The credit gap in Nigeria is massive, at over 74 trillion. However, there are still not enough loans to go around for everyone who needs them. Beyond the tech to scale, lenders also need the capital to lend.
How many loans could a startup lender possibly give from bootstrapping? Say a lender starts with N10m in savings; that only gets to 100 customers taking loans of N100,000 each. That’s a small business. Lenders need funds to grow. However, accessing funds to finance these loans is a challenge for small and medium sized lenders.
Below, we’ll explore on-lending as a source of funding for lenders and how lenders can access these funds.
What exactly is on-lending?
In the simplest terms, on-lending is giving out loans with a loan.
On-lending describes a situation in which lenders give out loans with borrowed funds. Lending is a viable business after all, and can qualify for loans to carry out their core activity of money lending.
The way this works is that banks provide loans to the non-bank financial institutions (NBFIs) for them to lend to individuals and MSMEs. In this way, the banks are able to leverage the network of these NBFIs to provide access to credit to the weaker economic segments that are unable to secure bank loans. These funds are typically routed to drive growth in weaker sectors of the economy which have the potential to create value if properly resourced.
It’s not news that banks shy away from consumer credit and its associated risks. So, in a country like Nigeria where the informal sector makes up about 60% of the entire Nigerian economy, on-lending gives the wider segment of economic participants a chance at enjoying the benefits that comes with access to loans. It’s also a particularly viable means of driving growth in the Nigerian economy.
How on-lending can transform your lending business
Lenders, especially small and medium sized lenders worry about funding and the resultant stunted growth their businesses have to endure. NBFIs are solving the intimidatingly huge problem that is the credit gap but a lack of resources can frustrate their efforts, and many times, even drive lenders out of business.
On-lending provides the security lenders need to lend and provides the resources that, when utilized efficiently, can help lenders scale their business tremendously. And without emptying their own pockets. On-lending can help you grow your business from just being able to give out N10 million in loans to N100 to being able to give out 10 times that amount. Just think about the ripple effect of that.
Additionally, on-lending allows lenders to benefit from a risk-sharing arrangement so lenders don’t carry the burden of this venture alone.
How to access on-lending facilities
On-lending is very common with Nigerian banks who routinely get funds from the CBN and the Bank of Industry to lend to others. Lenders can also access loans from the Development Bank of Nigeria (DBN) via banks: commercial, microfinance and other financial institutions. All MSMEs; whether start-up or those that have been in operation for a while; involved in productive enterprises are eligible for the loan. You must also be a customer of an established financial institution to qualify for the DBN loan.
Banks who give out on-lending loans to lenders are thorough in their assessment before granting these loans, given the provision for shared risk. The risk acceptance criteria (RAC) can be quite robust and lenders must demonstrate a high level of competence, be managed by experienced and exceptional talent and show a good track record of loan performance to make the banks comfortable about proceeding with the loans.
Banks may expect routine reports to ensure all activities are on track and the lenders are disbursing the loans within the agreed scope of activities.