This is not news. The lending rule has it that only responsible borrowers should have access to credit. This will prevent instability in the financial system. Such instability could deny genuine borrowers from gaining access to further credit. But the online microloan platforms have democratised lending. They have made access to credit very easy for all Nigerians. This is so glaring during the coronavirus pandemic.
Because of the easy access to credit, a borrower does not need collateral. You don’t need a guarantor to secure a loan of up to N4 million from the online micro-lenders. What a borrower needs is a mobile phone and there are over 10 online micro-lenders in Nigeria who will give a borrower quick cash without demanding collateral.
Some of these players are Paylater, Kiakia, Lydia, Palmcredit and Palm pay. Others that do not require collateral before giving credit include Branch and Grofin. What you need, after the preliminary mobile checks and balances, is for you to repay the loan within four weeks, or at most 12 months. This depends on your credit score. It also depends on your social reputation index.
If this is all you need to secure a loan, why then do Nigerians evade microloan repayment? What is the implication of non-repayment on the financial system? What is the impact on the players? How would this attitude affect millions of genuine Nigerians who survive on loan daily? Before an answer comes, let us trace the roots of this challenge.
If this is all you need to secure a loan, why then do Nigerians evade microloan repayment?
The Nigerian banks would not grant you unsecured microloan. If a bank considers giving you a microloan, it would be served on a gold tray. It would be expensive. The rate would be high. The collateral would be high. But the loan would be low. So, why bother with it? An insider in one of the banks told me that the banks deliberately hike loan conditions because of the high-risk environment where they operate. To corroborate his words, some media reports have it that non-performing loan ratios have crossed 20% for some banks.
That is why the banks have resorted to higher yields. The banks place a premium on the risk they bear when they give out a loan. According to the governor of the Central Bank of Nigeria [CBN], Godwin Emefiele, the figures from the National Bureau of Statistics [NBS] have shown that some Nigerians and corporate organisations owe the banks N1.2 trillion as at the end of June 2020. Well, this huge debt must have influenced the apex bank to issue the Global Standing Instruction [GSI] policy. Next week, I will share what the GSI means to loan defaulters.
Meanwhile, with the gold-crested service from the banks, no young executives would be interested in such a loan. That is why homemakers, artisans, undergraduates and fresh graduates – the major beneficiaries of microloan – have jettisoned the banks. They have flocked to the micro-lenders. As observed, the majority of these loan applicants get the credit for personal use or business-to-consumption [B2C]. Some of the applicants access the microloan to fund needs such as house rent, clothing, school fees, mobile phone data and others. The banks would not fund such “lowly” endeavour.
On the other hand, the microfinance banks cannot help this same group. Another insider in one of the microfinance banks told me that microfinance banks have pegged interest rate at three to five per cent. According to him, this depends on the “loan you are applying for and tenure. Besides, you are also expected to provide a house, a car or something tangible as collateral to secure the loan”.
If you meet these “conditions”, you are not guaranteed a loan. If you get a loan, it is not instant. You see, that is the existing gulf. This schism is what the plethora of online micro-lenders have come to fill. They are bridging this gap by lending to people who do not have collaterals. They are giving unsecured loans to people who do not have high credit scores. But, calm down.
This is a “refinancing crisis.” It is akin to using the resources that legitimately belong to one party to satisfy a legitimate need of another party.
These people – who do not have high credit scores – own very expensive smartphones. These same people, funnily, get instant credit. They get the credit, not from the banks. But from the micro-lenders through their mobile phones! Because of the above scenario, market dynamics have changed. According to research, the micro-lenders charge 14 per cent interest rate per month on an unsecured loan. To verify, a colleague borrowed N8, 500 from one of the operators. He repaid N10, 500. That is N2, 000 extra at 23 per cent interest.
This is high. Is that why the applicants are defaulting? Could that be why the applicants are drowning in debts? Is this why they have devised a crafty means to repay the loan? A source in one of the micro-lenders told me that the company has over 20 employees. The employees are dedicated to monitoring loan defaulters by calling them daily.
This company has discovered that some of the loan defaulters had changed their SIM cards. They tossed their SIM cards in order to evade calls from the micro-lenders. Aha, some debtors who are yet to abandon their SIM cards have applied for another round of loan from another micro-lender. In turn, they used the new credit to defray the previous loan. This practice is popular in Nigeria. It is like borrowing from Paul to pay Peter.
However, research showed that the practice is not restricted to Nigerians only. A report by Financial Sector Deepening Kenya (FSD- Kenya) discovered that many Kenyans are in a web of mobile loans that forced them to jump from one micro-lender to another.
The survey showed that 14% of digital borrowers are balancing loans from more digital lenders. This is a “refinancing crisis.” It is akin to using the resources that legitimately belong to one party to satisfy a legitimate need of another party. This is especially within the same group to solve a problem in a way that makes another problem worse, producing no net gain. And no stability in the system!
That is the news from the micro-lending ecosystem. Who would help sanitise the lending system and ensure that only responsible borrowers get access to credit? Who would help restore stability to the system?
*Olaegbe (firstname.lastname@example.org, Tweet @RarzackO, Skype:rarzackolaegbe)