High-cost borrowing often forces people to take new loans to pay off existing debts, creating a vicious debt cycle, particularly affecting lower-income Nigerians.

The number of approved digital lenders in Nigeria has increased by 79.77% since April 2023, reaching 311 registered lenders by September 2024. 

This growth aligns with a 329.28% year-on-year rise in personal loans, which totalled ₦7.52 trillion in March 2024, according to the Central Bank of Nigeria (CBN). 

The Federal Competition and Consumer Protection Commission (FCCPC) registers digital lenders under the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022, requiring registration and approval. 

Fully approved lenders grew from 119 to 269, while conditional approvals fell from 54 to 42. The rise in consumer credit is linked to inflation, which reached 32.15% in August 2024, and the increasing demand for accessible loans through fintech.

Growing Consumer Credit and Inflation

The CBN attributes the surge in consumer credit to inflation and the popularity of loan apps. A 2023 report from Piggyvest showed that four in ten Nigerians are in debt, with 26% owing loan apps. Another study from SBM Intelligence found 27% of Nigerians, across income categories, turning to loan apps to cope with living expenses amidst record inflation. 

Trade Lenda’s CEO Adeshina Adewumi noted that “rising cost directly impacts the need to access more funds.” Similarly, Money Lenders Association President Gbemi Adelekan confirmed that “demand for loans has increased double-fold due to hardship,” with loan demand growing at 5% monthly, according to Babatunde Akin-Moses of Sycamore.

The Impact on Borrowers and Economic Distress

Loan apps are popular for their accessibility and speed. Apps like FairMoney, Carbon, and Palmcredit have made it possible for people to get quick, unsecured loans. 

According to recent reports, these platforms have collectively issued billions of naira in loans. The apps appeal because they require no collateral, have quick processing times, and are available to people without access to traditional banking. 

CBN governor Olayemi Cardoso predicted that mobile money and digital lending would drive service sector growth, with more people borrowing. 

However, Prof. Bongo Adi from Lagos Business School noted that most loans are for consumption, pushing borrowers into deeper debt. His research shows that borrowers spend their loaned funds quickly, then struggle to repay, driving them further into financial instability.

Loan Sharks and the Debt Trap

Loan apps often charge high interest rates, sometimes reaching 90%, mimicking traditional loan sharks. Borrowers face challenges with high repayment demands, hidden fees, and aggressive recovery methods, such as harassment and public shaming. What initially seems like a short-term solution can quickly spiral, leading to a debt trap that is difficult to escape.

On average, digital loan apps charge monthly interest rates of 15-30%, with annual rates surpassing 200% in some cases.

These add to financial distress and mental health issues, with anxiety and depression on the rise among borrowers. 

Poverty and Debt’s Impact

Approximately 70% of Nigerians live on less than ₦1,500 per day. High-interest loan repayments take away household incomes, forcing families to sacrifice essentials and perpetuating the poverty cycle. 

This financial limitation affects the current generation and also risks intergenerational poverty, impacting children’s future education and growth opportunities.

Regulatory Challenges and the Need for Reform

While the FCCPC introduced a regulatory framework in 2022, enforcement remains challenging due to the volume of loan apps and the complexity of monitoring their practices. 

Former FCCPC CEO Babatunde Irukera has highlighted the issue of multiple loans from various apps leading to unmanageable debt. A centralized credit information system will improve accountability by offering lenders insights into borrower histories, promoting better lending methods. 

However, gaps in consumer protection remain, pointing to the need for stronger regulations, including possible interest rate caps, transparency requirements, and limitations on debt collection methods.

Proposed Solutions: Alternatives and Financial Literacy

Expanding financial literacy programs could empower Nigerians to make better borrowing decisions. Community-based lending models, like cooperatives and savings groups, could provide low-interest options. 

Collaboration between NGOs, financial institutions, and the government could help provide affordable loans and support financial education. With these measures, Nigeria can address the risks associated with digital loan apps while providing safe financial alternatives for those in need.

Strengthen Regulatory Frameworks

• Enforce Existing Regulations: The Federal Competition and Consumer Protection Commission (FCCPC) and the Central Bank of Nigeria (CBN) should enforce existing regulations more strictly to ensure compliance by digital lenders.
• Update Guidelines: Regularly update the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending to address emerging issues and close loopholes.

Increase Financial Literacy

• Educational Programs: Implement nationwide financial literacy programs to educate consumers about responsible borrowing, the risks of high-interest loans, and how to read loan terms and conditions.
• Workshops and Seminars: Conduct workshops and seminars in communities to raise awareness about the dangers of falling into debt traps and how to avoid them.

Promote Alternative Financial Services

• Microfinance Institutions: Encourage the use of microfinance institutions that offer lower interest rates and more flexible repayment terms.
• Community Savings Groups: Support the establishment of community savings groups where members can pool resources and access funds without resorting to high-interest loans.

Enhance Consumer Protection

• Transparent Loan Terms: Ensure that loan apps provide clear and transparent information about interest rates, fees, and repayment terms.
• Complaint Mechanisms: Establish strong complaint mechanisms for borrowers to report issues with loan apps and seek redress

Encourage Responsible Lending Practices

• Interest Rate Caps: Implement interest rate caps to prevent loan apps from charging exorbitant rates.
• Ethical Standards: Promote better lending processes among digital lenders, including fair treatment of borrowers and avoidance of harassment and blackmail.

Support for Borrowers in Debt

• Debt Relief Programs: Develop debt relief programs to help borrowers manage and reduce their debt burden.
• Counselling Services: Provide access to financial counselling services to help borrowers develop repayment plans and manage their finances effectively.

SERAP also urged the governors to provide information on the projects executed with these loans, including their details and locations.

The group, which made the demands in a Freedom of Information request dated March 30, 2024 and signed by its deputy director Kolawole Oluwadare, said the request is for the purpose of making this information available to the public.

SERAP also urged them to invite the Independent Corrupt Practices and Other Related Offences Commission (ICPC) and Economic and Financial Crimes Commission (EFCC) to investigate the spending of the domestic and external loans obtained by the state government and the FCT.

It stated that Nigerians have the right to know how their states are spending the domestic and external loans obtained by the governors.

SERAP said widely publishing copies of the loan agreements and spending details of the loans obtained would ensure that persons with public responsibilities are answerable to the people for the performance of their duties in the management of public funds.

The FoI requests, read in part, “we would be grateful if the recommended measures are taken within seven days of the receipt and/or publication of this letter. If we have not heard from you by then, SERAP shall take all appropriate legal actions to compel you and your state to comply with our request in the public interest.

“SERAP is seriously concerned that many of the country’s 36 states and FCT are allegedly mismanaging public funds which may include domestic and external loans obtained from bilateral and multilateral institutions and agencies.

“Transparency in the spending of the loans obtained by your state is fundamental to increase accountability, prevent corruption, and build trust in democratic institutions with the ultimate aim of strengthening the rule of law.

“According to Nigeria’s Debt Management Office, the total public domestic debt portfolio for the country’s 36 states and the Federal Capital Territory is N5.9 trillion. The total public external debt portfolio is $4.6 billion.

“Many states and the FCT reportedly owe civil servants’ salaries and pensions. Several states are borrowing to pay salaries. Millions of Nigerians resident in your state and the FCT continue to be denied access to basic public goods and services such as quality education and healthcare.

“Several states including your state are also reportedly spending public funds which may include the domestic and external loans to fund unnecessary travels, buy exotic and bulletproof cars and generally fund the lavish lifestyles of politicians,” the organisation said.

SERAP also maintained that it is seriously concerned that the domestic and external loans obtained by the states and the FCT are vulnerable to corruption and mismanagement.

“Your government has a responsibility to ensure transparency and accountability in how any loans obtained by your state are spent, to reduce vulnerability to corruption and mismanagement,” it added.

The primary objective of this substantial investment is to bolster the company’s cement production capabilities.

In a joint statement released on Tuesday, both the IFC and BUA expressed their enthusiasm about the funding, emphasizing its role in partially financing the development of two advanced and energy-efficient cement production lines at the Sokoto state plant located in northwest Nigeria.

The financing structure consists of $160.5 million from the IFC, $245 million in syndicated loans provided by the African Development Bank, Africa Finance Corporation, and the German Investment Corporation, and an additional $94.5 million from institutional investors.

According to the IFC and BUA, the newly established cement production lines will operate partially on alternative fuels derived from waste and solar power.

Once fully operational, each line is expected to have an annual cement production capacity of approximately three million tons. This increased capacity will facilitate the supply of cement to markets in Nigeria, Niger, and Burkina Faso.

Currently holding the position of Nigeria’s second-largest cement producer, BUA Cement has an existing capacity of 11 million tonnes. With the injection of this new investment, the company’s total capacity will rise by an additional six million tonnes.

Moreover, the funding package includes provisions for BUA Cement to replace a portion of its diesel trucks with vehicles powered by natural gas, thus contributing to the reduction of pollution, as highlighted in the joint statement.

Abdulsamad Rabiu, the prominent Nigerian billionaire and majority owner of BUA Cement, boasts a present net worth of $8.24 billion, as reported by the Bloomberg Billionaires Index

This was expressed by Wenjie Chen, the IMF’s Deputy Divisional Chief, in a keynote address at the International Monetary Fund Regional Economic Outlook on Tuesday in Lagos.

Chen claims that the economies of Sub-Saharan African countries like Nigeria have continued to be strained by high borrowing costs, high-interest rates, and the rising value of the dollar.

She pointed out that loans from China and other developed economies to Africa have decreased as a result of the unpredictability surrounding the world economy.

Stating that the public debt ratio has doubled in the region in the past decade, Chen added that the debt vulnerabilities of Nigeria and the rest of SSA would continue to increase.

Chen said, “In terms of the funding squeeze, the three main manifestations that many countries are facing are: the rise in borrowing costs. You can see that virtually all the frontier markets have been shut out of the Eurobond markets since the spring of 2022. What that means is that they cannot raise financing on these international markets. The Eurobond market has been a large component of financing for these countries.

“Lastly, what this has meant in terms of the global economy’s reaction to the Russia-Ukraine war in terms of rises in price and the cost of living crisis has placed very high-interest rates. Not only were interest rates rising, the value of the dollar rose to a 20-year high last year. For many African countries, the cost of servicing these debts has also gone up.

“Inflation is still a major concern for many African economies. Many countries are still going through recovery after the pandemic.”

To address the many issues confronting the Nigerian economy, Chen said the IMF’s policy advice to Nigeria is based on four key policy priorities — fiscal policy, monetary policy, exchange rate policy, and structural reforms.

She said the new emphasis on addressing the current liquidity squeeze should focus on reducing off-budget commitments (extra-budgetary spending, arrears, guarantees, etc), enhancing debt management, and domestic revenue mobilization.

On forex-related challenges, Chen said that significant exchange rate pressures in the past year largely reflect global factors; terms of trade changes, and monetary policy normalization.

Noting that the scope of forex interventions is limited in many cases by low foreign reserves, she said Nigeria and its counterparts would have to adjust to new fundamentals.

Also speaking, IMF Representative for Nigeria, Ari Aisen, said that with the funding squeeze, it would be critical for Nigeria to rely on internally-generated funds.

He, however, said that the global lender remains confident of its earlier projection that Nigeria’s economy will grow by 3.2 percent this year.

Ari further stated that for Nigeria’s economy to react positively to this funding squeeze, the private sector needs good macroeconomic policies to thrive.

Ari said, “In Nigeria, we always believe that growth has the potential to be much higher, but because of the shocks since the pandemic and the food price shock because of the Russia-Ukraine war, the economy managed to grow by three percent. We are forecasting 3.2 (this year).

“It could be higher. It’s helped by services which are the main driver of growth on the supply side of the economy. The oil sector has not also contributed as much as it should have contributed, partly because of investments in the sector and partly because of leakages, particularly oil theft. These issues are gradually being addressed and we are hopeful that it will continue, so we are now projecting 3.2 percent growth.”

This move is aimed at improving dollar liquidity through foreign banks’ representatives in Nigeria.

The Director of the Financial Policy and Regulation Department, Muhammad Musa, signed the Guidelines for the Regulation of Representative Offices of Foreign Banks in Nigeria, which stated that the policy is in line with the CBN’s duty to support financial system stability.

He said the guidelines are backed by Sections 6(1) and 8 (1) of the Banks and Other Financial Institutions Act 2020 (BOFIA) respectively which state that “no foreign bank shall operate in Nigeria without prior approval of the CBN”.

According to the CBN, the regulations apply to any financial institution with a license issued under a foreign law whose registered headquarters are located outside of Nigeria and whose primary business is the receipt of deposits, the awarding of loans, and/or the provision of current and savings accounts.

It also includes any foreign-based functioning bank or financial holding company with foreign ownership, ownership of a controlling interest in one or more banks or institutions, and provision of current and savings accounts as its principal business.

The CBN has also given the banks permission to promote the products and services of their overseas parent or a subsidiary of that parent that is registered and headquartered outside of Nigeria.

They can also carry out research activities in Nigeria on behalf of the foreign parent and also serve as a liaison between the foreign parent and local banks, private institutions within Nigeria, and other customers of the foreign parent based in Nigeria.

The banks can also connect banks and other financial institutions to their parent firm, and assist exporters in Nigeria with information related to the laws and markets of target countries in which the foreign parent or any of the Group’s affiliates has a subsidiary.

Part of the responsibilities includes collating and distributing economic and financial information or country reports to its foreign parents for use by their customers and assisting their customers who desire to invest in Nigeria or do business with Nigerian companies subject to the extant Data Protection Regulations.

They are also authorized to connect exporters with potential customers in jurisdictions where the parent company operates; and assist Nigerian exporters with finding new markets through its international offices.

“Representative offices are permitted to record revenue, in so far as such revenue does not relate to non-permissible activities as set out in section 3.2 below and emanates from intra-group services rendered to the parent company with such revenue taxed by transfer-pricing regulations. Revenue in this provision is limited to line items such as staff costs and business premises leasing fees,” the CBN said.

However, the banks are not allowed to provide services designated in Nigeria as banking business and provide any commercial or trading activity that may lead to the issuance of invoices for services rendered.

In establishing a representative office in Nigeria, the CBN said a Memorandum of Understanding (MOU) between the CBN and the applicant’s home regulatory supervisor is essential. “Where such an MOU is non-existent, the CBN will work with the home regulatory agency to establish/execute an MOU as soon as possible,” it said.

“Not later than three months after obtaining the Approval-In-Principle, the promoters of a proposed office shall apply for the grant of a final license to the CBN,” the apex bank said.

Across Africa and other emerging markets, community groups and associations play an important role in providing various essential services and protecting the interests of the collective.

They also facilitate accountability and self-governance that enables communities to function as effectively as possible.

Moni is pioneering a community finance model that builds on the importance of this form of group responsibility in African communities to improve access to essential financial services for small business owners across the continent.

According to the African Development Bank (AfDB), SMEs account for more than 90 percent of businesses and almost 80 percent of employment in Africa.

However, insufficient data and ineffective credit decisioning by traditional financial institutions have led to a $421 billion credit gap, with business owners unable to access the working capital they need to scale.

Moni has built a risk engine that combines financial data and business performance with social intelligence to enable more effective credit decisions for African SMEs.

Starting with Nigeria, small business owners with a good social reputation simply need to join a lending cluster with an invite from an existing Moni user and once eligibility has been confirmed, they can access financing in 5 minutes or less.

Once the loan is disbursed, the cluster shares responsibility for the loan, and members can access funds from an automated savings pot to bail out members if needed.

The Y Combinator-backed startup launched the pilot of its commcommunity-poweredns in August 2021 with 3,000 mobile money agents (more than 5,000 on the waiting list).

In 2022 alone, Moni disbursed more than $22 million in loans to more than 11,000 SMEs, with a 99 percent repayment rate.

The company is now building on the success of its community-powered model to deliver game game-changing financial services to a wider range of African SMEs who have previously been underserved by the traditional financial system.

According to Femi Iromini, CEO and co-founder of Moni, “Our community-powered business loans product is just one of the ways we are innovating around our unique context in Africa to make the most of what is already in place to deliver the financial services business owners need to create long long-lasting for themselves and their communities.

We have ample evidence to show that this approach works and we are excited to be bringing more businesses on board to drive the economic development we all want to see on the continent.”

]]> https://techeconomy.ng/moni-announces-plans-to-drive-growth-for-african-smes-through-loans/feed/ 0 https://techeconomy.ng/fg-to-convert-cbn-loans-to-bonds-over-a-40-year-period/ https://techeconomy.ng/fg-to-convert-cbn-loans-to-bonds-over-a-40-year-period/#respond Thu, 20 Oct 2022 08:05:43 +0000 https://techeconomy.ng/?p=86795 Dr. Zainab Ahmed, the Minister of Finance, Budget, and National Planning, claimed that she had been given permission to securitize the Ways and Means portfolio of the Central Bank of Nigeria (CBN), which is worth N20 trillion.

At the Ministerial Presentation of the 2023 Budget at the Ministry of Finance Headquarters in Abuja, Ahmed made this announcement.

She also revealed that the government’s contingent liabilities as a share of GDP fell from 2.75% in 2020 to 2.64% in 2021. By the end of 2022, it is anticipated to be in this region.

Dr. Ahmed said that the “total public debt as a percentage of GDP stood at 23.06% as of June 30, 2022, within the 55% threshold recommended by the International Monetary Fund (IMF)/World Bank (WB) as well as Nigeria’s self-imposed limit of 40% set in the MTDS 2020-2023, even after including the outstanding balance on CBN Ways & Means Advances”

She added that the Target Ratio under the MTDS 2020-2023 is 70:30 and that the Debt Management Office was expecting to achieve the target by end of 2023.

While responding to the question on the Ways and Means, the minister said, “The total Ways and Means today is 20 trillion and we have the approval to securitize.

The securitization will be over in a 40-year period with an interest rate of 9%. But over the years, we have been paying the interest component at the current rate that is charged on the Ways and Means.”

She added that the exposure to refinancing risk remained stable as a result of the strategy of issuance of long-dated securities in the domestic and international markets in addition to accessing long-term funds from multilateral and bilateral lenders.

“As of September 27, 2022, N3.7 trillion had been repaid by the obligors and most of the loans are still under moratorium, especially manufacturing, which forms the largest pile of CBN’s portfolio – over 31 percent,” said CBN’s Director in charge of the Development Finance Department, Philip Yila Yusuf.

In view of this, the CBN warned all its debtors to immediately begin repayment of their loans, or else risk visitation by officials of the Economic and Financial Crimes Commission (EFCC) for forceful recovery.

According to Yila, the intervention funds had been slowed down in the bank’s efforts to rein in inflation.

He, however, warned that the bank is coming after debtors who will refuse to repay their loans when due.

He said the bank had collaborated with the EFCC to set up a desk with a view to recovering the loans.

“Any person who borrowed from us will pay back. We have also started recovering those loans from state governments. We have been doing a long workout program on them.

Any state government that has benefitted from our fund and is already in default, over a six-month period, we’re going to be debiting them at N50 million every month, and we have started that program,” he said.

Yila narrates that the loans were securitized and critical sectors such as agriculture, manufacturing, health, exports, and SMEs had benefitted from the intervention.

While traditional banks deserve some accolades for digitizing some of their operations, they are still trailing in the aspect of making finance (loans) accessible to customers. The processes involved in accessing a loan from deposit banks are time-consuming and almost impossible. 

However, a digital bank like Carbon, which has been in operation for the last 10 years, has been on the front burner, disrupting and innovating its offerings to Nigerians. 

Accessing Loans from Carbon

Carbon’s major goal is to empower all people with financial access. Its loan process is designed to fit customers’ needs with a low-interest rate.

As a digital lender, it issues funds in an unsecured loan based solely on the borrower’s creditworthiness and promises to repay.

“Access to finance is one of our biggest achievements in the last 10 years,” Chijioke Dozie, Co-founder & CEO of Carbon, said.

“If you look back 10 years ago… If you ask a 22-year-old on the street right now where she can get financing, she will probably know and rattle off a list of all the fintech companies that will give her a loan. Ten years ago, that was not the case.”

Chijioke argued that people who were gainfully employed couldn’t get access to finance at the touch of a button 10 years ago. 

Deposit banks do not believe Nigerians are credit-worthy, but Carbon has assessed about 4 to 5 million people for loans, and Nigerians are paying them back. 

“But I think the fact that we’ve been lending for 10 years is a testimony that Nigerians do pay back if you have good credit processes in place. And that’s something we also found out ourselves. 

The digital bank conducted data collection and analysis from about 5 banks and discovered that most Nigerians who were indebted wanted to pay back but were constrained by the payback modalities. 

Before we started carbon, we started a debt collection business, and when we were dealing with Nigerian debt, we realized a lot of people wanted to pay, but the banks had not set it up so they could easily repay the money back. “

“So, I think, you know, the ease of how people get money today. I think this is one of our legacies, we made it accessible. 

We’ve shown other financial institutions, especially banks, that you know, Nigerians are creditworthy because, you know, we just felt that the situation where banks will take your money, take your salary, keep it and won’t even give you a basic loan. 

“So they trust you enough to take your money, but they don’t trust you enough to give you back to give you something or to give you a loan. We thought that was unacceptable. 

“And when carbon started, we were giving money to people who had never banked with us.​ ​We were the ones giving them the money, not them,”​ ​he said.

Other digital banks give loans to customers, but a striking difference is that Carbon does not send unsolicited messages to the contacts of defaulters—a phenomenon that has been described as an invasion of privacy. 

Focus & Value Propositions 

Being customer-centric is a journey we are on, and we are making sure that all products and services are specifically tailored towards satisfying our customers, Chijioke said. 

“I think for us, you know, we want to distinguish ourselves by being customer-centric, and that’s a long journey. I don’t think any company can say that they have achieved customer centricity. So, for us, it’s a focus.”

Ngozi Dozie, Co-founder & Managing Director at Carbon, believes that there is no traditional bank that offers the types of customer-centric packages it provides to customers. 

“Every month in carbon, every customer that has a current account balance with us will get the interest rate. There is no management fee; there is no fee for anything.

Unlike in other banks, where customers are debited at the end of the month, here every customer is getting their credit. There is no bank right now.” 

According to Dozie, Carbon is doing several things in terms of innovation that put it ahead of its current banking competitors and is poised to do more. 

“When we started, they said customers were never going to pay back. We proved them wrong. They said we couldn’t give loans to customers. They said we couldn’t offer a free payment plan. We proved them wrong.”

He said that as core bankers and revolutionaries, Carbon is constantly looking to push the barriers and make sure that it’s all about the customers. 

If you’ve banked with any of our competitor banks for X years, and they can’t give you an unsecured loan or a free account, then we think something’s wrong.”

Furthermore, on offerings, Dozie said Carbon gives 1% cashback on all debit card payments, even if a customer spends up to 1 ​​million Naira.

“There is no bank right now that allows you to go to a restaurant, use a POS, and spread that payment over six weeks immediately from your app.”

“There’s no bank that tells you that it gives an instant refund. If you send the payment and it fails, you get an instant refund from Carbon.”

It began operation as a One Credit, a brick-and-mortar consumer lender focused on the Nigerian market. In 2016 it became a digital lender via its Paylater App and was focused on providing access to consumer credit services, according to a statement.

The business changed its name to Carbon in 2019 and received a microfinance banking license from the Central Bank of Nigeria with the renewed goal of evolving into a fully-functional digital financial service platform that provides loans, cost-effective bill payments, free fund transfers, and high yield savings and investment options.

Co-founder and CEO Chijioke Dozie said, “At Carbon, we are really proud of what we have accomplished, due to our customers and the folks at Carbon. 

When we consider the past ten years and the years to come, we want to place a greater emphasis on the needs of our customers, make sure we are responding to market trends, and transform how Nigerians make payments.

According to Ngozi Dozie, who is also co-founder further “with our newly launched buy now pay later product “Carbon Zero” which gives you the flexibility to shop what you want, when you want, without breaking the bank at a zero per cent interest rate.

‘As humans, time is our most valuable asset and by using Carbon Zero, our customers can be more flexible with their funds and improve their quality of life significantly.”