lenders extending new loans and this happens in several ways. Inflation means higher prices. Higher prices often translate to more people needing to take loans to be able to buy big-ticket items, especially if wages are not increased. According to Adeniran, inflation also creates opportunities for investors to hedge their funds in safe bet assets.

“They (investors) are constantly on the lookout for opportunities to invest in instruments that provide above inflation rate returns,” Adeniran said. “Thankfully, we’re able to provide high-yield savings plans that continue to beat today’s inflation rates.”

While loan demand from individuals may be sluggish, businesses seem to view borrowing as a survival strategy. Demand for loans by businesses on Moni’s platform is increasing. However, the only way they will continue to access these loans is by consistently making prompt repayments, says Adeniran.

“Our model incentivises businesses to repay on time and inflation hasn’t had much of an impact on our repayment rates,” he said.

Moni is also seeing more retail customers subscribe to its monthly rental product. Adeniran sees this as a result of customers realising that it makes economic sense for them to spread their payments across a period of time rather than make a significant yearly lump sum payment, particularly in tough times like the current one where rental prices are through the roof.

For Autochek, the surging prices might even be a blessing in disguise. The cost of transportation is higher now as well as car prices. Consumers are going to move from one place to another nonetheless. Hence, many would need to buy a car and since the cost might seem prohibitive, they would have little choice but turn to auto finance options which guarantee flexibility in payment.

Prior to now, the lack of auto finance options meant that people relied on saving up to purchase vehicles outright. Companies like Autochek now allow customers to contribute a portion of the vehicle’s cost, and get the rest financed, providing them with an opportunity to own a vehicle without full upfront payment. Nigerian customers account for most loan portfolios on Autochek.

“While there may have been slight dips in collections during the electioneering period and banking disruptions in January, we have quickly recovered from those temporary setbacks,” said Adamolekun. “At the core of our credit management strategy, our focus remains on delivering excellent services and maintaining good relationships with our customers, this has helped keep our default rates low.”

Fintech lenders are also hedging the growing risks by expanding to markets outside Nigeria. While Autochek is now in nine African countries, Moni has a presence in five countries.

But Ngozi Dozie, co-founder of Carbon, a digital bank with a core business in lending, says neobank players might want to look towards artificial intelligence to survive the difficult times ahead, especially with traditional banks breathing down the necks of digital banks with lower rates.