Establishing payment security and credit systems in Nigeria’s business sphere

While the Nigerian economy has been able to drastically increase the population of banking customers who transact business through the banking system, thereby enabling most payments for goods and services to pass through a central channel, we still battle with the heavy disadvantages of a cash-based economy. In comparison with a cash-driven system, a good credit system is essential to the economic development of every nation. As of 2020, Nigeria recorded about 39 million micro, small and medium-sized companies (MSMEs) in the country, with a significant contribution of about 48 to Nigeria’s GDP, economic growth and job creation.

One main factor entrepreneurs have reiterated as an impediment to business success or growth is funding. While this is real for many businesses, recent business reports have proven the existence of a stronger factor that can make or mar any business. The payment security and credit system in the business world. The successful execution of this area will be a major booster to the business world, particularly that of SMEs. Furthermore, an effective credit system in a country is a catalyst to fostering investment, innovation, and entrepreneurship.

A common saying that “business thrives when friends and family pay” can be extended to “business thrives when everyone who buys pays as at when due”. MSMEs constantly deal with end-users and other businesses. Selling is fun and encouraging, however, when a sale ends up with unpaid invoices and incessant unfulfilled promises to clear the debts, the business, though a fast seller, becomes fast on the track to being cash-trapped or bankrupt.

Small and Medium-sized enterprises (SMEs) in Nigeria face challenges in obtaining credit terms due to the lack of a system for validating the creditworthiness of other businesses. This results in many buyers exploiting gaps in the system, acquiring goods with poor payment integrity despite promises made for a specified payment date. This situation is often beyond their capabilities, as they lack verifiable facts to make informed decisions about extending credit terms.

The Nigerian business world faces underdevelopment, inequality, and missed opportunities due to a poor credit system. Access to data is a significant restriction on industry growth. In developed countries, individuals have credit profiles, which can assess their creditworthiness and access to loans or assets. Debt is often encouraged to prove creditworthiness for large loans. Proper data availability allows stakeholders in the banking and business sectors to assess risk levels and creditworthiness of individuals they engage with. A central credit assessment portal is also needed for business owners to check and input data on financial integrity.

It is pitiful because as the trend continues without any repercussions, more business vendors are normalising the situation hereby tripling the potential of the supplying businesses. When payments are not made, the supplier is adversely affected immediately and the buying business is adversely affected in the long run. Causing an overall negative impact on business growth and economic development.

Payment effectiveness and processes are becoming increasingly insecure, causing businesses to struggle to distribute products to partnered outlets, malls, supermarkets, and online vendors. These products are sold in bulk on a credit basis, expected to yield returns when payment is made. However, many vendors withhold payments without recourse to sellers, leading to delayed payments for weeks, months, and even years. This accumulation of delayed payments causes significant damages to small and medium-sized businesses, including cash flow issues, financial obligations, inability to restock adequately, increased risks of bad debts, and operational inefficiencies.

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SMEs are exposed to risk as business transactions are only guaranteed upon payment, limiting market growth based on actual demand capacity. This invisible limitation limits market potential and negatively impacts the country. The poor credit system in Nigeria has impacted struggling businesses, causing significant losses. While pushing out goods on credit is inevitable, it can lead to significant losses when business owners fail to establish good working relationships. Addressing the credit system is crucial to address this issue and ensure the growth of the market.

In contrast to other developing nations, payment methods are almost seamless because of the existence of strong legal implications protecting national retailers and also structured database systems that track the creditworthiness history of a vendor. This has improved payments and also reduced the possibility of dents incurred by business owners in the process.

The database system mostly encompasses credit scores, credit reports, and credit monitoring services. Here, there’s a numerical expression based on the analysis of a vendor’s credit files compiled by credit bureaus such as TransUnion and Equifax. This provides a more detailed report on credit accounts that would help guide and evaluate the decisions of business owners before lumping their products.

Strategies to employ for an improved payment and credit system in Nigeria.

Lending criteria: Small and medium-sized businesses, particularly those importing goods for Nigerian sales, have established credible relationships with vendors. However, for business growth, new lending criteria need to be set for business-to-business relationships and with financial institutions. Business owners should design product-lending criteria that consider factors like credit scores, debt-to-income ratio, employment history, and mandatory partial payment. Exposure to credit improvement programmes can help improve these criteria, offering counselling, financial education, and guidance on navigating debt and transactional issues.

Policy implementation: To enhance credit systems, clear communication and implementation of policies are crucial. This communication between distributors and wholesalers is essential for establishing enforceable payment terms, and limiting contract trespass. Business owners should also offer incentives for early payment, such as discounts or coupons, to encourage timely settlements. Penalties for late payment should be imposed to discourage delay, potentially including additional interest charges. This approach helps maintain a healthy credit system.

Governmental interference: The government’s role in improving a country’s credit system is crucial, as it ensures compliance and enforces binding policies. This could involve introducing a central Credit Bureau System, which maintains a comprehensive database of registered businesses, wholesalers, and retailers. This system would provide scores on creditworthiness and trust, enabling distributors to assess businesses and drive pitches to credible buyers.

The government should enact laws such as credit insurance schemes to protect national retailers against non-payment risks. When laws like this are implemented, it strengthens the business legal structure, where wholesalers would be forced to throw in their marketing prowess, making sure sales targets and deadlines are met. This would dissuade any nonchalance regarding the withholding of payments after sales and would reduce most of the afflictions national retailers are faced with.

The Government can also introduce tax benefits programmes that encourage consistently meeting timely payment obligations. Taxes paid by these vendors may be subsidised if there’s a maintained record of creditworthiness. Here, recognition programmes could also be set up, businesses with flourishing payment systems would be recognised and used as exemplary measures to convince others in the same dimension. These moves would see a positive swing on businesses to improve outcomes.

Financial literacy and management programmes: The key actors in business as a field are finance and management. Business owners should deliberately induce themselves with programmes to improve their knowledge of financial literacy and management in order to get robustly informed on issues relating to payment solutions, credit management, and other business practices. Those exposures would serve as an intellectual resource for effective navigation in the business space.

Conclusion

While poor payment security and credit systems remain a challenge for small and medium-sized enterprises, the implementation of robust payment security strategies and advocacy for comprehensive government support, which includes the enactment of numerous legislations targeted at protecting the transparency of payments and credit systems of businesses-to-businesses,.

A collaborative approach involving the combination of creative strategies, technology, and a legal framework would appear as a concerted effort to mitigate the risks associated with delayed payments, further contributing to shaping the overall business landscape where growth and impactful strides of both retailers and buyers are sustained.

Mrs. Omotola Lawson is a Toy Distribution Entrepreneur and Government-certified Instructor in Nigeria.