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The Myth of Digital Credit as a Catalyst for Financial Inclusion in Nigeria

A review of the top 20 digital credit companies in the country reveals that regulation is sorely needed
Loan disbursement, Nigeria. Photo by Olusegun Aderemi, 2012 CGAP Photo Contest.

In the last decade, digital credit has witnessed a tremendous level of adoption in Africa, particularly in the East African countries that blazed the trail on the continent. Subsequently, the phenomenon made inroads into West Africa, and adoption of digital credit has exploded in Nigeria over the past few years. The rapid acceptance of digital credit can be traced to its unique features of being fast (turn-around time of less than 24 hours), convenient, and confidential.

While digital finance is often promoted as an important mechanism for expanding financial inclusion, has this been true for Nigeria? In this blog post, I examine the market offerings for digital credit and how they may or may not contribute to financial inclusion.

What is on offer in Nigeria?

In order to test the hypothesis that digital credit engenders financial inclusion in Nigeria, I reviewed the loan disbursal requirements and conditions listed on the websites and internet/mobile applications of the top 20 digital credit companies in Nigeria. These companies represent 80 percent of the digital credit market in the country. As you can see in the table below, there is practically no variation among the different digital credit providers.

Top 20 digital credit companies in Nigeria

Let’s take a look at these conditions in more detail, and what implications they have for financial inclusion.

Bank account ownership is required. On all of the digital credit platforms evaluated, owning a bank account is a prerequisite for obtaining loans. Loan applications cannot be submitted without first inputting bank details. In addition, loan repayments are only accepted via debit card, direct debit mandate, bank transfer and postdated cheques. These requirements make it painfully obvious that digital credit companies only target existing bank account holders. Unfortunately, they currently have no products to address the credit needs for the population at the bottom of the pyramid who do not have access to basic financial services. Consequently the millions of unbanked Nigerians are automatically excluded from securing loans from digital credit companies.

Applications are only accepted through a website or app, making internet connectivity and a smartphone a must for loan application processing. The implication here is twofold. All those living in areas without internet connectivity, as well as those who cannot afford a smartphone, are disqualified from the loan application processes.

The only credit products offered are personal loans which require salaried employment or structured businesses. Loan applications will be immediately turned down if the applicants are not in paid employment or do not have a structured business. In almost all cases, the employer must be the Federal Government, State Government, Foreign Agencies or blue-chip companies.

Interest rates are very high. Almost all of the companies apply risk-based pricing, which translates to anything between 3.5 to 50 percent monthly. Only two charge a flat annual interest rate that is clearly spelled out on their website or app (30 to 36 percent per annum). The extremely expensive nature of these loans, combined with their very short tenure, makes them unsuitable to support any type of business, and the best that can be hoped for is to utilize the loan in meeting unplanned small obligations.

Regulation is sorely needed

As we can see from this review of the top 20 digital credit companies in the country, the digital credit offer in Nigeria can be defined as fast, small, convenient, short tenured and very expensive loans that are granted to existing bank account holders who must be salary earners or own structured businesses.

This fixation on salary earners will eventually be the downfall of digital credit companies, as it creates a debt trap for civil servants who also have access to staff cooperative loans with single digit interest rates and bank loans with longer tenures and cheaper interest rates. It is therefore urgent that this sector be properly regulated to prevent over-indebtedness and abuse of debt service ratio laws, problems which have plagued some East African countries in recent years.

Above all, it is clear that digital credit companies in Nigeria have very limited reach and lack the capacity to bridge the credit gap at the bottom of the pyramid. In order for digital finance to contribute meaningfully to financial inclusion in the country, the Central Bank of Nigeria needs to consider opening up lending licenses to Super Agents, Mobile Money Operators, Telcos and Payment Service Banks. We should learn from the digital credit models in other countries such as Kenya, where M-Shwari and M-Pesa operate on the telco network. These types of companies have enormous subscriber bases, strong financial footing and broad network reach, and are therefore in a much better position to help expand financial inclusion than the digital credit companies currently in the market.


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Thomas A. Timberg
02 April 2020

The parallel to the South African micro finance industry is clear, and the regulatory response would benefit from the South African model.

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