How would you assess the consumer lending landscape in Nigeria overtime?
Since the advent of credit bureaus, some Nigerian banks have made attempts to grow their consumer loans portfolios. There have been introduction of consumer loan products such as credit card, auto or vehicle loans and mortgage loans. Some banks have also established dedicated desks to serve the Small and Medium Enterprises. We have witnessed some improvements in the number of beneficiaries of consumer loans as well as the total value of loans to the consumer segment of their loan portfolios. However, formal lending to consumers is still relatively very low in Nigeria. Nigeria has 22 commercial banks, over 900 microfinance banks, about 100 primary mortgage banks apart from other non-bank financial institutions, and yet, Nigeria has not experienced the kind of volume of consumer credit you will expect. The total value of loans to consumers by commercial banks is just about 10 per cent of their total loans. This is very low compared with over 40 per cent in South Africa and about 33 per cent in Brazil. Even though we have experienced growth in the value of total loans over time, the substantial value of loans still go to large corporates and high net worth individuals. About 30 per cent of total loans from our banks still go to the oil and gas sector. Less than five million bankable Nigerians are enjoying credit facilities at any point in time from commercial banks. When you situate this against the bankable Nigerians, you will realise that we have not even scratched the surface.
What are the challenges facing consumer lending in Nigeria and how can we tackle them?
As a player in the credit bureau segment of the economy, in what ways would you say the economic recession has affected people’s ability to repay their loans?
Most of the issues that pose to be hindrances to consumer lending in Nigeria are historical, attitudinal and refusal to embrace new lending business models by our banks. One, there has always been the challenge of information asymmetry leading to inability to have proper knowledge of the consumer borrowers. This leads to difficulty in tracing and tracking customers by identity and by location. Secondly, consumer loan transactions are too small and regarded as expensive by the banks because of what is involved in underwriting, managing, tracking and collecting small loans. Very closely associated with this is the adoption of wrong lending models. You cannot use corporate lending model and mindset to go into consumer lending. Consumer lending requires special lending skills, technology and mindset. A major model of bank lending in Nigeria is personal banking and relationship management. This adopts a system of processing individual customer application and applying personal judgment based on personal knowledge of the customer. There is no bank that can grant loans to millions of customers with this model and mindset.
Clearly, recession has adversely affected the repayment ability and capacity of borrowers, both corporate and consumer borrowers. During a recession, people lose jobs, disposable income is compromised because of inflation, interest and foreign exchange rates rise, making it difficult to service on-going obligations, thereby precipitating default. A number of white-collar employees have lost their jobs and most of them, whom the banks had granted loans on the strength of their employment, are now unable to service and repay those loans. Quite a lot of other businesses have also closed shops and their employees are in the labour market. As stated earlier, about 30 per cent of bank loans in Nigeria were made to the oil and gas sector. We all are witnesses to what is going on in the oil and gas industry. The price of crude oil in the international market has declined, and for sometime, the crisis in the Niger Delta region prevented uninterrupted operations. Coupled with the devaluation or depreciation in the value of naira, the exposures by most oil-related companies became humongous. They were unable to service their loans. The total non-performing loans ratio in Nigerian banks have moved to double digit, far away from the CBN’s guided rate of five per cent.
What can be done to change Nigerians’ poor general attitude to loan repayment?
Most people don’t and will not willingly honour their obligations, unless there are compelling reasons, circumstances and processes. This is the situation all over the world. Nigerians are human beings, like any other people in the world. The near absolute compliance in loan repayment we see in some other parts of the world is largely influenced by the structures put in place to support both lending and borrowing and to compel repayment and honouring of financial obligations. It is important to have a reliable and functional credit bureau system where lenders can have unbiased and quality information about most borrowers. It is also important for all borrowers to know how the activities of credit bureaus can affect them, to have access to credit and to deny them access to credit, depending on honouring past loan obligations. The credit bureau system has been in place since 2009 and it has been very effective in curbing the incidence of frauds, serial defaulting, abandonment of loan obligations and cheque kiting. In May 2017, the Federal Government passed the Credit Reporting Act and the National Collateral Registry Act, two legislations which further strengthen the credit reporting system. Before then, the Nigerian banking system has established a unique means of identification of their customers, which is the now popular Bank Verification Number. So, we are in the right direction and it is a matter of time before we can fully address the incidence of willful default. We just have to keep on putting processes, structures, institutions and laws in place to dissuade willful default and make it difficult to have access to credit once you do not fulfill your current or past financial obligations.
At the macroeconomic level, the government needs to do more to empower Nigerians. Where workers are owed salaries for month, there is no way such workers would not default in their repayment obligations. Where the macroeconomic environment is harsh and industries are closing down, and workers are losing their jobs, such phenomenon will increase default in loans obligations. And an economic environment where interest rates are growing and the foreign exchange rates keep on changing would always s lead to poor repayment of loans, no matter the good intentions of borrowers. The government still has a lot to do. Finally, we need to strengthen our bankruptcy laws. Laws and legislation remain one area where we can still have a lot of improvement.
What is your assessment of credit risk management in Nigerian banks.
There has been significant improvement in credit risk management in Nigerian banks over time. Since the era of Emir Sanusi Lamido Sanusi as the CBN governor, the risk management function has moved to the executive floor. Risk management has taken its pride of place in banking and most other regulated financial institutions. There is now robust risk management structures, framework and practices in most of the banks. Governance generally around credit and general risks has been strengthened including at the board level. I will give kudos to the regulators and also the operators in this area.
However, there are significant rooms for improvement. Some new infrastructure and laws have evolved to further help banks to practise robust risk management. Some of the banks have still not adopted full application of credit bureau products and services in their credit risk management. Apart from credit reports, credit bureaus now provide other tools that can be used to properly dimension customer risks and also improve in managing existing credits or even embark on collections. Credit scores are now available to banks, and so are portfolio monitoring tools and products. I believe that the adoption and implementation of the IFRS 9 will further strengthen the risk management practice of Nigerian banks.
Your company, CRC Credit Bureau, is known as a credit assessment and rating company. Will the recent introduction of FICO Score in Nigeria by your firm makes things different?
What CRC Credit Bureau was doing before was that, we had reports of credit history, pattern of behaviour of the person (the borrower) etc in the last two to three years. With the introduction of FICO, everything has now been aggregated into figures. So with three digits, you can get everything. Again, in arriving at scores you can get all the information of the credit history. What volume of loan does an individual currently enjoys? How long have you been borrowing? What has been your payment behaviour? How much loan was taken and how much have you repaid? How much is outstanding? etc. These are some of the issues that have been considered to arrive at that FICO Score. With the scores, most lenders don’t need the reports anymore because the FICO Score is sufficient enough to determine everything.
Does this make the job easier?
Yes. It makes the job easier. It democratises access to credit and also depersonalises credit rates. Lenders can give money to borrowers who have good FICO Scores irrespective of who they are and where they come from. They can also automate the process which makes it faster; which means that within a few fours people can begin to get response about the level of applications they have submitted sourcing for loans. We are going to a stage where electronically loans will be processed in which case even on Sunday you can apply for loan and once the banks have electronic software that can help them to process it, you can have access to loans even on a weekend because all of them would have been automated with this new system.
What is a credit score?
A credit score is a three-digit number that is generated from information in a credit report to assess the creditworthiness of loan applicants. Examples of globally recognised credit scores are FICO Score, Vantage Score 3.0, and scores from Experian, Equifax and TransUnion. For instance, the CRC FICO Score ranges from 300 to 850 with 300 being the lowest score and 850 the highest. The lower a credit score is, the riskier it becomes for the individual to default when granted credit.
Why did your company partner the United States-based Fair Isaac Corporation?
The Fair Isaac Corporation pioneered analytic solutions such as credit scoring that have made credit more widely available. Founded in 1956 in the United States, FICO has over 50 years history of data and analytics experience. Partnering with FICO is in line with our philosophy of working with the best partners in our areas of interest, as we believe Nigeria deserves only the best.
Currently, FICO is the leading analytics software organisation, helping businesses in more than 90 countries make better decisions that drive higher levels of growth, profitability and customer satisfaction. Over 100 billion FICO Scores have been sold to date making it the most used credit score in the world. FICO’s groundbreaking use of big data and mathematical algorithms to predict consumer behaviour has transformed entire industries globally.