The increasing number of people moving over to digital banks to save or invest their money due to attractive interest rates between 10 percent and above has created a familiar problem. These platforms now have too much money in their vaults they must give to borrowers in order to pay the promised rates.
The challenge, however, is the country’s recessive economy has left millions of Nigerians’ income and employment prospects so battered that they are not so eager to add debt to the burden. Last year, the National Bureau of Statistics said that over 82 million Nigerians lived below its poverty line of N137,430 ($381.75) a year, and unemployment has risen to 27 percent and is expected to worsen with the COVID-19 pandemic still very much around and devastating businesses.
But the growing poverty rate has not stopped millions of Nigerians from jumping on the train of digital banking platforms like Carbon, Kuda Bank, Piggyvest, Cowrywise, and many others.
Data from the Central Bank of Nigeria (CBN) show that currency outside the banking system increased to N2.5 trillion at the end of December 2020 from N1.2 trillion in December 2011.
In its recently released financial report 2020, Carbon said its 659,000 customers processed N96.54 billion (~$241.35 million), up 89 percent compared to the same period a year earlier.
BusinessDay findings show that FinTech companies have high-yielding saving platforms and investment havens for savers as they enjoy rates above the 11.5 percent Monetary Policy Rate (MPR) and more than 1.5 percent offered by banks.
Carbon, for example, has one of the most attractive savings rates at 15.5 percent for fixed deposit, 13 percent for periodic investment, and 11.5 percent for a one-time investment.
A user of these fintech services who wants to remain anonymous to speak freely said saving with the platforms is primarily because of the interest rates. He used to enjoy a 10 percent rate from Cowrywise, a digital savings platform that also allows its users to invest in mutual funds, but the company recently reduced the rates to 7 percent due to the prevailing economic challenges.
Razaq Ahmed, CEO/Co-founder at Cowrywise, had told BusinessDay in an interview that the COVID-19 and the impact it had on the mutual fund market had led the fintech company to revise its interest rates. The company recently secured a $3 million pre-seed funding from US-based venture capital Quona Capital.
Read Also: Improved optimization of digital solutions essential to boost agricultural output- McKinsey
However, the pandemic is still pushing economies like Nigeria to the brink and leaving millions of people unemployed. High unemployment piles pressure on the income of many citizens. Citizens not spending and unable to meet debt obligations does not bode well for companies like Carbon, Page Financials, Renmoney, Credit Direct, Kuda Bank, among others.
Not to be deterred, many of these companies are rejigging their strategies.
Kashim Hamid, a 28-year project manager, told BusinessDay that in recent times he has received unusual phone calls from some of the fintech companies offering loans with many incentives attached. One of the companies has gone ahead to even assign a specific marketer to convince him to take a loan. The lady marketer has called him and left him messages on different social media platforms including LinkedIn.
In one of the messages Hamid showed BusinessDay, the fintech lender expressed the desire to be a one-stop finance provider when he needs extra cash, extra income, or any other financial services.
“We understand that opting for a loan is not an easy decision. It’s a tricky balance between wanting to be debt-free while trying to sort out unexpected expenses. We get it, that’s why we’ve got you covered on our quick loans. Get up to N5 million in less than 3 hours. No paperwork and at affordable rates,” the message read.
George Udim, a videographer, also said he has noticed an increasing number of text messages from a particular fintech company offering up to N6 million in loans.
There are several reasons many Nigerians would not want to take a loan.
The major hindrance for the average person is the highly exorbitant interest rates, says Mubarak Ayodeji Sulola, an analyst.
“It is much easier for people with a steady income to leverage on that compared to the majority of Nigerians who depend on daily income. Also let’s not forget the instability of the Nigerian business scene, one new policy and you’re in a trap hole with a loan shark,” Sulola said.
Samed Olukoya, founder and CEO of Investors King, agrees with the high-interest rate but adds that the challenging business environment and the lack of consistent sources of income make collecting loans in Nigeria not attractive.
For instance, Page Financials’ loan rates go from 2.9 percent to 4 percent in a month, which is about 48 percent on an annual basis. A Carbon loan attracts interest rates starting from 5 percent per month on the first loan. To put it in context, if a customer took a loan of N1 million, he is likely to repay as much as N1.4 million or more in one year.
Part of the challenge is the poor credit system environment in the country, according to some experts. Operators need to hedge against the risks of not collecting collateral before giving loans. It means lenders do not have accurate borrowers’ information to work with. An efficient credit score system allows lenders and other financial institutions to determine the creditworthiness of an individual.
Fintech companies like Carbon have stepped up the search for borrowers with offers such as the Carbon Zero that allows users to pay for electronics in installment at zero interest rates. It is only available to Carbon customers and they have to be Nigerian-based salary earners with a verifiable income and up-to-date bank statements. Also, interested customers must earn a minimum monthly salary of N200,000 (~ $526) to be eligible.
Kuda Bank, the self-styled bank of the free, is however taking a different approach by tapping celebrities to push up the adoption rate. Last year, the company secured a $10 million funding which is pushed into lending.
However, experts like Adedeji Olowe, CEO of Trium Network, a venture capital firm, and Uzoma Dozie, founder and CEO of Sparkle, suggest that more Nigerians need to be educated on the impotence of loans.
“When I was young, one of the words of wisdom that I heard from my father was ‘never a borrower or lender be’. Guess who became a purveyor of these words? Like the catchphrase used by sellers of alcoholic beverages ‘drink responsibly’, lend and borrow responsibly and the bedrock of that is financial education which we need more of, even in the supposed educated,” Dozie said.
