5 issues that lenders have with Nigerian credit bureaus

Before credit bureaus were created in Nigeria, banks operated as lone wolves, reluctant to share credit information with third parties. They also didn’t have ways of knowing if a borrower had unpaid loans with other banks/financial institutions. As such, borrowers could easily secure multiple loans and cart away funds from different institutions without the lenders knowing.

So, lending was risky, chaotic. In fact, the magnitude of non performing loans could make the devil weep, especially in the 1980s and 1990s.

The state of lending in the 1980s and 1990s

1987 recorded a total of N4.77 billion as non performing loans, a significant jump from N273 million recorded in 1981. As economic conditions worsened and banks continued to face defaults on loans, the country plunged further into a banking crisis in the 1990s.

When the total loans and advances in1990s was about N30bn, N12bn, representing approximately 44% of the total, was nonperforming.

In 1995, the percentage of non performing loans stood at 60.82%, and then 55.69% to 68.87% to 79.77% in 1996, 

Between 1989 and 1996, the number of distressed banks increased from 8 to 25. CBN had to revoke the license of 5 banks in 1994, 1 in 1995, and took over management of 17 distressed banks in the same year. 

All because these banks were unable to manage the rising levels of non-performing loans which made up a substantial portion of their portfolios.

Credit bureaus saved the decade, what went wrong?

But the tide began to turn when CRC Credit Bureau Limited, CreditRegistry (officially registered as CR Services (Credit Bureau) PLC) , and FirstCentral Credit Bureau (formerly XDS Credit Bureau Limited) were licensed in 2008 and the banking sector immediately felt their impact. For the first time, banks, OFIs, and moneylenders could access detailed credit histories of borrowers. Defaulters could no longer hide, and lenders could make more informed lending decisions.

This newfound confidence in the lending sector greatly reduced non-performing loans and Nigeria ranks 15th place globally on the Getting Credit Indicator. As of June 2024, the rate of non-performing loans (NPLs) in Nigeria’s banking sector was reported at 3.9%, a decrease from 4.8% in April 2024.

Nigeria’s ranking on the Ease of Doing Business improved to 131st out of 190 countries, thanks to the efforts of the Presidential Enabling Business Environment Council (PEBEC) and the crucial role played by credit bureaus. By December 2017, the total value of loans granted in Nigeria had surged from N7 trillion to N16 trillion. It showed lenders were beginning to trust the credit system more, and banks have expanded their loan size by 57%.

Despite these remarkable strides, Nigerian lenders are beginning to voice their concerns. The very tools that once empowered them are now becoming sources of frustration. The three main credit bureaus in Nigeria, once praised as champions of transparency, now face scrutiny from the very people they were designed to support.

What went wrong?

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1. Lenders cannot depend on incomplete/outdated credit histories

Credit bureaus are only as effective as the data they receive.  These bureaus rely on banks and moneylenders to submit accurate and complete credit information, which is regulated using the Common Data Template (CDT). 

This template, developed by the Central Bank of Nigeria (CBN), the International Finance Corporation (IFC), and the Credit Bureau Association of Nigeria (CBAN), was launched in 2016 to standardize the data collection process. Data submission is typically done at least once a month, with updates as needed. But, problems arise when data providers (banks and moneylenders) submit incomplete information.

But, the system does not always flag these incomplete submissions, leaving gaps in the credit histories presented to lenders.

Also, when updates are left on an as needed basis instead of in real time, it is possible that some borrower profiles are not revisited at all.

When the puzzle is incomplete, lenders cannot get the full picture of just how creditworthy a borrower is. As such, they are left with using intuition to decide, which isn’t much to go on with because people are natural born liars who would only let you see what they want you to see.

2. Neither can lenders depend on mismatched/duplicate credit records

Data entry is a long and manual process of filling forms and fields which leaves plenty room for significant human error. The credit reporting system in Nigeria does not always flag duplicate records. Since the data is manually entered, it can easily result in duplicate entries or mismatched records. 

This can happen when small discrepancies like name variations, errors in ID numbers, or differences in how addresses are recorded lead to multiple entries for the same borrower.

For example, if someone is recorded as “Lagbaja A. Doe” in one bank and “Lagbaja Doe” in another, the system may treat these as two different individuals, or worse, merge incorrect data under one profile.

3. Credit bureaus are not operating in sync

Lenders are always advised to use multiple credit bureaus to cross-check borrower data and when it doesn’t align, they are forced to make judgment calls. Ideally, these bureaus should operate in harmony, providing consistent and up-to-date credit reports regardless of which bureau a lender consults. But, in practice, it’s often not the case.

But, each bureau collects and processes its data independently, which means sometimes the credit reports they generate might differ. 

For instance, one bureau may show an all clear credit report and good repayment history, while another shows the borrower is still owing 2 loans. So, which one would lenders trust as updated or missing critical information?

This lack of coordination means that a borrower could have different credit scores or reports depending on which bureau’s information is being used by a lender. And as a result, lenders are left with an incomplete or conflicting view of a borrower’s creditworthiness.

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4. Pulling multiple reports from credit bureaus is financially draining

Again, lenders are advised to use multiple credit bureaus to run credit checks on borrowers. But, who is helping them incur the costs of pulling multiple reports on one borrower?

A single report might not seem too expensive in isolation. But, the costs add up quickly for financial institutions that process hundreds or thousands of loan applications each month.

The issue is even worsened when the reports from different bureaus do not align. So, it seems lenders are being punished for carrying out thorough due diligence.

5. Many borrowers still lack credit histories despite their growing numbers

CreditRegistry claims to be Nigeria’s largest credit bureau. CRC Credit Bureau boasts of having the credit scores of 33 million Nigerians out of 233,483,906. FirstCentral is playing its part as well. But, despite the establishment of credit bureaus and the increase in data submissions by banks, OFIs and moneylenders, a significant portion of the population remains “credit invisible.”

This issue stems from a combination of factors. First, a lot of lenders still operate under the radar especially in rural areas. So, a lot of their lending activities go unrecorded, leaving borrowers without an official credit history.

The challenge is also compounded when even recognized institutions/ lenders do not submit data regularly. Even though they are required to do at least once a month. Until these gaps are addressed, a large segment of Nigeria’s population will remain excluded from formal credit.

Are credit bureaus doing more harm than good?

We cannot deny the fact that credit bureaus are still a useful line of defense. They provide vital credit information that can prevent risky lending and protect against defaulters and fraudsters.

But, if efforts are not made to fix the gaps these issues have created, the very mechanisms designed to protect lenders might be the chains that bind them. They would keep hurting their chances of survival in an already harsh lending environment