|
Getting your Trinity Audio player ready...
|
Adebayo Kolawole, 36, is manager of a Lagos-based business consulting firm who has always had his reservations about Nigeria’s weak and fragmented consumer credit economy.
Kolawole, who schooled and worked for a combined four years in the United States, says it’s bizarre that most Nigerians must pay 100 percent out of pocket for everything from automobiles to healthcare.
He says it’s a sign of a non-existent consumer credit economy that it’s debit cards you find in working-class Nigerians’ wallets, and rarely a credit card.
While it will take time to fully bed a consumer credit culture in Nigeria due to some traditional challenges, there are signs that the building blocks are being laid by commercial banks under pressure by the Central Bank of Nigeria (CBN) to open the taps on lending.
Consumer credit is a personal debt taken on to purchase goods and services. A credit card is one form of consumer credit. Although any type of personal loan could be labelled consumer credit, the term is usually used to describe an unsecured debt that is taken on to buy everyday goods and services.
Consumer credit or what most Nigerians refer to as “Pay-Day” loans is what most banks have started offering since the CBN started forcing them to grow their loan books last year.
Banks sent out emails and followed them up with visits to millions of working-class professionals at their offices to sell their pay-day loan products. While that has somewhat reflected on their loan books, the CBN wants more.
Since mandating banks to lend at least 60 percent of their deposits, the CBN has returned to raise the bar to 65 percent and could even raise it higher this year.
That has seen the banks put in more work to grow loans and retail pockets offer the fastest route to achieving that and avoiding the CBN’s hammer, according to Aderonke Akinsola, a banking analyst at Lagos-based investment bank Chapel Hill Denham.
The competition for retail pockets among the banks is now so intense that some have started reducing the cost of lending.
Nigeria’s biggest publicly listed bank, Guaranty Trust Bank, sent out emails Tuesday, Jan.14, saying rates on its Quick Credit product had been reviewed downwards to 1.33 percent monthly from 1.75 percent.
“This means that the effective interest rate on quick credit is now 16 percent per annum,” GTBank said in the email to clients. This is coming from a peak of around 25 percent.
Analysts expect other banks to follow suit in reducing the cost of credit to customers as competition for retail pockets heat up.
As a result, working-class Nigerians are now weighing up the possibility of targeting relatively cheap personal bank loans amid the drastic fall in lending rates.
“I am tempted to borrow some money to get a second car for use on the car-hailing app Uber as a way of making some income on the side,” Ade Akinowo, a civil rights lawyer told BusinessDay.
Although it comes with its risks, the impact of making consumer loans more accessible would be transformational on households and the economy as it stimulates consumption.
Akinsola of Chapel Hill Denham said a lending boom could yet drive non-oil sector growth this year and that would be a welcome boost for an economy still reeling from a recession in 2016.
“Credit to the private sector has already started improving since the CBN’s aggressive lending push and that growth shows signs of continuing this year which could be positive for economic growth,” Akinsola said.
“It’s the CBN’s LDR policy working magic here,” Akinsola added. “The policy has helped cut out traditional distractions for the banks and they are now forced to look for opportunities outside government borrowing and oil and gas lending.”
On 7 January, the CBN circulated a directive that Nigerian banks must maintain a minimum 65 percent loan-to-deposit ratio (LDR) by March 2020, or CBN will impose a 50 percent cash reserve requirement (CRR) equal to the lending shortfall on deposits.
Consumer lending in Nigeria is hampered by weak household credit record history and higher incidence of nonperforming loans
The CBN in July 2019 imposed a minimum LDR of 60% for Nigeria banks and in September 2019 increased that to 65%. As of October 2019, the system’s LDR ratio was 61.9%, according to the latest CBN data, indicating that some banks do not yet meet the requirement.
While the CBN directive has forced banks to open the lending taps- which holds benefits for the economy as individuals and businesses have better access to credit, it may have some downsides.
Peter Mushangwe, a banking analyst at credit rating agency, Moody’s Investors Service, said the CBN’s directive may do more harm than good for the economy in the long term.
Although gross loans and advances increased 4% by October 2019 from July, when the regulation took effect, loans will need to grow by around NGN690 billion (about 5% of gross loans as of 31 October) to meet the minimum requirement by March 2020, according to Mushangwe.
“Given Nigeria’s challenging operating environment, meeting the minimum requirement will be credit negative for banks because we expect them to make potentially riskier loans, which will outweigh potential benefits from diversification as they lend to more granular borrowers and reduce their high single-name concentration risk,” Mushangwe said.
Nigerian banks have limited exposure to SMEs and household borrowers, who have a combined contribution of lower than 10 percent of total loans.
Consumer lending in Nigeria is hampered by weak household credit record history and higher incidence of nonperforming loans.
LOLADE AKINMURELE
