We spoke to real lenders about the problems they’re facing in their business

Every day, thousands of Nigerian lenders wake up to face a market that’s equal parts promising and precarious. The nation’s vast population, entrepreneurial spirit, and rapidly growing SME sector make it an attractive ground for credit services. 

Over 40 million MSMEs account for nearly half of Nigeria’s GDP, and many of these businesses rely on credit to survive and grow. Yet, for those tasked with providing that credit, the landscape is fraught with challenges that go beyond mere financial transactions.

Lenders—whether microfinance institutions, fintech companies, or traditional banks—are the engines powering a significant portion of Nigeria’s economic activity. But this comes at a cost. 

With Nigeria’s credit-to-GDP ratio still hovering at a low 12.91%, the lending ecosystem is constrained by limited access to reliable data, regulatory inconsistencies, and high default risks. While this creates significant opportunities, it also opens up a set of unique and pressing challenges that are reshaping the industry.

The challenges faced by lenders aren’t new, but they are evolving. Now, let’s look into what those issues are and their impact on lending businesses in Nigeria.

1. Loan recovery is still a thorn in the side of Nigerian lenders

Loan recovery is a headache for almost every lender, no matter who they’re lending to. Whether it’s civil servants, small businesses, or individuals, the challenge of getting money back once a loan has been given is universal. Many lenders have said they would “pay anything” to fix this problem because if you can’t recover loans, you can’t keep lending.

Even with all the new technologies and systems that alert borrowers about upcoming payments, it’s not a perfect solution. Borrowers find ways to dodge these alerts and systems. For example, direct debit, which is supposed to automatically deduct money from a borrower’s account, sometimes fails. Maybe the borrower didn’t have enough money in the account, or there was a glitch in the system. Some lenders try to be clever by using multiple debit mandates on different accounts or asking guarantors to also sign up for debit mandates, but even this doesn’t always work.

Legal recourse, like involving the police or courts, is another option, but it’s costly and time-consuming. One lender shared that they had to spend 3.5 million naira just to recover 5 million. And after all that effort, there’s still no guarantee they’ll get the full amount back. This leaves lenders in a tough spot, as they often face the harsh reality that they may not recover the money they are owed, which threatens their entire business.

2. Demand outstrips supply and lenders don’t have enough capital to catch up

Capital, or simply having enough money to lend out, is another major problem for lenders. It’s like having a car without fuel—you might have everything else in place, but without capital, the business just doesn’t move.

Many lenders are seeing more demand for loans than they can meet because they simply don’t have the cash on hand. This is especially true for lenders who focus on small and medium-sized businesses (SMEs) and consumer loans, where the need for credit is high. When lenders don’t have the capital to give out loans, it hurts their reputation, frustrates customers, and can drive them to competitors.

Some lenders try to bring in external investors to fill the gap, but that’s not always easy. Investors see Nigeria as a risky market, and they often demand high returns. This means the lenders have to charge higher interest rates to borrowers to cover their own costs, creating a vicious cycle where loans become too expensive for borrowers.

Some lenders have turned to creative solutions, like peer-to-peer lending platforms, where individuals or businesses can lend directly to borrowers. But even these platforms haven’t been able to meet the growing demand for loans. The market is expanding fast, and the money needed to fuel that growth isn’t keeping up.

3. Blockers in credit scoring and reporting

Lenders rely on credit scores to figure out whether someone is likely to pay back a loan, but in Nigeria, the system isn’t always reliable. The credit bureaus that track people’s borrowing habits often don’t have the full picture because not all lenders report their data, or the data they provide is incomplete or outdated.

This puts lenders in a tough spot because they’re essentially flying blind. They might approve a loan for someone who looks good on paper but has a history of defaults that wasn’t properly reported. This leads to higher default rates and makes lenders hesitant to approve loans, especially for new customers they’re unfamiliar with.

While there are credit scoring tools available, many lenders say they don’t work well enough to cover the wide variety of borrowers they deal with. As a result, they often have to rely on manual methods to assess a borrower’s risk, which is time-consuming and not scalable. This inefficiency ultimately limits their ability to grow and serve more customers.

4. Technology is a nice to have but it’s expensive too

Lending technology is expensive, and while it promises to make things more efficient, many smaller lenders struggle with the cost. They know they need technology to keep up in the market, but the high price tags can make it feel like an impossible investment. For example, implementing an advanced loan management system or a predictive tool for defaults can be a huge financial burden, especially when lenders are already dealing with tight cash flow.

In Nigeria, much of the lending is still done offline, so there’s a question of whether the technology available is really suitable for the way loans are issued here. Some lenders feel like they’re being forced to adopt solutions that aren’t a perfect fit for their business models, which makes the investment feel even riskier.

Without the right technology, it’s tough for lenders to scale their operations. But without scaling, they can’t afford the technology that would help them grow. It’s a catch-22 that many lenders are stuck in. As such, many end up using a “patchwork” approach, combining digital tools with traditional methods to manage their operations.

Now that we know, what are we doing about it?

Lenders, financial institutions, and the broader fintech industry are not standing still. The challenges around loan recovery, capital access, credit scoring, and tech adoption have forced lenders to rethink their strategies and push for more collaborative solutions.

Lenders are pairing alternative data sources with credit bureaus for more comprehensive credit assessments, using P2P lending platforms to plug the capital black hole, taking advantage of Lendsqr’s free loan management system, etc. 

The challenges are clear, but so are the opportunities—and as these issues are addressed, the lending industry will continue to transform, opening up even more possibilities for growth and inclusion.