Nigerians do not save enough; that’s what the data says. The World Bank pegged our national savings rate at 17% in 2017, below Angola (26%), our fellow petro-state, and the Heavily Indebted Poor Countries (19%), a cluster of poor countries the World Bank targeted for debt relief. But the data can be deceiving if you don’t look hard enough. For example, a famous Enhancing Financial Innovation & Access (EFInA) report in 2016 estimated that only three out of ten Nigerian adults save in banks. Nigerians have been saving in many ways for years, just not in banks, and a generation of alternative financial technology (Fintech) platforms have exposed this truth.
The rise of alternative investments in Nigeria can be linked to a simple truth: Nigerians have always tried to save but had been let down by traditional financial institutions. Fintechs in Nigeria have opened a new world of investment opportunity. Today, a public official in Abuja can invest in a farm in Sokoto, a plot of land in Kwara, an insurance firm in the United States, or lend money to a stranger in Lagos.
The high nominal return to investing in Nigeria has never been in doubt, but there have been obstacles impeding people from investing. Fintech companies have removed these obstacles; for example, by applying data science techniques to create a viable credit rating system—which then allows people to lend money to each other—or by de-risking agriculture investment by securing buyers for the commodity at the start of the farming cycle. In some cases, Fintech companies have taken established investment practices and made them simpler: from automatically locking your savings or enabling you to trade on the Nigerian Stock Exchange. In others, it has opened doors to entirely new territories, like platforms that allow Nigerians to trade in global markets or buy cryptocurrencies.
It is not that Nigerians did not want to save or invest, but that they could not find viable opportunities. Look at peer-to-peer lending: I have always lent money to people, but only those in my inner circle that I could trust. Peer-to-peer lenders expand the circle of who I can trust: FINT has a risk-scoring system that allows me to identify strangers’ risk and determine my threshold, while the platform helps me manage my loans and automates the process, making it easier and cheaper to lend and invest.
Nigeria’s financial institutions have not only let down those looking to save or invest, but have also made things difficult for borrowers. High interest rates aside, financial products have not been accessible to many people; nearly four out of ten Nigerians is financially excluded.
Take the agriculture sector as an example. The sector got 4% of the loans in Nigeria’s banking sector in 2018, even though it hires nearly half of the working population. We don’t have to go too far to uncover the reason for this problem: asymmetric information means that lenders don’t know which borrower to trust so only give loans to an inner circle.
This poor access to credit has created a significant opportunity for fintech firms. Successful alternative investment platforms have found ways of solving the information problem; like agri-tech schemes that manage farmer risk by expanding agriculture extension programs or peer-to-peer lenders that limit the pool of borrowers to salaried workers.
And yet, we cannot discount the ecosystem conditions that have facilitated the rise of alternative solutions for borrowers and savers. We have witnessed a substantial improvement in payments infrastructure in recent years,and this has played a critical role in enabling Fintechs focused on providing savings & investment platforms. Besides, human capital in technology has been transformed in the last half-decade, and the availability of developer talent cannot be disregarded. Without this human and technology infrastructure, Fintech firms may have struggled to distribute and optimise their products.
You can also observe this alternative investment trend on a Sub-Saharan (SSA) level. PwC estimated that Fintech investment in Africa rose from $200 million to $800 million between 2014 and 2016. Again, we can trace the trend to the fact that similar credit market challenges exist across SSA. Farmers all over Africa struggle to access credit, which is why we see Kenyan start-ups like Twiga Foods (raised $3 million in 2018), who connect rural farmers with urban retailers in informal markets. Likewise, other African countries struggle with credit scoring; so you see Tala, a start-up that operates in Kenya and Tanzania, using over ten thousand customer data points to build a credit score. Tala raised $65 million in 2018.
Other alternative investments have more international parallels; for example, peer-to-peer lending has spread from larger platforms in the United Statesto social lenders in China. For once, Nigeria has not been excluded from the global trend.
For a long time, Fintechs have been seen as the future of savings & investment. In 2017, a PwC survey found that retail banking and wealth management was highly at risk of disruption within the next five years. Given the impact of mobile money in Kenya, there were even suggestions that Fintechs would run Nigerian banks out of business. Sensitive to this, Nigerian banks have responded, with many retail and investment banks opting to enter the Fintech space—whether by establishing digital banks or wealthtechs. Nigerian banks are becoming Fintechs, the Fintechs are here to say.
Famoroti is a Partner at Stears, a media and data company focused on expanding data-driven journalism and data networks in Nigeria