Consumer lending is basically loans to individuals, like me and you, to purchase goods and services. Of the forms of consumer lending, credit cards are perhaps the most popular.
Yet, if you’re a Nigerian reading this, that last sentence is not very relatable, mostly because not only is consumer lending uncommon in Nigeria, credit card penetration is so low you have probably never seen a Nigerian with a credit card before. Given the massive size of the Nigerian economy, our stats on personal loans and credit cards is very shocking.
There are even more. In 2020, lending to consumers fell by 11% over two months, primarily driven by the pressure to curtail bad loans. While this can be explained away by the COVID-19 pandemic, there is a lot we can draw from this.
The first is that banks’ legacy credit risk approach has made it averse to improving consumer lending for years even though the CBN is forcing them to lend more. There’s also the fact that for the banks, there are easier ways to make money than consumer credit.
Consumer credit is a tough bull to ride
Today, trying to buy a phone or any accessory in Nigeria will require you to put down the full payment in cash. It is difficult to find deals that help you spread the payments in installments. And if you could find one, they will scalp you with an ungodly interest rate.
In 2017, a CBN report showed that only 5.4% of Nigeria’s adult population had access to credit. Despite the financial inclusion strategy the CBN is implementing, that number has grown at such a slow pace it makes a crawling snail look like a speeding demon.
In 2018, it was 5.5% and in 2019, that figure was 6.2%; the credit gap in the country is astounding and it is at odds with the fact that Nigeria has big banks with impressive coverage.
For banks with millions of customers, solving this problem seems like a low-hanging fruit. They have a massive heap of transaction data, it should theoretically mean that banks can partner with Original Equipment Manufacturers (OEMs) to provide payment deals on phones for instance.
That hasn’t happened yet and it is not for lack of trying in some quarters. While a few banks have attempted to provide consumer credit, the pricing and interest rates often discourage people. To be fair to them, these banks take risk of default into consideration before they give these loans.
Where the rates are reasonable, the problem may then become access. For instance, one of the reasons credit card penetration is low is because the banks don’t provide access to it. For years, credit cards were only available to certain classes of working people.
To be fair to the banks, their reluctance to ride the bull that is consumer credit is based on the fear of bad loans. Yet, their reluctance has real economic consequences. When consumer credit isn’t growing, it impacts economic growth because consumption reduces. Infact, there’s a direct correlation between consumer credit and gross domestic product (GDP).
Now that we know how important consumer credit is and why it is an important problem, why are banks ill-qualified to solve the problem?
Institutional barriers to lending
Like everywhere else in the world, there are a lot of institutional rails that guide retail lending. One of those rails is using credit history to determine credit worthiness. In Nigeria where credit bureaus were first set up in 2003, there is still a paucity of data that means that banks cannot make lending decisions, effectively shutting millions of people out.
According to Tunde Popoola, CEO at CRC Credit Bureau Limited, “From just over 1000 customer base in 2009, repository records show that it has grown to about 17 million in Nigeria.”
17 million records means that the majority of the population can not hope to get a bank loan in the near future. Another institutional barrier borne out of the need to manage risk is our supposedly tough Know Your Customer (KYC) procedures as well as the need to collateralize loans.
The truth remains that only a handful of Nigerians can put up the kind of collateral that will give them access to bank loans. The banks will insist that they cannot take away these requirements because they are already dealing with fairly high non performing loans.
But that refusal to make changes is symptomatic of the inflexible structure of the banks and is a pointer to why they cannot solve the consumer credit problem.
Legacy structure of banks make innovation difficult
Nigerian banks report huge profits every year and most of this is down to the fact that they’ve become pretty good at doing a narrow set of things very well: They lend to mostly large corporates and commercial companies. If you are rich, they could throw you some loans as well. But if you are the average man on the street, then .
A few years ago, they took advantage of high interest rates and focused on buying treasury bills. Yet what they have not done in all those years is figure out how to crack the riddle of consumer lending.
Despite the fact that the Central Bank of Nigeria has increased the lending to deposit ratio to 65%, innovation hasn’t come easily to the lending efforts of many banks. While digital lenders are constantly trying to improve the data that underpins their lending decisions, banks sit on large troves of data that they arguably could use better.
One of the reasons why digital innovation has been so difficult for banks is their structure. A rule change by the CBN forced banks to focus on risk management thanks to the 2009 financial crisis.
The institutional response to the crisis was to ask banks to narrow their focus. Although they are now breaking out of that mould by forming holding companies, their thinking hasn’t changed much.
They still retain many of the old rules with stringent conditions for loans that favor elite customers, ignoring the vast size of Nigeria’s informal market. Without recognising the huge size of the informal market, the banks are not only leaving money on the table, they are showing they don’t understand the problem.
Alternative lenders show that banks don’t care about retail lending
Despite the excuses banks give, the approach of digital lenders show that the banks are simply taking the easy way out. Their lending to corporates as well as their large loan sizes to companies they think are too big to fail reflects their thinking.
They also lean heavily on tactile lending which is pretty difficult to scale. If you need to meet everyone you want to lend to, you cannot realistically fill the massive gap in the Nigerian market.
Instead, leaning on machine learning and algorithms like the digital lenders are doing is what will make the difference. In fact, lenders like Migos are selling products to banks to help them make better lending decisions.
That’s just how much of a headstart that the lenders have, with many of them having their own proprietary algorithms and being at a point where they make dizzyingly fast lending decisions.
For instance, in the same year 2020 when consumer lending by Nigerian banks fell, digital lenders like Fair Money and Carbon reported their highest ever loan disbursements. Basically, while banks and digital lenders faced the same problem — a pandemic — only the digital players were nimble enough to still work around that challenge.
The digital players are also talking a lot about providing access to informal markets, proving that they understand where huge markets lie. This is not to say that digital players are also without their own struggles.
But they are in a better position than the banks because they have been iterating their solutions for the last five years. Realistically, it could take another 5–10 years for even the smartest of banks to catch up.
Until they change their core DNA, which is inflexible, they will keep playing catch up even if they launch shiny new products every year.
Banks will lose the retail lending space to fintech lenders
Despite all of this, one thing is clear, that lending will continue to grow massively, because more alternative lenders will join the fray and innovation will force players deeper into the market. Some of these lenders will be powered by cloud platforms such as Lendsqr which removes the technology barrier to lending at scale.
So here is how it is all likely to play out; banks would own the corporate and large commercial loans while alternative lenders will grow the retail lending space.
This bifurcation will result in a larger retail lending space and in a few years, the banks may start to feel green with envy about the big chance they missed with retail lending.
It will be interesting to see if the CBN, which has historically protected the banks, would produce some regulation to help them when it happens but one thing is clear, banks have lost the retail lending game and not even regulations can change the trajectory of the market.