Retail Lending in Nigeria

The financial sector in Nigeria is grappling with a significant hurdle in offering retail and SME lending services as access to credit facilities by this segment from major financial institutions could be better. According to a report released by EFINA in 2021, only a tiny percentage of the population, approximately 3%, can access such credit facilities. Moreover, despite being responsible for nearly half of the deposits, retail customers make up just 9% of the loan portfolio of a major financial institution, as per one of its reports. The situation is even worse for MSMEs, who receive a mere 2% of loans despite contributing almost 12% of deposits to the same financial institution. In contrast, big corporate organizations, which account for 26% of deposits, receive nearly 80% of the total loan portfolio. One may argue that the reason for this low amount of loans to those segments is that there is no demand for loans by these segments of the economy. However, Nigeria’s lending market for individuals and small businesses is estimated to be worth N74 trillion.

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Source: GT Bank

The reluctance of traditional financial institutions to provide credit to retail and small businesses in Nigeria, despite the lucrative market opportunity and the significant deposit base of these segments, raises questions. One of the major concerns is that individuals and small businesses are perceived to be high-risk borrowers due to the high rate of loan defaults. In 2021, the Bank of Industry reported that the default rate on loans granted to entrepreneurs seeking to establish small businesses was almost 100%. This incredibly high non-performing loan(NPL) ratio is dangerous to banks whose historic NPL ratio has been in the single digits.  Moreover, it has been said that banks tend to prioritize corporate lending and treasury bills, which have proven profitable, to play it safe rather than cater to a segment they consider highly risky.  While there is no readily available data on the non-performing loan ratio of retail customers, the aggressive methods employed by some lending institutions in recovering their loans suggest a high default rate. Another obstacle retail customers and small businesses face is the requirement to provide significant collateral and complete extensive paperwork to access credit facilities, which may be burdensome; this could discourage individuals and companies from approaching financial institutions to seek credit. 

In addressing the challenges facing retail lending in Nigeria, there are several potential solutions. Open banking is a transformative tool for the banking industry, with the potential to spur innovation in financial products and services. By enabling banks to share data such as loan defaults, open banking can facilitate the creation of next-generation lending solutions. In 2020, the Central Bank of Nigeria (CBN) introduced the Global Standing Instructions (GSI) guideline to aid loan recovery. The GSI allows lenders to retrieve loan repayments from the bank accounts of defaulters, regardless of the customer’s bank. The borrower’s Bank Verification Number (BVN) is linked to their bank account, enabling lenders to track them across different banks and helping to recover outstanding loans. We expect the GSI to reduce non-performing loans, improve loan recovery rates, and ultimately increase lending to retail and small businesses since it significantly minimizes the risk of default. Financial institutions can also leverage data analytics and machine learning algorithms to improve lending decisions. With vast amounts of data available, banks can develop models that accurately predict the likelihood of loan repayment, even without traditional forms of collateral. These algorithms can analyze credit history, income, transaction history, utility bill payment,  spending habits, and other factors to make informed lending decisions.

Lending startups continue to make new strides in Nigeria, with mature players such as Carbon and Fairmoney already taking advantage of advances to expand their customer base and revenue. For example, since introducing its Buy Now, Pay Later product (Carbon Zero); Carbon has doubled its revenue and grown its customer base to over 3 million active users. Fairmoney has raised over $50 million and disbursed more than ₦70 billion since its establishment in 2017, with many other credit-led companies hitting incredible milestones. The lending sector in Nigeria is thirsting for growth, and companies that employ innovative solutions to address the challenges Nigerians face in accessing credit are poised to reap the rewards.

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Victor Kareem

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