Consumer Credit system is the debt incurred by consumers who intend spending the money immediately. Every country with a standard finance system has a good credit system. The ease of access to funds by borrowers for business and/or personal purpose is key to the viability of any economy.
If a borrower can easily access funds, and repay on time, it will stimulate the overall growth of the country. In a normal credit economy, credit can be in the form of loans, credit cards and mortgages. A healthy credit system in Nigeria is necessary for economic growth, business performance and income growth and middle-class increase.
It is an obvious truth that the credit system in Nigeria isn’t doing well and this has an adverse effect on the country’s economic growth. Daily, thousands of people kill brilliant business ideas, after considering the stress they would have to go through to access loans or any other form of credit.
This is not a good reality, but does Nigeria have what it takes to run an effective credit system? In this write, some key aspects of the Nigerian Credit system will be looked into. What are the loopholes in the system currently? What are the setbacks for the system? Is Nigeria ready for a working credit system?
The topical issue of a credit-based banking system in Nigeria has been on for years. Many stakeholders in the country’s finance industry, have called out various financial institutions for their incompetence in operating a standard credit system. In fact, to date, many Nigerian banks cannot establish an agreement between banks and borrowers and lack the know-how of assessing the borrowers’ creditworthiness.
The question, however, that many people have asked is: given the poor data storage system in the country, can Nigerian banks be blamed for the poor credit system? Developed countries like Canada uses something known as a credit score to measure credit worthiness. In Canada for instance, if one needed to get a car, all they need to do is walk into a car store, show proof of creditworthiness, fill a loan application, and in no time, walk with the loan and the car.
Unfortunately, this reality cannot be obtained in Nigeria. For instance, on the 17th of January, 2019, one of the top players in the country’s finance system, TayoOviosu, CEO of PAGA, lamented the poor credit system in the country, and the rigorous process his finance company went through, yet still failed. He had tried to get a loan to purchase some cars, but after enduring some tough processes for a while, he gave up and had to pay in cash.
The rigorous procedures involved in getting loans from Nigerian banks have made concerned individuals raise eyebrows regarding how Nigeria was ranked 131 on the World Bank’s Doing Business Index 2020 after moving 15 places from its 2019 spot.
The poor credit system of the country is one way, out of many ways, through which the banking system in Nigeria can be considered under-banked, and of no real value to customers.
However, as asked earlier, can Nigerian banks be blamed for this malady? First, there is no to direct access to a unified database where Nigerian banking customerscan provide financial institutions with accurate and adequate banking information, such as their Bank Verification Numbers (BVN). This truth alone has made granting loans in the country, business with high-risks. Apart from the use of landed property collaterals, many Nigerian banks do not have a standardized system of sizing the creditworthiness of a prospective borrower.
Most banks do not consider certain key factors when giving out loans. They loan out money based on what they “think” is right, and not what should be obtainable from empirical data. It is almost easier for a camel to pass through a needle hole, than it is, for a start-up to get easy access to loans from Nigerian financial institutions.
One other thing that should be considered is the shallowness of the value system of the Nigerian banking system. As in most capitalist countries, there is an obvious divide between the elite and the ordinary citizens. Members of the elite class are not faced with proper scrutiny when asking to have access to social amenities (including access to loans), and this has made many Nigerians lose trust in the system completely.
For the credit system to work effectively in Nigeria, a high premium has to be placed on data. For instance, according to Canada Buzz, the lowest credit score to secure a car loan in Canada is around 630. This number is based on accrued financial history of the individual involved. With proper availability of data, for instance, stakeholders in the Nigerian banking industry can easily assess risk level, analyze interest rate, provided mutually comfortable options for banks and borrowers, and on a general note, make informed decisions regarding loan recipience.
However, there are signs that the Nigerian Credit System might be improving, although in baby steps. With the emergence of a plethora of online lending platforms, who have put modalities in place, to efficiently determine the creditworthiness of loan recipients. If this can continue effectively, in a few years, the credit system in Nigeria would rise enough to be able to compete with credit systems in other countries. Because the fact is that small businesses need credit to grow.
Safe to say that the major setback in the Nigerian credit system is the lack of synchronization of data from the many financial institutions. In other words, there is no unified platform for the collation of needed data for running an effective credit system. If this setback can be surmounted, then Nigerians would be able to build a credit history that can help them access loans from stakeholders in the finance system in the country.
Of course, the government also has a role to play in all of this. On the part of the government, certain steps have been taken. In 2017, while he was acting president, V.P. YemiOsinbajo signed the Credit Reporting Act and also the Collateral Registry Act.
Summarily, for Nigeria to be fully ready for a Credit System, there has to be a centralized and structures source to reduce risks and create a better environment for financial institutions. And until this is done, Nigeria, and her citizens, will remain underbanked and financial institutions will remain handicapped in terms of providing real value.