Nigerians turn to loan apps as inflation bites

Nigerians are turning to loan apps as a means of coping with the challenge of rising food inflation. A study by SBM Intelligence found that 27 percent of Nigerians across different income categories now resort to loan apps to keep up with their living expenses in the wake of record inflation.

Amina Abubakar, a mother of three residing in Lagos, shared her experience: “With the prices of food items rising so rapidly, my family has been struggling to keep up. I had no choice but to resort to these loan apps to put food on the table. It’s not ideal, but it’s the only option that we have right now.”

“Early last year I could conveniently buy a loaf of bread and a derica of rice for a little over N1,000, but presently, just a derica of rice costs N1,000. Now we eat more beans because it is cheaper, but cook it on a charcoal stove to save gas,” she said.

The surge in demand for these loan apps is indicative of the severe impact of the unyielding inflationary pressures on the daily lives of Nigerians, especially those already grappling with limited financial resources.

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Experts who spoke to BusinessDay say that while demand for credit is rising, lenders are increasingly hesitant to lend because of the state of the economy. According to Adedeji Olowe, CEO of Lendsqr, a startup that helps credit companies recoup their loans and avoid default, there are minimal lending activities happening on the side of the fintech. “The lenders are aware that nearly all the requests for loans are going to be deployed into consumption; hence the high risk of massive default is scaring them away from giving out loans to users.”

According to recent data from the National Bureau of Statistics, the food inflation rate rose to 30.64 percent in September, the highest in 18 years, from 29.34 percent in August, leaving many households across the country groaning under the burden of exorbitant food prices.

There has been a proliferation of online banks that offer credit facilities primarily targeted at people in the low-income bracket. There are also about 161 loan apps with full approval from the Central Bank of Nigeria (CBN) to operate.

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This is not the first time this year that demand for loans is surging. Consumer credit rose by 1.3 percent to N2.32 trillion in the first quarter of 2023 from N2.32 trillion in the previous quarter, according to a CBN report. A big factor for the growth in demand was the CBN’s move to phase out old naira notes and replace them with newly minted currencies. The policy not only flopped, it created a national scarcity of cash, leading many people to seek ways to borrow in order to survive.

While many online lending platforms benefitted from the demand, a lot of consumers also became victims of loan sharks. However, reported cases of unethical practices from these loan apps did not deter or quench Nigerians’ appetite for credit facilities from these digital lenders. The federal government delisted 37 loan sharks in September.

Demand, however, continues to rise, according to Salami Ogunyinka, who operates a lending company in Ibadan, Oyo State.

“Truth is there has always been a rise in loan demands as our loan officers have constantly in the last two months been telling us about the demands. They, however, cautioned that we should not go with the flow as it might be quite difficult to retrieve,” he said.

He described the floating of the naira as a major contributor to the demand for loans. According to him, every time there is a remarkable increase in the dollar rate, there seems to be an increase in demand because there is no gainsaying that it has a direct impact on the prices of goods. On Tuesday, the naira fell to a record low of 1,235 per dollar following strong demand on the parallel market, also known as the black market.

Ogunyinka said the continued weakening of the currency left consumers desperate for loans and many hardly have plans to pay back. While his company is not turning every borrower away, it has now included new requirements before loans are issued to recipients. For example, after concluding their background check, borrowers need to present collateral, which could be in the form of a signed document guaranteeing consequences in the case of default.

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“We have had some reviews in the recent past, for instance, cutting loan requests of N200,000 to N100,000,” Ogunyinka said. The company said it rejected a loan request of N1 million recently due to the risk. It however approved the N300,000 request on Monday but not without ensuring the borrower met its stringent new rules.

Notwithstanding the measures the company has taken, Ogunyinka said: “The rate of default also increased a little.”