In recent times, consumer lending in Nigeria has improved significantly, but with such positives, came the negative effect of increases in non-performing loans. Overall, Nigeria has a strange attitude to debt.
In 2015, the Federal Government launched the Anchor Borrowers Scheme (ABS) to give much-needed loans to farmers. Fast forward to 2021, when the Government struggled to get thousands of farmers to repay their loans. Out of 70,000 farmers in Kebbi State, only 200 had paid back.
The difficulty in accessing loans could be easily linked to the difficulties faced with recovery.
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Some Nigerian commercial banks have had to deal with non-performing loans with large corporations in some sectors, so you would be hard-pressed to get them interested in consumer lending.
The rise of digital lending companies like Carbon and Fairmoney seemingly brought massive changes to the scene. In 2019, the Central Bank of Nigeria (CBN) increased the loan to deposit ratio for Nigerian banks, which seemingly forced them to improve consumer lending.
However, as some startup executives will later find out, increased lending levels also increase the chances of non-performing loans.
This leads to the question, why does the average Nigerian default on loans?
Unknown consequences
Failure to pay back a loan could result in court charges in Nigeria, but not much is known about this: and for good reasons.
Loan defaulting is a civil matter and not a criminal offence, so you typically won’t go to jail for defaulting on a loan. But there’s a chance of that happening, especially if the court finds that you’re willfully refusing to pay. Lying when getting a loan could be termed fraud, which is a criminal offense.
Lenders only use the civil court as a last resort, so not much is known about this consequence.
However, defaulting on loans could ruin your credit score and prevent you from accessing loans from other companies.
The fraud menace
Nigeria’s fintech space has been facing issues with fraud that largely go unreported. In nine months of 2020, Nigerian financial institutions lost $12 million to fraud.
Some fraudsters borrow money from fintech companies A, B, and C and refuse to pay back. There are also cases of fake IDs and stolen identities.
Fintech players like Abdul Hassan, Mono CEO, explains that this menace led to the creation of Sigma in 2020. While Hassan was at Data Science startup, Voyance, he helped create the platform to help fintech companies flag suspicious IP addresses.
Adedeji Olowe, CEO of lending infrastructure startup, Lendsqr, explains that all lenders need is a robust platform that helps guard against incidents like these.
Olayinka Alimi, CEO of Blocka Cash, one of the digital lending apps powered by Lendsqr, emphasizes the importance of blacklisting for defaulters timelessly, thereby automatically blocking them from accessing further loans and protecting other lenders in the financial ecosystem.
According to Alimi, this is one of the benefits Blocka Cash enjoys from running its app on Lendsqr’s platform and states that bad actors will have to rethink their lackluster attitude towards repaying their loans when they realise there are actual consequences for their actions.
An increasing cost of living
Though some people are to blame for not paying back their loans, the country’s prevailing economic circumstances make things difficult for well-meaning borrowers.
Inflation hit 15.6% in January 2022, but recent events like fuel and diesel scarcity have served to only make things worse.
The constant currency devaluation has not helped matters either. Today, the Naira exchanges on the black market at ₦570/$1. We use the black market rates considering the fact that the CBN has made it extremely difficult to access the dollar at the official rate of ₦415/$1.
If you were earning ₦200,000 ($416) in 2021, that would have reduced to ($348) in 2022. A 16% decrease in value.
“The truth is that when the cost of living is impacted, repayment of loans is definitely going to take a hit,” Olowe states.
Nigeria’s torn social fabric
Closely linked to the rising cost of living, is the dwindling values of most Nigerians.
Per Abraham Maslow’s hierarchy of needs, people who have not satisfied their basic needs like food and shelter, cannot aspire to things like accountability, self-actualisation, and esteem.
According to the National Bureau of Statistics, food takes up over 55% of the average Nigerian household’s expenditure.
Hence, there’s some credence to back the maxim, “Every Nigerian product is competing with food”. Only this time, morality and accountability are also competing.
Several Nigerians only have to look up to a political system fully laden with corruption to base their moral judgments.
Entitled borrowers
Besides increasing hardship and a messy social fabric, there’s some degree of entitlement with the average Nigerian.
Look no further than the ABS loan scheme referenced above, where some farmers reportedly thought that the loan from the federal government was free money.
The widespread defaults in payments led to court proceedings being filed against the farmers. All other methods, including setting up a debt recovery committee proved fruitless.
“It doesn’t also help that the consequences for defaulting on loans are not widely known. Neither do they care to know that money lent to them is actually other people’s money,” Olowe argues.
The psychology of debt recovery in Nigeria deserves a closer look, but just that feeling of not wanting to pay could be a major factor for loan defaults in the country.
Financial illiteracy
One of the main reasons why people struggle with money is a lack of financial literacy. Sadly, that is largely the case in Nigeria.
The CBN’s report on Financial literacy reveals that 53% of Nigerian adults do not know, or only have a rough idea of, what they spent in the past week.
As a result, most people don’t know how to structure their finances in such a way that they know what they can borrow comfortably. Or even how to structure repayment plans so paying back is not difficult.
According to Olowe, if a typical Nigerian accounted for varying interest rates between lenders, inflation, and other acts of God (unforeseen circumstances) before taking any loans, repayment would be much easier.
Individual platforms like Money Africa have stepped up to educate people on financial literacy.
A compelling reason to pay your loan?
In addition to the fact that most Nigerians are ignorant of the consequences of loan defaults, there’s not been many policies in place to discourage it. All that could be changing.
Recall that in August 2020, the CBN introduced the Global standing instruction (GSI) which allowed regulated lenders to automatically debit the BVN-linked accounts of loan defaulters.
If a customer fails to pay Bank A, it can decide to debit any other accounts the customer is currently using. Even fintech wallets. The Bank Verification Number (BVN), which links every financial account together, makes this possible.
This system would help lenders recover their funds, especially from entitled borrowers.
For lenders plugging into infrastructure companies like Lendsqr, the technology to execute the GSI on defaulting borrowers comes within easy reach.
The combination of policies and technology companies will be creating less and less room for defaulters to hide.
A compelling reason for Lenders to use technology
The use of technology for lending is still one of the best approaches to reducing the loan defaults. This is where Lendsqr is helping thousands of lenders in Nigeria, offering a world-class cloud lending platform for free while giving them the solution that blocks chronic defaulters and fraudsters.
Lendsqr has also created a process through which lenders can sign up at no cost and start lending in minutes.
Your article points to your complete lack of knowledge on the matter or a profound hypocrisy.
Very correct