Lending is a risky business. Lenders can’t “take risk and succeed” their way into giving loans. Secretly, lenders probably wish they could, but the reality is that they run the huge risk of running down their business and having the Central Bank of Nigeria (CBN) clamp down on them for accumulating too many loan defaults.

As a result, lending in Nigeria is known to have a bad reputation. While lenders are simply trying to ensure that the loans they give out do not turn out to be non-performing loans, their approach to achieving this doesn’t favour borrowers; borrowers find the process lengthy, tedious, and expensive.

The typical loan procedure requires a lot of documentation, guarantor and collateral requirements that SMEs struggle to fulfill, and a high-interest rate of about 26% per annum that many borrowers have difficulty paying back.

While this process seems logical and assuring to financial institutions, it does not guarantee that a borrower fulfilling these requirements cannot default. If this were the case, then the country’s non-performing loan ratio should not have gone from 6% to 12% between 2019 and 2020¹.

This approach to credit disbursement does not affect SMEs alone but, also limits the growth and opportunities that financial institutions can access.

How This Approach Hampers the Growth of Financial Institutions

Nigeria has a highly entrepreneurial economy, with an estimated 37 million micro, small and medium-sized businesses (MSMEs). The entrepreneurial economy contributes roughly 48% of the country’s GDP and employs over 60 million people, making Nigeria the largest economy in the sub-Saharan region.

As encouraging as these numbers are, very few businesses successfully obtain loans from financial institutions to fund and grow their business.

According to an article on “developing Africa through effective, socially responsible investing”, “there still exists a ‘missing middle’, which finds it hard to access funds due to the category of funding they belong to.” — PwC Nigeria SME Survey².

This means that financial institutions are missing out on a wealth of opportunities within the MSME sector.

According to The Credit CrunchÂł, a joint report by the Central Bank of Nigeria (CBN) and the International Finance Corporation (IFC), of the 840 MSMEs surveyed in Nigeria, only 31% successfully obtained a loan from a bank or microfinance institution.

The risks associated with credit access in Nigeria stem from many causes.

One of them is the lack of data.

How Lack of Data is a Problem

Nigeria does not have a credit history.

In more developed countries, an individual’s credit history can be used to determine their creditworthiness. However, the lack of credit data history in Nigeria is why financial institutions resort to the tedious methods earlier stated to ensure the loans they give out do not default.

With the recent introduction of identification numbers like Bank Verification Number (BVN) and National Identification Number (NIN), and the compulsory linking of these numbers to bank accounts by the Government, an opportunity has sprung up for better tracking of financial history.

Technology companies have built products that leverage BVN and NIN to call up the financial history of individuals.

This has made it easier for a number of financial institutions and startups to solve this loan problem by using alternative credit scoring models.

Businesses That Leverage Alternative Methods

According to a report by Nairametrics⁴, as of 2018, total microfinance loans to the private sector were just N250 billion. In a recent report, this has doubled within a two-year space due to improved technology, easier processing of loans, better loan recovery methods, increased competition, and a growing class of employees with an appetite for short-term credit.

 

Companies like Credit Direct that give loans to the underserved make up some part of this statistic. Credit Direct uses Decide to dig into a borrower’s credit, spending, purchasing habits, etc., analyses the data to determine their creditworthiness, disburses loans to worthy borrowers, and automatically retrieves loans when due through Direct Debit (DD)

How Decide Works

Decide is a financial analytics API that uses machine learning and artificial intelligence models to analyse the financial habits of borrowers. Decide takes in the bank statement of borrowers through a manual upload or through integrated open-banking tools like Okra, MBS, and Mono. Using this bank statement, Decide performs an analysis to check for the following:

  • Income analysis — to understand how much the borrower earns
  • Cashflow analysis — to understand how money enters and leaves the borrower’s account
  • Spend analysis — to check the borrower’s purchasing habits
  • Behavioural analysis — the risk profile of the customer e.g. gambling
  • Transaction pattern analysis — to check for recurring transactions

The result of this analysis — usually in form of a percentage rating, guides a lender to automatically/manually approve or deny the requested loan.

How Decide Helps Lenders and Borrowers

Lenders want to give risk-free loans, while borrowers want to collect loans instantly. To ensure both parties succeed, here’s how Decide helps:

  1. Reduces loan risk: Decide’s machine learning and artificial intelligence models help lenders to cut down on loan risks. By providing accurate ratings on borrowers, lenders can determine the chances of a loan defaulting or not.
  2. Simplifies the loan process: Decide performs a loan analysis in minutes, which is 10x faster than the typical process where lenders sort through a ton of documents manually. Decide takes all required information like BVN and bank statements, and converts them to digestible information that lenders can use to make better lending decisions.
  3. Ensures quick and seamless loan disbursement: Decide makes loan approval seamless and quick. Lenders have a wallet on the Decide platform through which loans are instantly disbursed to borrowers after an automated or manual approval of a requested loan. Hence, increasing retention and reducing churn for lenders.
  4. Encourages hassle-free debt payment: Decide saves lenders the stress of chasing borrowers to pay back their loans when the due date arrives through a Direct Debit (DD) on the borrower’s account. Decide uses Paystack’s secure payment gateway to process this direct debit.

The lending system should be a classic case of demand meets supply. Borrowers request loans, and lenders give out loans. However, this has proven difficult in the past due to the risks and tedious processes involved. With the development of credit tools like Decide, this problem is no longer a problem.

The wide gap between borrowers and lenders is being bridged by Decide in a way that favors both parties. Lenders can now take risks and “actually” succeed.

 

Set up a 30mins call to see how Decide works.

Resources:

  1. Nigeria’s financial services law ushers in tighter controls of banks, fintechs
  2. Nigeria SME survey
  3. How the use of movable collateral and credit reporting can help finance inclusive economic growth in Nigeria
  4. Microfinance Banks record 82% boom in lending in 2020