In Nigeria, digital lending startups have become game-changers, offering fast and convenient loans to individuals and small businesses that are often overlooked by traditional banks.
With a smartphone and an internet connection, borrowers can access credit in minutes, a lifeline for many in a cash-strapped economy. However, as these startups grow, they face a serious challenge: how to assess risk effectively in a market where traditional credit data is scarce.
For startups, this is more than just a numbers game. High default rates can eat into profitability, while ineffective risk models make scaling almost impossible.
But what if startups could use artificial intelligence (AI) to turn these challenges into opportunities?
AI offers powerful tools to assess risk in new and creative ways, unlocking growth and sustainability for digital lenders in Nigeria.
The Risk Assessment Problem
The first hurdle for Nigerian digital lenders is the lack of traditional credit data. Many potential borrowers, farmers, traders, and artisans, operate in the informal economy and lack credit cards, mortgage, or other financial records. For startups, this means they must rely on incomplete or unconventional data to make lending decisions.
This data gap leads to the second problem: high default rates. When you’re essentially guessing a borrower’s ability to repay, it’s not surprising that many loans go bad.
Startups are forced to charge high interest rates to cover their losses, which can alienate borrowers and lead to negative reviews on social media, a death knell in a trust-driven market.
Regulation adds another layer of complexity. Nigeria’s Central Bank has been tightening the rules for digital lenders, particularly around data privacy and loan recovery practices. For startups, the pressure to comply with regulations while staying competitive can feel like walking a tightrope.
Lessons from Other Markets
Globally, AI has already transformed digital lending. In Kenya, for example, mobile-based platforms like M-Shwari analyse mobile phone usage to assess creditworthiness.
The logic is simple: if someone regularly tops up their airtime and pays for mobile services on time, they’re likely to repay a loan.
In India, startups like CreditVidya tap into alternative data such as utility payments, social media activity, and even e-commerce transactions.
This gives them a clearer picture of a borrower’s financial behaviour, allowing them to offer loans to people with no formal credit history.
Even in developed markets like the U.S., platforms like Upstart use AI to look beyond traditional metrics. By analysing data like education and employment history, they’ve significantly reduced default rates while expanding access to credit.
The key takeaway? AI doesn’t need perfect data to work, it just needs the right data.
How AI Can Work for Nigerian Startups
For digital lending startups in Nigeria, the challenge is to adapt these AI-powered strategies to the local context. Here’s how:
- Leverage Mobile Data
With over 220 million mobile subscribers in Nigeria, startups can use mobile phone data to build credit profiles. Call and SMS patterns, airtime purchases, and mobile money transactions can provide valuable insights into a borrower’s habits and ability to manage money.
- Expand Data Sources
Startups can look beyond mobile data to include utility payments, rent records, and even transport app usage. A person who pays their electricity bill on time or frequently uses ride-hailing services likely has the financial discipline to repay a loan.
- Localised AI Models
Off-the-shelf AI models won’t cut it. Nigerian startups need AI solutions trained on local data that account for cultural nuances, such as how different income levels and social structures affect borrowing and repayment behaviour.
- Make AI Transparent
Borrowers in Nigeria are increasingly skeptical of digital lenders, often accusing them of being unfair or predatory. Transparent AI models that explain why a loan was approved or denied can build trust. This also helps startups comply with regulatory requirements.
- Invest in Financial Literacy
Many defaults aren’t due to bad intentions but poor understanding of loan terms. Startups can use AI-powered chatbots to educate borrowers about interest rates, repayment schedules, and penalties. An informed borrower is more likely to repay their loan.
- Prioritise Data Security
Nigerian borrowers are wary of data misuse. Startups must ensure their AI systems adhere to strict data privacy standards. This not only builds trust but also keeps them on the right side of the law.
Building a Sustainable Model
AI is not a magic wand, it requires investment, expertise, and ongoing refinement. For startups, the journey starts with collecting the right data and partnering with AI developers who understand the local market. Start small, test the model with a limited customer base, and refine it based on feedback.
Scaling comes next. Once the AI system is proven, startups can expand to underserved areas where traditional banks are unable to serve adequately. This doesn’t just drive profitability, it’s also a win for financial inclusion.
By offering affordable, accessible credit to those who need it most, digital lenders can play a key role in lifting Nigerians out of poverty.
The Road Ahead
The digital lending sector in Nigeria is at a crossroads. Startups have the potential to improve access to credit, but the risks of doing business as usual are high. AI offers a way to not only solve the risk assessment problem but also build trust, expand reach, and achieve long-term sustainability.
The Writer;
Henry Bankole is a thought leader with a proven track record in fintech and financial services. With experience spanning both Nigeria and the UK, Henry has consistently driven business growth and championed solutions that bridge financial gaps for underserved communities.
His career began at Nomba, a Y Combinator-backed fintech startup, where he played a key role in expanding its agent network and driving substantial revenue growth.
Henry is also the co-founder and CEO of Trocah, a UK-based financial services startup, where he is focused on delivering accessible, community-focused currency exchange solutions to immigrant and underserved communities.
As an advocate for financial literacy and inclusion, Henry is committed to creating equitable financial ecosystems that empower individuals and communities to achieve long-term financial stability. He holds a Master’s degree in Management from the University of Bradford and continues to be a trusted voice in the financial services industry.
