The importance of a functional credit system in Nigeria, By Ibrahim Shelleng

In essence, a poor credit system creates a vicious cycle of underdevelopment, inequality, and missed opportunities. To break this cycle and unlock Nigeria’s true economic potential, there’s an urgent need to address the deficiencies in the credit system, and to promote financial inclusion, innovation, and sustainable growth of all segments of society.

Imagine a Nigeria in which dreams are nurtured, businesses flourish, and innovation thrives – all made possible by a robust credit framework. Credit is the lifeblood of any free market economy, fostering investment, innovation, and entrepreneurship. It fuels the engine of growth, allowing individuals and businesses to take calculated risks, expand operations, and contribute to overall economic prosperity. A robust credit system not only enables access to capital but also empowers dreams, creating a positive ripple effect throughout the society.

The credit system is like a financial bridge, connecting those who have excess capital with those who need it to invest, grow, and create opportunities. In Nigeria, however, this bridge has shown some cracks, affecting individuals, businesses, and the entire economy. The stark reality is that our credit system is marred by challenges that require collective wisdom and strategic action. This article aims to shed light on the current state of Nigeria’s credit system, its implications, and the transformative power of change.

Limited Access to Credit

For too many Nigerians, formal credit remains a distant dream. Whether it is the ambitious entrepreneur with a groundbreaking idea, the small business owner seeking expansion, or even the regular salary earner who needs to acquire some household items or meet up with urgent lifestyle demands, access to credit is crucial. However, numerous factors, including a lack of credit history, inadequate documentation, and limited awareness, hinder their abilities to secure loans. These factors are greatly exacerbated in the rural areas of the country, where the populations are largely underbanked, with limited access to formal financial institutions. This lack of access stifles potential, curbing economic growth and innovation.

High Interest Rates

Interest rates can either encourage or deter borrowing. Unfortunately, the high interest rates prevalent in Nigeria create a challenging environment for businesses seeking capital. The monetary policy rate (MPR) is currently at 18.75 per cent, the prime lending rate is 13.98 per cent since July. While lenders factor in risks, excessively high rates can discourage borrowing altogether, stifling investment and job creation. With already thin margins caused by a fluctuating exchange rate, crippling inflation and high overhead costs, businesses can ill-afford to borrow at such high interest rates. Moreover, those with poor financial management and controls are often hit the hardest, and the debt burden may become more detrimental to their business growth.

Short-Termism

Financial institutions (especially deposit money banks, DMBs) in Nigeria typically prefer short term transactions (six months to one year). This not only means that their cash conversion cycles are shorter but it tends to reduce the likelihood of default. This may be ideal for risk management and shareholder profits but it has a detrimental impact on the economy, as it leads to transactional rather than developmental funding. It stifles longer term projects, such as housing construction and mortgages. With DMBs dominating the credit market and over 80 per cent of credit transactions, it is evident that a change in strategy could have a transformational impact on the Nigerian economy.

Collateral and Its Constraints

Traditional lending practices often demand substantial collaterals as safeguard. While this is prudent, it can inadvertently exclude many worthy borrowers who lack the requisite assets. This barrier disproportionately affects marginalised communities, preventing them from tapping into credit’s transformational potential. This may also lead to unethical practices of using third party collaterals or overinflating the valuation of collaterals,  which are often red flags for potentially defaulting credits.

The Informal Lending Issue

In the absence of accessible formal credit, many turn to informal lending sources. While these sources offer a lifeline, they often come with exorbitant interest rates and little regulatory oversight. This perpetuates a cycle of debt and limits opportunities for individuals and businesses to thrive sustainably. There has been a proliferation of microcredit apps in Nigeria, which give out collateral-free micro-loans but employ very unsavoury practices for loan recoveries. This has even led to the creation of skits on popular social media sites mocking some of these loan sharks and their unconventional recovery methods.

Embracing technology (blockchain in particular) can revolutionise credit accessibility. Digital platforms can provide efficient ways of assessing creditworthiness, thereby reducing the reliance on traditional collateral-based models. Additionally, technology can connect lenders with borrowers (P2P lending), even in remote areas, therefore fostering financial inclusion.

Financial Literacy and Credit Culture

A nation’s credit culture reflects its financial habits, attitudes, and practices. There is generally a poor credit culture in Nigeria and dare I say it, Nigerians are not the most diligent at paying back loans. However, this is not strictly a character flaw but could also be attributed to the lack of financial literacy. Individuals and businesses that cannot afford the services of competent financial advisors often suffer from their inability to manage cashflows, leading to unsustainable debt burdens that make it very difficult for them to repay their loans. In addition, those that take loans for consumptive, rather than productive, ventures often encounter a mismatch in income and expenditure. The volatile economic situation in the country, with spiraling inflation and interest rates, exacerbates these issues even for the most prudent.

The Ripple Effect

The inadequate credit system does not just affect individuals and businesses, it reverberates throughout the economy. When businesses cannot access capital to expand, they cannot create more jobs. When people can not secure loans to invest in education or housing, it hinders their potential contributions to society. Ultimately, the nation’s economic growth and development are compromised. Here are some key aspects of this ripple effect:

• Limited economic growth
• Reduced entrepreneurship
• Unemployment
• Inequality and poverty
• Limited infrastructure development
• Weakened financial institutions
• Reduced consumer spending
• Limited agricultural development
• Inhibited trade and investment
• Government fiscal pressure

In essence, a poor credit system creates a vicious cycle of underdevelopment, inequality, and missed opportunities. To break this cycle and unlock Nigeria’s true economic potential, there’s an urgent need to address the deficiencies in the credit system, and to promote financial inclusion, innovation, and sustainable growth of all segments of society.

 The Path Forward: Possible Solutions

The journey towards a stronger credit system requires collective effort and a vision for a brighter economic future. Here are some possible solutions that can spark change:

1. Financial Literacy Empowerment

Education is a powerful tool. Initiatives aimed at increasing financial literacy can empower individuals to make informed decisions about credit. When people understand the benefits, risks, and responsibilities associated with borrowing and lending, they can navigate the credit landscape more effectively. The onus for this must come from regulated financial institutions.

2. Technology as an Enabler

Embracing technology (blockchain in particular) can revolutionise credit accessibility. Digital platforms can provide efficient ways of assessing creditworthiness, thereby reducing the reliance on traditional collateral-based models. Additionally, technology can connect lenders with borrowers (P2P lending), even in remote areas, therefore fostering financial inclusion. There are a number of Nigerian fintechs that are making huge strides in this space – albeit with potentially higher non-performing loan (NPL) books.

The inadequate credit system in Nigeria is not a fixed destiny; it is a challenge that can be met head-on with innovation, determination, and a shared commitment to change. As we work toward a stronger credit system, we are not just opening doors to financial opportunities, we are creating a platform for dreams to take flight, businesses to flourish, and the nation to prosper.

3. Support for SMEs

Small and medium-sized enterprises are the backbone of any economy. By creating specialised credit products, offering mentorship programmes, and streamlining application processes, Nigeria can nurture these businesses, spurring economic diversification and job creation.

4. Policy Reforms

Regulatory adjustments and policy reforms can drive positive change. Collaborative efforts between the government, financial institutions, and regulatory bodies can lead to the lowering of interest rates and the relaxation of collateral requirements. This can create a more conducive environment for credit growth. The Central Bank of Nigeria (CBN) has attempted this with its development financing initiatives to key sectors of the economy, but this has not been entirely successful. A more holistic approach is required.

5. Strengthening Credit Information Systems

A comprehensive credit information system can make a world of difference. By collecting and sharing credit data responsibly, lenders can make more informed decisions, ensuring that creditworthy individuals and businesses are not unfairly excluded from opportunities. More work is required by the existing credit bureaus such as CRC Credit Bureau Limited (Credit Reference Company), CreditRegistry, and FirstCentral Credit Bureau Limited to include more commercial entities into their database. This would not only help with risk-based loan pricing, but will also deter chronic defaulters from toxifying the credit environment.

6. Strengthening Cooperative Models

Cooperative models for lending are innovative financial arrangements whereby groups of individuals or businesses come together to pool resources and provide credit to their members. These models leverage the collective strength of the group to provide access to loans and financial services that might be difficult to obtain individually. Cooperative lending models emphasise community collaboration, trust, and shared responsibility. They can be particularly effective in promoting financial inclusion, especially in areas where traditional banking services are limited. These models not only provide access to credit but also foster a sense of ownership and empowerment among their members.

Shaping Nigeria’s Economic Future

The inadequate credit system in Nigeria is not a fixed destiny; it is a challenge that can be met head-on with innovation, determination, and a shared commitment to change. As we work toward a stronger credit system, we are not just opening doors to financial opportunities, we are creating a platform for dreams to take flight, businesses to flourish, and the nation to prosper.

Imagine a Nigeria where a young entrepreneur’s idea is not stifled due to the lack of funds. Envision a Nigeria where every deserving business can access capital to expand and create jobs. A young adult with a decent paying job should be able to get on the property ladder through an affordable mortgage system. Envisage a Nigeria where financial growth and inclusion are not just ideals but tangible realities. By advocating for a more equitable and efficient credit system, we are contributing to a stronger Nigeria – one that thrives on empowerment, innovation, and collective progress. It is within our reach.

Ibrahim Abdullahi Shelleng is a business development consultant, chartered stockbroker (ACS) and an associate member of the Chartered Institute for Securities and Investments (CISI) UK.