At an event held last week in Lagos, the Central Bank of Nigeria (CBN) admonished the low access to bank credit by Nigerians. Factors including flip flop in government policies, a distrust of the banking system, and fear of high interest rates were blamed. Whilst these are obvious reasons, we think there are even more upsetting reasons why access to lending is nearly impossible in Nigeria.
Lack of Identification database
The country lacks a central identification base. Many Nigerians are yet to be issued their National ID cards, several years after takeoff. Other identity card bases are fragmented, and are based on addresses used at the point of capture. It is near impossible for banks to give loans to individuals without a valid ID or stable address. In advanced countries like the US, and Britain, presence of a valid identity base means individuals can be traced anywhere in the country, if they attempt skipping on loans. The CBN launched the Bank Verification Number over two years ago, which has to a large extent streamlines bank customers, it however lacks other critical information such as a customer’s biodata. This probably one of the major reasons why banks will not lend to majority of Nigerians.
Absence of a credit history for many Nigerians makes it difficult for many Nigerians to apply for a bank loan. Banks like to see records of previous loan repayments before giving loans. Hence the preference for blue chip companies that have existed for hundreds of years, when it comes to granting loans. These firms, can be bailed out by their parent companies if unseen risks such as the rapid depreciation of the Naira last year come up. Rating agencies exist in Nigeria but have operated for years without the right legal framework. Just recently, the Acting President signed into law the Collateral Registry act and the Moveable Assets act into law. These two acts may help improve the commercial bank lending to the informal market but this might take years to materialise. For now, 90% of Nigerians will continue to find it difficult to access bank loans.
High cost of funds
Maximum lending rate (rate at which banks lend to unsecured creditors) currently averages about 26% per annum. At this rate, very few Nigerians can access bank loans and will simple not bother to borrow. High interest rates are due to high inflation rates as well as banks cost of funds. A combination of inflation rates at 16.25% and interest rate on treasury bills which is almost risk free at 17% means loans to the private sector will be at higher rates. The high operating costs in the country and risks of lending in a system with poor identification makes loans more expensive than they should be. Besides the banks are better off lending to the government at 18% than to low income earners.
High default rates
Difficulty in recovering bad loans has also made banks wary of lending to many Nigerians. Court cases take many years to resolve and the banks end up crashing or having to be bailed out by the CBN. The Asset Management Company of Nigeria (AMCON) which bought bad loans from several banks, has not been able to recover a large percentage of loans. The poor macroeconomic environment means assets that were surrendered as part of settlement, are still sitting in the bad bank’s books, with no buyers in sight. To avoid this, banks prefer lending to blue chip companies and their staff, due to quick turnover and predictable cash flow. Ironically, it is this same blue chip companies that end up defaulting on their loans.