Rethinking consumer credit financing in Nigeria: A call to action

From the bustling streets of Lagos to the vibrant markets of Kano and Aba, to the buzzing business hubs across Nigeria, one thing is undeniable – the energy and aspirations of everyday people striving for financial security and the hopes of a better life. Yet, in the middle of all the beautiful chaos, one obstacle stands in the path of progress: the struggle to access credit facilities.

Accessing credit from traditional financial institutions for the average Nigerian can be tough. Salary earners, entrepreneurs, and traders face similar barriers to credit, hindering their ability to seize opportunities at the right time. However, this is an age-long challenge with many sides to it.

Financial Institutions are burdened by increasing non-performing loans (NPLs) and usually tread cautiously in extending credit to a populace grappling with economic uncertainties.

In an economy where improved access to credit facilities can open up new economic opportunities, it is important to reimagine the foundations of consumer credit financing and how it can work better for lenders and borrowers.

We need to address the limitations of existing lending systems and embrace innovative solutions that foster inclusivity, empower individuals, and propel economies forward.

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The Struggle to Access Credit Financing

Let’s consider the predicament of Chukwuma, a resilient market trader whose entrepreneurial spirit drives his ambitions to expand his business. Denied access to credit by traditional institutions, he is left to navigate the risky terrain of the informal lending system, where exorbitant interest rates threaten to suffocate her aspirations.

Then there is Adesuwa, a middle-aged and hardworking salary earner whose dreams of homeownership are dashed by the stringent lending policies of her bank. Despite her consistent income and good credit history, she finds herself excluded from accessing a mortgage loan, trapped in a cycle of financial stagnation.

And what of Mohammed, a former bank employee whose access to credit vanishes upon resigning from his position? Left without an alternative, he watches helplessly as his aspirations for entrepreneurship remain out of reach, stifled by the rigid structures of the banking sector.

Non-Performing Loans, Threat to Financial Stability

Banks are the pillars of the financial system globally; they create stability within the ecosystem with diversified portfolios and good risk management. However, NPLs remain a constant concern that threatens the health of banks, making them cautious lenders, especially to consumers and small businesses.

Strength of Portfolio Diversification

Central to the resilience of financial institutions is their ability to maintain a diversified portfolio – an essential pillar of risk management and growth. Banks can extend credit across a spectrum of sectors and industries, spreading risk and mitigating the impact of default events, fintechs cannot; by diversifying their loan portfolios, banks insulate themselves from sector-specific shocks and market volatilities.

Moreover, the strength of their customer base affords banks data-backed insights into market dynamics and consumer behaviour. With these, they can design lending strategies to align with evolving market trends that optimize returns and minimize risk.

This agility enables banks to navigate complex economic landscapes to capitalize on emerging opportunities while hedging against potential threats.

Risk Management: The Guardian Shield

Banks thrive on robust risk management by combining policies that identify, assess, and mitigate threats across all operations. From credit risk to liquidity, they employ an approach that quantifies and manages these exposures.

Their risk management framework shields them from the downsides of NPLs, along with a combination of credit assessments and careful analysis, to safeguard their funds This is one of the ways banks build financial resilience and trust with depositors, investors, and regulators.

 Savings Accounts: The Bedrock of Stability

Where Fintechs struggle for deposits, banks benefit from a deep pool of customer deposits, giving them a stable and reliable source of funding for lending. By leveraging savings accounts as a primary funding source, banks can raise funds for loans at favourable interest rates, reducing their cost of funds and enhancing their lending capacity.

This relationship between deposits and lending forms the bedrock of traditional banking operations, that drives stability, liquidity, and trust within the financial system.

Traditional Players’ Struggle, Opportunity for Fintechs

Banks, the cornerstones of a healthy economy, face a sticky situation; NPLs make them cautious lenders, prioritizing risk control over wider credit offerings. NPLs eat into profits through loss of funds and provisioning requirements, forcing banks to tighten their belts on credit access for individuals and small businesses.

This cautious approach, though understandable, creates a gap in access to credit, especially for those who need it most.

Caught between a rock and a hard place, banks grapple with the Central Bank of Nigeria’s push for more consumer lending with stringent loan-to-deposit ratio (LDR) guidelines and punitive measures for non-compliance. However, stricter rules haven’t solved the problem.

For banks, there is a struggle to balance the need for profit and the need to fuel economic growth. The solution? Innovation. Banks need new ways to manage risk and offer credit responsibly to create a thriving credit system that benefits everyone.

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Fintechs: Driving Innovation Amid Challenges

While traditional banks are not motivated to bridge the consumer credit gap, Fintechs have emerged with the commitment to democratize financial services and access to credit,  headfirst into the wide ocean ignored by banks.

Fintechs now face the ‘dark shadows’ of non-performing loans trying to innovate the lending system. Despite their best efforts to deliver seamless lending processes, they are also trapped in the same web of risk that plagues traditional banks, because they rely on the conventional credit decision pillars, built on the broken foundation of risk-based pricing models. In their quest to streamline the lending experience, they unintentionally sustain the same flaws that undermine the integrity of the credit system.

Compounding this is the harsh reality that Fintechs lack access to the cheap deposits enjoyed by banks, depriving them of a stable and reliable source of funding for loan origination. Forced to raise deposits at rates far above the Treasury Bill rate, fintechs grapple with exorbitant costs of loan origination, eroding their profitability and limiting their capacity to scale.

In the face of these challenges, Fintechs are confronted with a stark choice: ‘adapt’ or ‘perish’. To thrive in a landscape littered with risks and uncertainties, they must embrace new thinking around the foundations of credit decisions and risk management. Charting a new course – rooted in innovation, resilience, and foresight – can help fintechs navigate the treacherous waters of consumer lending to emerge stronger and truly transformative.

The Flaws in Traditional Credit Decision Systems

Reliance on credit bureau data and financial transaction analysis gives a false sense of security in consumer lending.

For years, financial institutions have relied heavily on credit bureau data and financial transaction analysis to make credit decisions. However, this sole reliance has proven to be misguided, as these data points often fail to accurately predict creditworthiness when used alone. In Nigeria, where the credit ecosystem is rife with inconsistencies and manipulations, the very foundation of our credit infrastructure is challenged.

The credit bureau report, believed to be a reliable indicator of creditworthiness, is marred by its lack of real-time and manual updates making it susceptible to manipulation. Financial Institutions are required to upload records at their discretion monthly, making the information provided lag behind real-time financial activities; this delay undermines the timeliness and reliability of credit decisions.t.

Similarly, financial transaction analysis, another pillar of the traditional lending system, is fraught with vulnerabilities. Customers can easily manipulate their transaction history to present a distorted picture of their capacity and creditworthiness. This manipulation further erodes the reliability of lending institutions’ risk assessments, making them vulnerable to defaults.

In regions where Financial Institutions rely heavily on credit bureau data and financial transaction analysis for credit decisions, robust credit infrastructures and policies exist to ensure the system functions optimally.

In such environments, heavy penalties are imposed to deter loan defaults and likewise, consumers are incentivized to maintain positive credit behaviour for continued access to benefits tied to a good credit standing.

This encourages responsible borrowing and helps to ensure that loans are not defaulted on. It also provides lenders with a measure of security, as they are more likely to receive payment on loans made to people with good credit.

Consequently, in Nigeria where the regulatory framework and enforcement mechanisms are less robust, credit bureau data and financial transaction analysis may offer insights into a borrower’s creditworthiness, they cannot be relied upon as sole determinants of credit risk.

The Downsides of Risk-Based Pricing

Also, the current risk-based pricing model, though logical, perpetuates a cycle of debt and delinquency. When high interest rates are prioritized over borrower integrity, financial institutions inadvertently incentivize default, undermining the basic principles of sound lending practices.

In essence, the flaws inherent in traditional credit decision systems undermine the integrity of the credit ecosystem, creating inefficiencies and limiting economic growth. To truly address the challenges of consumer credit in Nigeria, we must confront these systemic weaknesses by embracing innovative solutions that prioritize fairness, transparency, and inclusivity. This is how we can unlock the full potential of consumer credit as a catalyst for prosperity and empowerment.

Rethinking Consumer Credit Finance in Nigeria with Character-Based Lending Technology

There is an urgent need to reform our credit system to drive economic inclusion and access. As we confront current systemic issues, we must also look towards new, innovative approaches that fix the limitations of the existing system.

Initiatives like reforming credit bureau systems and incentivizing responsible borrowing are critical steps toward fixing the traditional credit access system, but these alone cannot address the systemic barriers that exclude a significant portion of the population from accessing credit.

The Promise of Character-Based Lending

Character-based lending technology is critical to revolutionising consumer credit finance in Nigeria, unlike the traditional systems, it focuses on a wider array of alternative and inclusive data points like payment histories on utility bills, rents, spending patterns, and other psychological insights – factors that conventional credit assessments often overlook.

This innovative approach not only extends credit services to underserved segments of the population but also fosters a more robust economic environment by transcending the limitations of traditional credit scores and financial history.

Crendly is at the forefront of emphasizing a borrower’s character and behavioural patterns as crucial indicators of creditworthiness through its proprietary character-based lending software, powered by AI, which introduces “Crendly Score” – a dynamic rating system that evaluates non-traditional data points to assess a borrower’s reliability and potential more accurately.

Crendly’s character-based lending approach not only enhances broader credit access but also reduces default rates.

By leveraging sophisticated algorithms, Crendly can offer a more precise understanding of each borrower’s unique situation. This results in fairer lending decisions, which democratize financial access and promote economic participation. More importantly, it drives empowerment and economic growth, creating a financial system where everyone has the opportunity to thrive.

Nigeria’s consumer credit system is at a crucial juncture. Traditional banks, burdened by non-performing loans (NPLs), struggle to meet the needs of many Nigerians. Fintech companies offer innovative solutions but face significant funding limitations and rely on flawed credit decision systems.

To unlock Nigeria’s true economic potential, a reformed credit infrastructure is essential—one that leverages technology, character-based lending, and responsible borrowing practices.

Building a Reformed Credit Infrastructure

To transform consumer lending and drive economic inclusion in Nigeria, we must address and fix the systemic deficiencies plaguing our credit bureau system. While credit bureaus serve as invaluable repositories of financial information, their effectiveness is often hampered by outdated practices and inadequate data integrity measures.

We need a system grounded in the principles of integrity, accountability, and innovation.

Real-Time Updates and Comprehensive Reporting: At the core of this reform is the enforcement of real-time data updates and comprehensive reporting mechanisms. In a world where financial transactions unfold at lightning speed, relying on outdated, batch-based reporting systems is no longer tenable.

We must shift towards real-time updates for loan disbursements, repayments, and default statuses, ensuring that credit decisions are based on the most accurate and up-to-date information.

Traditionally, only financial institutions have been authorized to furnish data to credit bureaus, leaving alternative lenders and fintechs on the sidelines. By democratizing access to credit data and encouraging participation from all stakeholders, we can enrich the credit ecosystem and make it more inclusive and robust.

Incentivize Responsible Borrowing: To encourage responsible borrowing practices, a balanced approach of incentives and penalties is crucial. Enforcing strict penalties for loan defaults can deter reckless borrowing behaviour and cultivate a culture of financial integrity. Stringent penalties for loan defaults send a clear message about the importance of honouring repayment commitments and upholding the integrity of the credit system.

Beyond punitive measures, we must also incentivize responsible borrowing by rewarding individuals with a track record of timely repayment and prudent financial management. Integrating the Bank Verification Number (BVN) and the National Identification Number (NIN) into the credit infrastructure can enhance this approach.

Defaulters can be denied access to their accounts across all financial institutions, fintechs, payment service providers, and telecommunication services, acting as a strong deterrent against loan defaults. Meanwhile, borrowers with high credit scores can enjoy preferential loan terms, encouraging them to maintain positive credit habits.

Embrace Character-Based Lending: Our reality is that the majority have been excluded from the credit system for too long and they have no credit record with the credit bureau. To truly democratize access to credit and foster a credit economy, we must shift focus towards character-based lending models that prioritize fairness, inclusivity, and long-term sustainability.

The future of credit financing in Nigeria lies in embracing innovation and character-based lending. By moving beyond the limitations of traditional credit decision systems, Crendly’s technology can democratize access to credit, foster economic inclusion, and drive sustainable growth.

This approach not only mitigates the risk of defaults but also creates a more equitable financial landscape, where credit becomes a tool for empowerment rather than exclusion. With a reformed credit infrastructure, Nigeria can unlock its true economic potential and ensure that all citizens have the opportunity to participate in and benefit from economic growth.