Similoluwa Bolaniran
As an individual account holder, imagine the difficulty you may have had to encounter if you attempted to get a loan 5 years ago. The often rigorous conditions of providing all or a combination of your six months bank statement, letter of salary domiciliation, letter of employment/confirmation, confirmation of your terminal benefits, two guarantors, equity contribution, and then the frightening interest rate were altogether not appealing. If you were a business owner without a regular source of income, your case may even be more complex. There were some exceptions though. Especially if you worked with an established company, the banks had a system that pre-approved such, making access to credit less stringent for its staff.
As an ex-banker myself, I cannot count how many such requests I had to turn down. I remember with a bit of humour now, but our sad reality then involved attentively listening to customers’ needs, justifying why they require the credit and their plan to pay back at all cost. I had to allow them to express this out of professional courtesy, but my response was always the same. The banks were also berated, and it was mostly related to ‘extremely’ high-interest rate and the stringent conditions to access credit. While they have their share of the blame, primarily that they did not act as a financial intermediary between the surplus and deficit sectors of the economy; receiving customers deposits and investing in treasury bills rather than channelling it to the real sector, it is also important to establish the paucity of a credit scoring system and high cost of doing business in Nigeria reasonably constrained the banks. This is, however, a discourse for another day.
Our reality is different today. A simple Google search for “request loan” will return a long list of applications or services willing to advance as little as N5,000 sometimes up to N5m. Three interesting facts have emerged; most of these providers are not the regular commercial banks or big names we are used to, secondly the requirements involved have been streamlined, and last, they can process a request in a matter of hours to minutes sometimes. We can assume that the average individual with a bank account in Nigeria has a 90% chance of getting a loan on the first request.
The vital question is, what changed? While there is no single answer, I think there is a simple one – our credit system is maturing. The most important lending variable any institution considers is the ability of the borrower to pay back following the terms of the loan. Even when banks request collateral, they intend that the disposal of such assets is employed as a last resort in recovering loans. And as our credit system got better, there was also a massive digital push to encourage people to borrow. Borrowing became cool! The approach became responsive and active rather than lethargic and passive. Giving due credit, one entity that set the tone for this change was Renmoney as they provided a digital/online interface whilst partnering with payment institutions like SystemSpecs to set up direct debit mandates on the borrowing individual’s account, often their salary account. Expectedly, this still had its issues; requirement to visit a bank, agreement on rates, a handful of requirements, but as a whole, there was some sense of progress. As this system developed, others were working to fine-tune it, and within a short while, the options available increased. Smart companies, especially digitally focused microfinance banks (MFBs) and mobile money operators (MMOs) began to look beyond from just lending to building a credit system. Their purpose evolved from giving out loans to building a repertoire of customer data. Some were even willing to burn some cash in the short-run hoping to recoup this through the means of data monetization. And this was where the real change began!
Companies were catching up with the data is the new oil frenzy and started to think differently. Commercial banks started by harnessing their internal customer data and using analytics to build products (mostly short-tenured) that allowed its customers access credit from the comfort of their mobile phones in most cases. They further expanded this through strategic partnerships with payroll management companies who already had access to data of salary earners across different organisations that use their services. This expansion meant that a bank could extend credit to an individual who is not the bank’s customer; as long as the individual’s salary is processed by the partner payroll management company. This led to a massive rollout of salary advance, back to school, electronics financing loan products. And they also created more digital channels for access to these credits; USSD, internet banking, mobile banking, e.t.c. giving users greater flexibility and control.
Somewhere in the backdrop, and pre most of these changes, the credit bureaus were building a scheme. To achieve this, they had to integrate with all banks, fetching their (banks) customers’ data and using this to build a credit rating system. Again, lending entities had another layer of comfort as they partnered with these credit bureaus, leveraging their ability to assign credit scores to different lenders. Just choose the credit threshold you are comfortable with, and the system does the rest. Some companies also went a step further by building a proprietary algorithm that serves as credit scoring scheme sometimes using bank statements, account balance, e.t.c. as primary inputs. I have not discussed the technical details involved in building all of this, but in the interim, we can say ‘thank you BVN’. I say this because if we did not have this in place, well we would have had to build one because I cannot imagine an otherwise efficient way to make this scale. To highlight this, it provided a common link among different accounts owned by one individual/entity.
But, despite these best efforts, all is not yet Uhuru. There are still issues around implementing an efficient loan repayment process. Except for many commercial banks that can control the repayment loop of their customers and so pass a debit without an intermediary, most other institutions rely on the manual direct debit arrangement or trust that their customers will just payback. For instance, an MFB may need their customers to pay back through another payment service provider. In the business of giving loans, the more loops required to pay back a loan, the greater the incentive to default, and the converse is likewise true. There is a need to efficiently operationalise repaying loans, implementing direct debit across multiple banks on a digital scale like what is obtainable with recurring debits on cards through the process of tokenisation. This will open up conversations around open banking and the need for greater collaboration among financial institutions.
To paint a picture, I am proposing an arrangement whereby I can access a loan through X and allow it to debit any of the bank accounts linked to my BVN in repaying or recovering my loan. And we can automate this such that the balances across all my bank accounts can be read and a debit passed in bits or a chunk depending on how much is available in the different accounts. It is not the perfect solution and we may not have one, it may likewise sound utopian with its inherent risks, but it is possible and workable. Even if not implemented in this manner, it should attempt to mimic this. Evading this arrangement on the side of the borrower will require some effort; avoiding the financial system altogether and/or receiving all my payments in cash.
As we grapple with this desired end, the news from the 345th Bankers Committee of the CBN is comforting. Under this new arrangement, banks will debit loan defaulters’ other bank account(s) and the latter would be required to agree to this in the terms of the loan agreement. I reckon that the BVN service would play a crucial role in achieving this, but the CBN also has to go beyond this. Commercial banks are the elephants in the room and regulations akin to this have to be implemented to ensure that customers have more control over their data and monies and can allow the sharing of the same with any financial institution they so choose without the inefficiencies that surround it. With the CBN’s recent directive to deposit money banks (DMBs) to maintain a minimum of 60% loan-to-deposit (LDR) ratio, one can only hope that they will be more cooperative in collaborating better.
Like the banks, MFBS, MMOs will rake in billions in net income from loan fees, the average individual is also better for it and the economy at large in the long run. Greater competition means lower pricing. Who would have thought it was possible to get a loan of up to N5m at 1.75% interest rate monthly hitherto? Increased access to loans should also lead to some level of expansion in the economy, even though there is a risk of an inflationary spiral. I would argue that the upsides mostly outweigh the downsides. And the benefits will also gradually impact various other sectors like housing, e.t.c., – thus creating a robust credit rating system is a critical input on the path to building a functional mortgage system. Should we be wary of the possibility of a credit crunch similar to that which hurt the United States in 2008? Yes, but we are a long way from that and have other short- and medium-term issues to worry about, in the meantime.
So, what is next? I believe there would be heavier investment in using data mining and analytics as companies churn out fancier and robust products. This will lead to the need for related skills as well. The endgame for smart companies will be your data. Whatever pricing concession you may receive in getting loans might be recouped as your data gets monetised. We will also see the rise of TechFins – technology companies delivering financial services. You can think about Opay as an example. Concerns around data management will come up and policy will have to play an active role in defining how this is used. Policy will, as is often the case, continue to play catch up as several innovations will emerge, testing the boundaries of existing regulation. And maybe we are on a path to getting something right as a country and it is not all gloom and doom. I am convinced we will record massive growth with several unintended positive outcomes along this path. They may not give us the Eldorado we all want, but the progress we are recording provides a glimpse of hope.
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