*Loan uptake high in digital lending space

By Babajide Komolafe

Bank customers enjoyed a 43 per cent increase in consumer loans in two years, as banks and fintechs intensified competition for the lucrative retail lending space through digital lending services.

Financial Vanguard findings from the Central Bank of Nigeria (CBN) data show that consumer loans rose to N1.84 trillion in the first half of 2021 (H1 ’21) from N1.21 trillion in H1’19, representing N630 billion or  43 per cent  increase.

This also translated to average annual growth of 21 per cent in consumer loans during the two years period.

However, during the period, the share of consumer loans in the total credit to the private sector rose marginally to 5.7 per cent in H1’21 from 5.2 per cent in H1’19.

Industry observers have pointed at the loan to deposit ratio (LDR) policy introduced by the CBN in 2019 as a key driver of growth in consumer loans.

They also attributed the development to the increasing competition from Financial Technology companies, Fintechs.

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The initial LDR policy which came into effect September 30th, 2019,  stipulates that banks must give out 60 per cent of their total deposits as loans. One month after the policy came into effect, the CBN increased the minimum LDR to 65 per cent.

The directive, according to the CBN, was aimed at driving up bank lendings to Small and Medium Enterprises, SMEs, Mortgage, as well as Retail, and Consumer lending.

In a circular introducing the policy, titled, “Regulatory measures to improve  lending to economy”, the CBN stated: “To encourage SMEs, Retail, Mortgage, and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose.

“The CBN will provide a framework for classification of enterprises that fall under these categories.”

The apex bank employed punitive measure to ensure compliance by the banks including a levy of additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target LDR.

Following the CBN policy, the banks increased offering and marketing of consumer and personal finance loans.

The Fintech challenge

 Furthermore, some banks, in response to competition from fintechs, developed and deployed digital lending apps. These include: Quick Credit by GTBank,  Quickbucks by Access Bank, First Advance by FirstBank, Alat by Wema Bank

On the other hand are  fintechs like Kuda Bank, Fairmoney, Renmoney, Carbon, Branch, Palm Credit, and KwikCash which deployed alternative credit-scoring systems  to provide instant, unsecured, short-term loans to individuals.

To fully exploit the huge potential for micro lending in the country, the fintechs offer easy to sign up, easy to use stored value wallets using  mobile phones and incorporating key use cases for customers across transportation, food and digital services.

Confirming the impact of the above development on lending to households, the CBN in its Credit Condition Survey for Q4’19 and Q4’2020, stated:  “The availability of secured credit to households increased in Q4 2019 and was expected to increase in the next quarter. Improving liquidity positions was the major factor for the increase in secured credit.

“Lenders reported that the availability of unsecured credit to households increased in Q4 2019, but it is expected to fall in Q1 2020. Most lenders adduced market share objectives for this increase.

“The availability of secured credit to households increased in Q4 2020 and is expected to increase in the Q1 2021. Changing economic outlook and increased market share objectives were major factors responsible for the increase in supply of secured credit.

“Lenders reported that the availability of unsecured credit to households increased in Q4 2020, it is expected to increase in Q1 2021. Most lenders cited improving economic outlook and increased market share objectives as contributory factors for the increase.”

Also, reflecting the impact of the CBN’s directive, credit to the private sector  grew by 30.5 per cent  in two years to N32.3 trillion  in H1’21 from N24.8trn in H1’19. This translates to   average annual growth of 15.25% during the two year period.

Analysts explain

 Analysts, however, noted that while the CBN’s directive and interventions contributed to growth in consumer lending, the major driver is the competition between banks and fintechs in the digital lending space.

Speaking in this regard, FBNQuest Capital Analyst, Tunde Abioye, said, “Loan growth has been substantial, in the double digits, since the CBN established the LDR policy in H1 2019.

As a result, it is reasonable to conclude that the CBN’s policy has been quite successful in expanding credit to the private sector as well as the retail end of the spectrum. 

“I believe that one of the most important factors has been competition from fintechs, which are using technology to get into consumer financing prospects.

”Fintechs have shown banks that lending to this category can be profitable if a proper risk management framework is in place. Additionally, the large margins in the consumer loan industry are a consideration.”

Corroborating the above, Afolabi Oriyomi, Research Analyst, PFI Capital, said, “While the CBN’s policy and intervention funds were the two major factors that aided consumer credit growth, another factor was the growth of digital lending in the economy.

“As a result of Nigeria’s population and the huge credit gap, it has attracted more digital lenders in the digital space.”


 However, Olaolu Boboye, investment analyst at CardinalStone Asset Management Limited, noted that

in spite of  the 43 per cent growth, consumer loan is still constrained by various factors hence the marginal increase of 0.5 percentage points in the share of consumer loans to total  credit to the private sector during the two years period.

He said: “While it might be difficult to net off the impact of CBN policy, we think that consumer credit has also been influenced by economic factors, default risk concerns, and risk emanating from the pandemic.

“We note that about 35% of the banking credit is tilted towards the Oil and Gas sector, as banks emphasize repayment capacity. Beyond this, we think that arbitrage Cash Reserve Ratio (CRR) debits portend a downside to credit creation and the financial system stability in the medium term.

“The share of consumer credit to the total credit will likely remain in a single digit. For one, we think that the large informal sector (estimated by International Monetary Fund, IMF, at a size of 65% of the economy and also accounts for about half of current employment in the country) limits consumer credit coverage due to inadequate information, concerns around default risk, and elevated inflation, which erodes purchasing power.”

However, Ajoboye of FBNQuest  opined that the growth trend in consumer loans will be sustained in the coming years, citing the huge population of financially excluded Nigerians

“I believe the growth trend in consumer lending will continue. According to Efina’s financial inclusion data, about 40% of Nigerians are still financially excluded.As a result, there is still room for lending expansion in that market.”

While sharing the same optimism, Oriyomi of PFI Capital, cited the impending removal of fuel subsidy as a factor that could undermine consumer loan growth. 

“Should the above parameters and other economic variables remain relatively constant, the trend would likely persist.

“However, the likelihood of the growth sustainability is highly remote given the economic shock the economy would likely experience on the removal of fuel subsidy at the end of H1 ’22,” he said.

Vanguard News Nigeria

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