With regulatory reforms threatening to curb banks’ traditional sources of profit, lenders will need to create risk assets to maintain and expand their margins. Chief among these will be lending to retail customers and small and medium-sized enterprises (SMEs), which carry significantly higher interest rates than the limited and heavily banked blue-chip corporate market. While such higher-risk lending has been constrained by poor visibility and a general lack of information on applicants, the availability of credit data is gradually improving.
Existing credit bureaux are expanding their coverage just as a new registry for movable collateral is being established. In parallel to the national identification initiative, a new biometric ID scheme is being made available to customers to help crack down on fraud and clear the barriers to financial access.
While these developments should improve visibility and remove a obstacles to reaching the mass market, a handful of unsecured lenders – licensed as microfinance banks (MFBs) – are achieving impressive, if limited, results in uncollateralised lending. Whoever finds the key to mass-market lending, especially to those outside the formal sector, stands to reap windfall benefits and blaze a trail others will have to follow. BUREAU BOOM Since the CBN set up guidelines in 2008, credit bureaux have greatly expanded their coverage, though they remain focused on commercial lending to the formal economy. The three bureaux – Credit Reference Company (CRC), CR Services and XDS – have invested N5bn ($30.5m) in their systems, according to the Credit Bureau Association of Nigeria, and their membership has grown to 100 institutions, including commercial banks, MFBs and mortgage lenders.
Commercial banks are required to share credit information with at least two credit bureaux, while MFBs must share with only one. According to CRC, the bureau with the broadest coverage, as of December 2012 there were 4.02m active loans (held by 3.7m accounts), of which 3.4m were held by individuals (3.2m) and the rest by corporations. This figure is less than one-fifth of the 21.08m credit reports on file at the three bureaux as of June 2013, according to CBN figures.
The lion’s share of credit information is provided to a handful of commercial banks. “We still have a high degree of concentration of lending in the banking sector,” Ahmed Tunde Popoola, CRC’s managing director, told OBG. “Five banks account for over 60% of active credit customers.” The most active lenders are United Bank for Africa and First Bank, which together account for 30% of clients with a credit rating, followed by Diamond Bank, First City Monument Bank (FCMB) and Stanbic IBTC. While the last three are striving to expand information sharing from current clients and extend their reach to a wider range of firms, such as retailers and travel agents, progress has been slow.
Current credit information should benefit from several additions in the near term. Following the examples of Ghana in 2010 and Liberia two years thereafter, the International Finance Corporation (IFC) and the CBN are establishing a registry for movable collateral. While the National Collateral Registry (NCR) was scheduled to open at end-2014, it now is set for June 2015. “Since the collateral registry is mainly aimed at facilitating access to financing for SMEs, we are starting with movable collateral, as this is the main type of goods that such enterprises own,” Ubong Awah, NCR project manager at the IFC, told OBG. “It will then be for banks to decide how far down they want to go, whether to containers, cars or even fridges.” A bill under discussion by the National Assembly would allow banks to accept some movable assets as collateral in addition to the immovable sort lenders usually prefer. “By eradicating the scope for using the same piece of collateral for several loans, the registry is aimed at improving banks’ comfort in lending,” Awah told OBG.
While the collateral registry could open up SME lending, the CBN has forged ahead with a Bank Verification Number (BVN) system, launched in February 2014 in cooperation with the Bankers’ Committee, that should facilitate credit to retail clients. Parallel to the National Identity Management System (NIMS) being piloted by the federal NIM Commission, the BVN scheme seeks to address the chronic problems of theft and fraud. Moses Tule, the director of monetary policy at the CBN, told OBG, “The unique bank ID number will address the issue of multiple identities once and for all.”
The CBN plans to issue ID numbers to all 25m bank customers by end-2015, starting with a pilot trial of 7000. The BVN scheme, contracted for $50m to Germany’s Dermalog Identification Systems, involves capturing biometric data like facial images and fingerprints from customers through banks’ established branch networks. The hope is to improve turnout over previous tries. “The CBN drive to implement the ‘know your customer’ rules in 2012 had only around a 40% success rate, as customers did not go to the branch to check their details,” Popoola told OBG. “To improve success with bank ID registration, the authorities will need to set a cut-off date for being able to conduct transactions.”
To help clamp down on fraud, incoming CBN governor Godwin Emefiele announced in June 2014 that a network of commercial courts would be set up to rule on loan fraud. Meanwhile, the rollout of unique BVNs will make it easier for clients to change banks while preserving their credit history and other records.
While the scheme will cover existing clients, the nationwide NIMS initiative will provide ID cards to all citizens in the largest-ever rollout of a biometric-based verification system with an e-payment dimension. It also ranks as one of the broadest financial inclusion programmes on the continent. To this end the NIM Commission, working with the army and local governments, has established a network of enrolment centres where citizens can register their biometric data. Some 13m cards, complete with chip and PIN, were made ready for the pilot programme, rolled out in August 2014.
Over the long term, the NIMS will be integrated with other databases to created a unified service platform, including driver’s licences, voter registration, health insurance, tax, SIM cards and the national pension system. “The national ID card itself will be an important step in expanding financial inclusion, since it will put a formal financial product in the hands of every Nigerian aged 16 or older,” Omokehinde Ojomuyide, vice-president and head of West Africa business at MasterCard, the scheme’s technical partner, told OBG.
While moves will take time, several smallscale microfinance initiatives have already demonstrated the potential for success. “The potential market for unsecured credit in Nigeria is huge, since less than 0.5% of the population has real access to credit,” Rotimi Oyekanmi, chairman of RenMoney MFB, told OBG.
Operating under MFB licences, microfinance institutions provide loans of N50,000 ($305) to N500,000 ($3050) for up to nine months. The two largest operators are Credit Direct, established in 2007 as a subsidiary of FCMB, and RenMoney, incorporated in 2012 as a subsidiary of Russia’s Renaissance Group, though smaller lenders are also active. Unlike other MFBs, they do not provide bank accounts or collect any deposits from larger entities or high-net-worth individuals.
Through its five branches in Lagos and network of agents, RenMoney lends purely for consumption, with over 18,000 active borrowers as of April 2015. Instead of requiring collateral, it uses an in-house analytic rating system to gauge creditworthiness. Aside from registering biometrics, the scoring system collects over 50 data points, weights each by importance and fine-tunes these to specific conditions in the local market. The company can thus gain a sense of creditworthiness even in the absence of an income, for instance.
The system seems to be bearing fruit. Oyekanmi estimates that only 30% of applicants have a credit rating, yet, as RenMoney has revised its analytics to better reflect local conditions, the firm’s default rate has fallen from 20% to around 10% currently. While unlisted and thus not required to divulge profitability on its $6m in outstanding loans, RenMoney says its higher lending rates offset the impact of non-performing loans by about three times the banking sector average (of 3.7% in June 2013). “The world over, unsecured lending rates are typically multiples of secured lending rates, credit card annual percentage rates are in excess of 20% and mortgage rates are about 4%. This relationship between rates also generally applies in Nigeria,” Oyekanmi told OBG. “Our experience is that, in deciding when to apply for or accept an unsecured loan, people wish to focus less on the rates than on ensuring they can meet the financial obligations.” RenMoney lends to formal and informal workers, and Credit Direct began by focusing on public-sector workers, but in recent years has expanded to private-sector ones.
Although still operating on a small scale, the early success of unsecured lenders reveals the potential for mass-market lending, even in a traditionally opaque market like Nigeria. As commercial banks seek to expand their loan books and create more high-yielding risk assets to boost profitability, such experiences offer important lessons. With new data ecosystems established in 2014, lenders will need to reach beyond their traditional markets to formal and informal workers.