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Digital lenders tighten purse strings as defaults spike

Small banks boost lending to SMEs in victory for financial inclusion

Digital lenders are now rethinking their business strategies and employing stricter measures before disbursing loans to Nigerians as the rate of loan default spikes.

The rising cost of living has made loan repayment difficult for many borrowers. While loan demand is growing, with Nigerians borrowing N740 billion between January and September 2023, according to the quarterly economic reports of the Central Bank of Nigeria, defaults are also at record levels.

The cost of living crisis in the country has worsened owing to record-high headline inflation, which hit 29.90 per cent in January. Food inflation, a major driver of inflation, also jumped to 35.41 percent from 33.93 percent, exacerbating pressures on Nigerians.

“Per-capita growth in Nigeria has stalled, poverty and food insecurity are high, exacerbating the cost-of-living crisis,” the International Monetary Fund said in a recent report.

Piggyvest said recently that four in 10 Nigerians were in debt, and 26 percent owed loan apps.

“Rising cost directly impacts the need for users to access more funds,” Adeshina Adewumi, chief executive officer/ founder of Trade Lenda, told BusinessDay. “There is a parallel and direct correlation effect between an increase in interest rate, economic performance, and rate of defaults. Everyone is affected.”

Babatunde Akin-Moses, co-founder of Sycamore, said loan demand has increased in recent months.

“There has been an increase in loan defaults industry-wide. We can see this based on the recorded number of bad loans applicants have (as captured by credit bureaus) when they come to our platform,” he added.

Many borrowers cannot repay, and digital lenders now have high non-performing loans in their books.

“Good day, house. Happy weekend, all; I owe Tloan money, and it is 9 days due now, and I don’t have money to pay, so I deleted my contact. Can they still get my contact again or post me without access to my WhatsApp? Please, what can they do?” one Nigerian posted in one of the Facebook groups where people gather to discuss their inability to pay back their loans.

In December, Babatunde Irukera, the then-chief executive officer of the Federal Competition and Consumer Protection Commission (FCCPC), said: “One of the big issues that we’re seeing is that there’s now a significant level of loan default.”

The FCCPC has hinted that it will fight these defaults with new regulations, but lenders do not intend to wait for the bureaucratic process that will birth this. Lenders are now adopting stricter due diligence, relying on data analysis, and researching customer backgrounds before disbursing loans.

While this is set to slow down disbursements, operators in the digital lending space told BusinessDay it is the only way forward.

“In the end, the users suffer for this, but the operators are not charitable organisations. We are accountable to our stakeholders and need to use their funds well judiciously,” one operator said.

Commenting on the new approach, Gbemi Adelekan, president of the Money Lenders Association, the umbrella body of registered digital money lenders in Nigeria, said: “Loan apps are very careful now in terms of onboarding customers because the default rates are increasing by the day due to the economic situation in the country.

“We now analyse to ensure they are capable and willing to pay based on all the available data. Credit registry. Some lenders are using data on phones to analyse customers. This is because people are borrowing without the intention to repay.”

Lenders are responsible for ensuring that funds disbursed are returned as investors and stakeholders’ funds must be protected, Adewumi, CEO of Trade Lenda, added.