How credit will solve Nigeria’s economic problems

Nigeria has a plethora of economic problems that make any reference to its status as the giant of Africa, very laughable. Agreed, it stands tall as the most populous black nation, but also as one of the poorest, with huge inequalities, high unemployment, and poor infrastructure.

While Nigeria’s economy is one of the largest in Africa, its huge population is defined by low standard of living, a 35% unemployment rate, and a 40% poverty rate. High government corruption has seen several citizens taking matters into their own hands.

From basic essentials like water and education, to infrastructure, Nigerians are trying to improve their living standards without waiting for government support. However, the lack of funds will is a limiting factor.

More developed economies have cracked this by providing access to loans on several levels. Unfortunately, accessing loans is still a luxury for most Nigerians. Despite some important policies and the rise of dynamic digital lenders, very few Nigerians can access loans.

Banks, Nigeria’s primary financial services providers, have preferred lending to wealthy people and large corporations, rather than dealing with the risks of lending to individuals and small businesses.

On the rare occasions banks lend, it’s usually with stringent KYC and other requirements, making it a prohibitive exercise for most people.

However, given the sheer numbers of individuals and small businesses in Nigeria, reveals a missed opportunity to develop the economy. Extensive research shows that improved access to credit would not only benefit the recipients (individuals and small businesses), it would also benefit lenders, positively impacting the economy in the process.

“Credit is how people can fund their small business idea, deal with the economic shocks of job losses, or acquire assets,” says Adedeji Olowe, Founder of Lendsqr, a Nigerian startup building the Infrastructure to power Africa’s credit economy.

With rising inflation that reached 15.6% in January 2022 and constant currency devaluations, individuals and small businesses would need constant liquidity to keep things running effectively.

Olowe argues that lending is a major revenue source for banks. When money is lent to those who actively need it, it creates ripple effects across a country’s economic value chain.

The lending problem and opportunity in Nigeria

While accessing credit has been historically difficult, there are significant bottlenecks getting in the way of widespread access to credit.

A significant inhibitor would be identification requirements. Per Verifyme’s report, over 100 million Nigerians do not have any form of identification. Without proper identification, how do financial institutions effectively operate a proper credit system?

High unemployment rates, policy somersaults, and a difficult business environment could make lending unattractive to traditional financial institutions.

Despite these issues, Nigeria has been witnessing some silver lining in recent years.

In 2018, some digital startups sprang up, offering collateral-free personal loans to great success. The likes of Carbon and Fairmoney have disbursed a combined $153 million worth of loans in 2020.

Following the increase of the Loan Deposit ratio by the Central Bank of Nigeria (CBN) in 2019, most banks seemingly improved lending to most of their customers with the launch of digital platforms.

Access Bank, for example, reported that it disbursed over 163 million loans through its mobile app, in just nine months of 2020. Guaranty Trust Bank arguably has the lowest rate of any personal loan provider in Nigeria.

In 2021, the CBN announced that consumer credit rose to N2 trillion, 40% higher than N1.4 trillion in 2020. Despite the game-changing actions of digital lenders and the CBN’s lending policy which has driven banks to offer personal loans at competitive rates, a huge gap still remains.

In 2020, just 3% of Nigerians have access to credit from regulated financial institutions. The rest are either at the mercy of informal and unregulated loan sharks or do not have access to financial services.

Lendsqr’s proprietary research shows that Nigeriá addressable loan market stands at N74 trillion across a wide range of sub-sectors that could drastically change the country’s economic landscape as we know it.

Where can credit help Nigerians?

The majority of the world’s 1.7 billion unbanked people live in just five countries; Bangladesh, China, India, Mexico, Nigeria, and Pakistan. All developing economies and easily some of the most populous countries in the world.

Financial inclusion in Nigeria has improved considerably over the years, but the bulk of this improvement has been lopsided toward owning a bank account or access to payments.

As Nigeria maintains its position as one of the poorest countries in the world, its economy is in need of capital injection across different facets such as personal loans, device financing, mortgage financing, and lots more.

Personal loans

Nigeria has a high unemployment rate, and the COVID-19 pandemic pushed the number northwards. In 2021, Nigeria’s unemployment rate reached 35%. Per Al-Jazeera, 20% of Nigeria’s workforce lost their jobs due to the pandemic. Efina states that 80% of the nation’s workforce was affected by the pandemic.

Some Nigerians actually ditched regular blue and white-collar jobs to face subsistence farming. According to SBM Intelligence, a consulting firm in Nigeria, 63% of people spend the majority of their income on food.

A 2019 National Bureau of Statistics (NBS) report corroborates this. Apparently, Nigerian households spent N40 trillion ($95 billion), of which N22.7 trillion ($53 billion) was spent on food.

Considering these numbers, it is little wonder we have the saying that every product competes against food in Nigeria.

“Most of these people who are often underbanked and financially underserved often have no recourse to credit facilities,” states Olowe.

This then presents a huge opportunity for anyone willing to take the bull by the horn and lift millions of people out of poverty. Those taking this bet stand a chance of making up to N4.3 trillion per Lendsqr’s research.

Beyond financing for basic needs, there’s also a significant gap for a different kind of financing.

Funding small businesses

Small and medium scale businesses account for 96% of businesses, 84% of employment, and 48% of GDP in Nigeria.

However, a majority of these businesses are petty trades with a constant need for cash flow, and are not registered by the government.

Most of these businesses either have to get capital from friends and family or join informal cooperative societies. Considering most of the issues mentioned above, bank lending is rarely ever in the discussion.

Interestingly, some startups, like Nolt Finance and Kredi Bank, are working to bridge this gap for SMEs. But it’s still unclear how much of the really small petty trades, which make up the bulk of SME numbers, they can serve.

Without the influx of fresh capital, the average Nigerian SME would have to make do with just surviving the day. Startups playing in this segment are looking at a potential N12 trillion jackpot in the offing, but proper execution will be key.

While lending has been poor for most individuals and small businesses, there are still significant gaps to be filled further up the social ladder.

Asset financing

Despite the economic realities, most Nigerians have to pay for items in full whenever they need to buy phones, laptops, televisions, or any other type of asset.

A worker who had his phone stolen or just came upon a pressing need for one typically has to shell out thousands of naira to pay in full.

While there have been many platforms claiming to offer Buy-Now-Pay-Later (BNPL) services, it’s usually at high markups and the eventual costs are usually prohibitive.

Olowe argues that such expensive markups have prevented BNPL companies from scaling.

On the flip side, these platforms have to deal with the possibility of not recovering their money. Some companies like CDCare are increasing in popularity with their measured approach to BNPL services.

“We decided to employ a model where we the consumer has to have paid up to half of the item, depending on the payment plan, before giving out the item,” says Oluwatobi Odukoya, CDCARE CEO.

Odukoya maintains that this shows signs of a serious customer.

While the company currently has up to 7000 customers, there’s a significant need to develop models like this at scale. Beyond this, there are even bigger credit facilities to finance.

Car policies vs auto loans

Nigeria has constantly been coming up with auto policies, which has done little to help the vehile ownership gap.

Placing a ban on importing over ten-year-old second-hand vehicles or crazy high duties on imported vehicles have only served to make smuggling more lucrative and drive up car prices.

Once again, Nigerians are still faced with the prospect of saving up millions to afford a decent car. The same can be said for domestically manufactured vehicles.

Per Nigeria’s Vice President Osibanjo, the annual vehicle demand is 720,000, but the local production stands at 14,000. Considering this, the government, once more, reduced import duties for foreign vehicles.

According to Lendsqr’s Olowe, the answer to the problem isn’t more auto policies since several Nigerians cannot afford cars at all.

According to 2017 data by the National Bureau of Statistics (NBS), “on the basis of private vehicles only, vehicles per 1000 Nigerians comes to about 24. It is also about 41 Nigerians to one private vehicle– one of the lowest among its emerging market peers.”

Rather than saving for years to pay fully for a car, access to vehicle financing can provide much-needed relief and improvements to living standards.

Even more expensive than vehicles is homeownership.

Using credit to improve homeownership

While people are able to own homes and pay for several years, Africa’s mortgage market remains thin.

Here’s data from one publication; “In Uganda, there are an estimated 5,000 mortgages for a population of 41 million while in Tanzania, there are only 3,500 mortgages in a country with a population of 55 million.”

The housing situation in Nigeria is apparently more baffling.

The mortgage market in the US is worth roughly $29.5 trillion, but Nigeria’s mortgage financing requirements stand at roughly $47 billion. Out of 10.7 million housing units, only 5% are in formal mortgage.

As of 2020, the CBN puts homeownership in Nigeria at 10% compared to 72% US,78% UK, 60% in China 54% in Korea, 92% in Singapore. Consequently, Nigeria has a housing shortfall of 12 – 16 million.

Such deficits across different sectors beg for a lasting solution.

What can be done

“The real game-changer for Nigeria won’t be more policies, but a more conscious drive towards expanding access to credit to every single Nigerian and creating a framework that makes eligibility a right instead of a privilege,” says Olowe.

With this in mind, he began building Lendsqr, a startup with a mission to aid all every kind of lending in Nigeria.

“I believe credit can lift millions of Nigerians out of poverty. So why not use technology and data to resolve this,” he says.

Since effective lending is fraught with significant bottlenecks, Lendsqr is working to reduce those bottlenecks to the barest minimum.

Lendsqr is not alone in trying to solve this problem though. The likes of Evolve Credit, CreditClan, and Indicina are also building solutions to help lenders better offer their services.

These companies are basically saying, leave the technology and worries about data to us, and focus on lending.

However, Lendsqr takes this a step further by offering a free lending cloud platform to the thousands of lenders in Nigeria, who may never be able to afford their own tech, in a bid to take credit to as many Nigerians and Africans as possible.