Driving growth: How Government can boost economy via credit ecosystem

“The importance of credit cannot be overstated. It is the lifeblood that courses through the veins of a nation’s financial system, propelling it forward and driving growth at an unprecedented pace. As Nigeria stands at the precipice of a new era under the stewardship of its latest administration, the critical role of credit in fostering economic prosperity takes center stage.”

Over time, countries have seen economic growth as crucial to raising the standard of living. Between 2007 and 2017, there was an average 3.34% increase in global output. For developing and emerging countries and Sub-Saharan Africa, it was 5.37% and 3.65%, respectively. While Nigeria’s average growth rate between 2007 and 2017 was 5.18%, less than the desired average of 6.4%.

Credit plays an important role in driving economic growth in developing countries like Nigeria by increasing the purchasing power of individuals and households; it generates ripple effects throughout the economy.

No economy can grow without credit, and Nigeria isn’t any different

In other words, every country has had credit contribute to its economic growth, and Nigeria isn’t different. Since Nigeria gained independence, various financial reforms have been implemented due to the country’s need for a sophisticated financial system to achieve sustainable economic growth.

A glance at history reveals a consistent pattern – economic giants like China, the United States, and Europe all experienced remarkable growth fueled by credit. China’s astounding economic transformation, growing its output by a staggering 80 times over a mere two decades, owes much of its success to aggressive financing of its industries. Europe was rebuilt with loans from the USA after WWII. This program called the Marshall Plan, is today considered an economic miracle. And so many other countries have trudged similar paths.

The glaring void: access to credit in Nigeria

Credit is one of the things Nigeria lacks leading to a constantly deteriorating standard of living. Many ventures Governments in other countries finance are not spared a thought by the Nigerian government; the current power has deemed it best to cut financing for essentials like education and health.

Without education financing, many intelligent, eager-to-learn Nigerian youths end up illiterate. This projects looming disaster decades ahead; when the “leaders of tomorrow” remain uneducated, the nation is bound to regress. The recent adoption of a student loan bill marks a promising step in the right direction, despite its slow execution.

Without health financing, hospitals are poorly run with substandard equipment resulting in rising death tolls. So the Nigerian workforce population is likely to experience a decline, which also translates to a decline in tax revenue.

One of the most heart-wrenching casualties of Nigeria’s credit gap is the stifling of entrepreneurial dreams. Funding for Small and Medium-sized Enterprises is acute, which is a massive shame because, without appropriate funding, SMEs cannot grow. This reduces their ability to create jobs, grow revenue and eventually create taxes for the government to run the economy. The dreams of many Nigerians to start a business to improve their living standards crash daily, courtesy of the nation’s almost non-existent credit access.

The road ahead: credit as an economic tool for the new government

The developmental challenges for the new administration are enormous but using credit as a leverage to jumpstart the economy is critical. The administration must depart from conventional methods of government intervention programs and cash transfers, which fraudulent activities and inconsistencies have often marred. Instead, facilitating the rapid development of a credit ecosystem that provides the platform for lenders to grow the economy should be a priority.

Without exhausting all possible options, here are a few things the new Government needs to urgently implement or facilitate:

The Government should continue to steadfastly back consumer protection through the Federal Competition Consumer Protection Commission (FCCPC) while solidifying this support as a fundamental pillar of policy. Despite differences in regulations, the FCCPC and the Central Bank of Nigeria (CBN) should also harmonize their standards for consumer protection. 

It is also imperative that the new administration bolsters lenders with policies and regulations that protect them as well. Regulations such as; expanding the Global Standing Instruction (GSI) mandate to all lenders, irrespective of regulatory jurisdiction, as it significantly derisks delinquency and ultimately reduces risk premiums. Additionally, a concerted effort with the CBN and relevant stakeholders to lower the cost associated with credit bureau data is essential, especially for small-scale lenders who require this data to make better underwriting decisions. 

To offer more credibility to the importance of credit discipline, the Government should elevate the significance of credit bureau checks and make them obligatory for specific tiers of government positions, board memberships and all official assignments. The Financial Reporting Council (FRC) should incorporate this as a part of corporate governance requirements. This sends a resounding message that being a good borrower is a prerequisite for corporate governance.

In the quest to expand credit access and jumpstart the economy, the Government should also collaborate and support the emergence of Lending-as-a-Service platforms like Lendsqr, to facilitate the penetration of lenders (large and small scale) into under-served communities, thus fostering inclusive economic growth. 

Equally important is for the National Communication Commission, as part of its access to financial services, compel telcos to adopt a common standard for data access which would help lenders use these data for alternative scoring. More data means lenders can lend faster, especially to vulnerable Nigerians without sophisticated financial history. Lastly, compelling the CBN to expedite the implementation of Open Banking will help lenders seamlessly extend credit to all. 

Featured article: Why Nigerian banks will never win the consumer credit game

Transformation is challenging, but it’s worth the effort for the Government

Nigeria has a short window to transform its economy and this is significantly challenging for any Government, not just this current administration. However, by collaborating closely with credit stakeholders and implementing well-crafted policies, the Government can lay the groundwork that will allow the emergence of private sector-led credit ecosystem.

This strategic approach holds immense potential to accelerate economic growth. As various sectors gain access to credit, entrepreneurial endeavors can flourish, and innovation can thrive, thereby fostering an economy that benefits all citizens.

Read about how Lendsqr helped Sterling Bank use SnapCash to bridge the credit divide