The Impact of Fintech on Consumer Lending in Nigeria

Introduction

Consumer lending refers to the provision of financing/loans for personal or household use. Banks and other financial institutions give out personal loans based on the borrower’s credit history and ability to repay the loan from personal income. At the end of Q1 2023, total consumer credit in Nigerian stood at N2.35 trillion – composed of N1.75 trillion personal loans and N598 billion retail loans. According to the Central Bank of Nigeria (CBN), this represents a 1.3% growth in consumer credit over the preceding quarter and enhanced access to formal financial services through fintech channels played a role in the growth.

The advent of financial technology companies (Fintechs) in the consumer lending space in Nigeria energised the drive to democratize the access to financial services (especially payments and credit) in Nigeria the country. Unburdened with the heavy documentation and stringent guidelines that characterize lending by the traditional banks, Fintechs have been able to offer seamless access to loans, along with other similar interventions, to Nigerians. McKinsey describes Fintech’s core value proposition for consumer lending as “instant, unsecured, short-term loans to retail consumers leveraging alternative credit scoring algorithms and data.”

Lending in Nigeria

Lending in Nigeria, as with other financial services, primarily falls under the purview of the CBN. Banks and other financial institutions are required to obtain their operating licenses from the CBN before commencing operations. The CBN is empowered by the Banks and Other Financial Institutions Act (BOFIA) 2020 to carry out periodic and special examinations of banks and other financial institutions from time to time.

Customers of Nigerian banks and other financial institutions can access loans should they satisfy the requirements (i.e., terms and conditions) that constitute part of the loan agreement. The requirements differ by credit type and type of financial institutions, among others.

Conditions such as customers operating their accounts with a bank for six months before they are eligible to apply for loans, providing guarantors and collaterals, filling of physical forms, etc., characterize lending by the traditional banks in Nigeria. This makes the process of obtaining loans cumbersome for many individuals who sometimes opt out of accessing the credit altogether. This probably explains why only 2% of Nigeria’s adult population have a loan with a bank, according to EfinA. 

Starting from the 2010s, there have been an increasing number of Fintechs in the consumer lending space to provide easily accessible loans to Nigerians, by leveraging on the existing technology of mobile applications, websites and USSD service. The Fintechs deliver express processing of loan applications, often promising loans in 2 to 5 minutes – from Carbon, to Fairmoney, etc. This is a stark departure from the lengthy loan processing time of the traditional banks. Nigerian banks have now delved into digital lending with banking fintech solutions like Specta by Sterling Bank, Quick Credit by GTBank, etc.

In additional to personal loans, fintechs in Nigeria (like Carbon, EasyBuy and Pay Flexi) also offer the Buy Now Pay Later (BNPL) option, which allows consumers to purchase an item today pay for it in instalments, to their customers. This has further widened the credit options available to consumers in Nigeria. Banking fintech platforms like Specta by Sterling also provide the BNPL option to consumers with PayWithSpecta. 

Available evidence shows that the Fintechs have made notable impact on lending in Nigeria. Between 2017 and 2022, Fairmoney disbursed loans in excess of N117 billion in the Nigerian market, and currently processes more than 10,000 loans on a daily basis. In 2020, Carbon disbursed loans worth N25 billion, up 9.1% from 2019. Fintechs are able to reach these milestones due to certain factors, which include:

• Technology: The lending activity of Fintechs is built on technology. This ensures that the marketing, origination, assessment, disbursement, and monitoring of credit facilities take place online. This is different from the traditional deposit money banks in Nigeria where the loan process is still largely paper-based.

• Data Analytics: Fintech are able to leverage their access to data and their data analytics capability to ascertain the creditworthiness of their customers. According to McKinsey, one of the reasons why fintech lending activity has increased in recent years is because fintechs are able to leverage payment data to determine lending risk more easily and utilize smartphones as a distribution channel. 

• Efficiency in Operations: The elimination of paper and manual processes enables fintechs to operate more efficiently than the traditional banks. This helps to reduce the associated business cost that would have otherwise been factored into the pricing of the interest rates on loans given by fintechs.

• Digital User Experience: Borrowers’ experience with the lending process is entirely digital for most fintechs – from application to funds withdrawal to repayment. This is cost-effective for the fintechs and enables them to scale their businesses more efficiently than the traditional banks.

• Machine Learning: Fintechs use machine learning algorithms to analyse customers transactions, identify trends, and make tailored products recommendations to their customers. This enables them to better anticipate their customers needs and meet them at the point of their needs.

• Funding Models: Fintechs have access to more funding models, than the traditional banks, to fund their core businesses. These models include venture capital, crowdfunding, bootstrapping, angel investors, etc. This enables Nigerian fintechs to raise funds for business expansion (lending inclusive) more easily than the banks.

• Partnerships: Like the traditional banks, fintechs are able to form partnerships to aid their business growth. An example is PiggyVest partnering with Paystack to become their payment processor.

These factors, among others, contribute to the successful inroads of fintechs into the consumer lend space in Nigeria. Nonetheless, banks are still the most popular source of credit in the country, according to KPMG. Fintechs are, however, fast encroaching into the market where the banks operate while extending lending services to the previously financially excluded market. 20% of respondents to the 2021 Nigeria Banking Industry Customer Experience Survey are reported to have accessed loans from digital lenders (fintechs) compared to 39% for banks and 14% for microfinance students.

Loan Strategy by Nigerian Fintechs

Tenor

Loans advanced to consumers by Nigerian Fintechs are typically short-tenored loans. For example, Carbon Finance’s loan facilities have tenors of up to 12 months. Branch’s loans tenors ranges from 1 to 12 month. FairMoney’s loans have tenors of up to 18 months.

Value

The value of personal loans offered to customers by Nigerian fintechs are typically smaller in value, compared to the commercial banks. For example, Carbon Finance offers personal loans of up to N500,000. FairMoney’s loan amounts range between N1500 to N3,000,000. Branch offers loan amounts of between N2,000 and N500,000. Union Bank, a Nigerian commercial bank, in contrast offers personal loans of up to N15,000,000; Specta by Sterling Bank offers personal loans of up to N5,000,000.

Pricing

Nigerian fintechs loans are high-priced loans, i.e., they have relatively high interest rates. For example, the loans offered by FairMoney have monthly interest rates of between 2.5% and 20% (with the equivalent annual percentage rate or APR range of 30% to 260%). Branch’s loans attract monthly interest rates of between 1.5% and 15% (with equivalent APR of between 18% and 260%). 

Licensing

Fintechs such as Carbon Finance, Branch, Fairmoney, MoniePoint, etc. have had to secure microfinance banking licenses from the Central Bank of Nigeria (CBN). Consequently, customers’ deposits with the fintechs are insured by the Nigeria Deposit Insurance Corporation (NDIC).

Online loan process

The end-to-end loan process by Nigerian fintechs, from application to assessment to disbursement, takes place online. This ensures ease-of-use and efficiency. Often, the loans are disbursed in minutes.

Loan Performance in Nigerian Fintechs

TechNext, a publisher of technology and business-related news, reports that loan default rates in Nigeria fintechs is on the increase due to growing economic uncertainty. One of the reasons given for this is the casual approach to loan facilitation which exposes the fintechs to more risks, compared to the commercial banks and traditional microfinance banks.

TechCrunch, an online newspaper focusing on high tech and startup companies, reports that the non-performing loans (NPL) ratio in FairMoney is less than 10%, and that the higher default rate explains the fintech’s high APR of 30% to 260%. For context, the regulatory NPL limit for Nigeria banks is 5%. In essence, the FairMoney had priced the high default rate on its loans into the relatively high interest rate that its loans attract – this is a pricing strategy that is common to Nigerian fintechs.

MicroMoni, a fintech who aim is to provide equal access to financial services for low-income MSMEs, reportedly recorded 40-60% NPL ratio. Similarly, in 2022, TechCabal reported that Kuda MFB, a fintech, recorded a NPL ratio of 69%, which resulted in a high impairment charge of N2.26 billion on its financials and eroded 96% of the interest income earned on the loans.

Carbon Finance recorded Earnings Before Tax (EBT) losses of N1 billion in each of 2020 and 2021, owing to impairment charges of N4.4 billion and N3.7 billion respectively in the two years.

Notwithstanding the considerable loan default rate, the number of fintechs offering credit, payment solutions and other services in Nigeria keeps growing. There are currently more than 200 fintech companies in Nigeria, and the sector keeps getting investments from investors, local and abroad. Furthermore, the sector remains attractive, with Carbon’s revenue rose by 107% from N3.7 billion to N7.7 billion between 2018 and 2021.

 Conclusion

Nigerian fintechs entry into the consumer lending space in Nigeria has been significant. However, with only 3% of Nigeria’s adult population having access to credit (and banks account to two-third of the total figure), there is a need to do more. BusinessDay reports that retail contributes between 10 to 15 percent to Nigeria’s Gross Domestic Product. Getting more funds into the hands of consumers to expand their means of livelihoods and for other uses will be a way to positively impact Nigeria’s economic growth, increase the financial inclusion rate and reduce poverty. Nigeria’s banks can leverage technology, like the fintechs, to assess their retail customers’ transaction dynamics and extend more credit to them in a seamless and profitable manner. In addition, the fintechs need to better strengthen their credit risk management strategies to improve their profitability and enhance their growth prospects.