Boosting Consumer Lending

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Goddy Egene writes that the introduction of FICO Scores will help to boost consumer lending and enhance the government’s financial inclusion policy

One of the major roles of banks is to facilitate economic growth by lending to customers so that they can finance business activities. When banks mobilise deposits, it is expected that significant part of the deposits is given those who want to fund businesses and thus contribute to the growth of the economy. It is a fact that many people in the country do not have access to financial services, a development the federal government, through the Central Bank of Nigeria (CBN) is trying to address.

Hence, various policies are being introduced to enhance financial inclusion. However, a lot is needed to be done for more Nigerians to really enjoy banking services and be able to contribute to the growth of the economy.

In the area of consumer lending, for instance, Nigeria is lagging behind, compared to some other countries. Only 10 per cent of banks’ loans in Nigeria is for consumer lending. This is lower than 45 per cent in South Africa, 33 per cent in Brazil and 18 per cent in Indonesia.

Why consumer lending is low

Ordinarily lending by banks to consumer ought to be an exciting experience because of the impact it will have on individuals and the economy at large. But many financial institutions prefer to deal with large corporates and high networth individuals instead of concentrating on retail customers.

The reasons for this are not farfetched. According to the Managing Director/Chief Executive Officer, CRC Credit Bureau Limited, a leading firm that has been providing credit information since 2009, Mr. Tunde Popoola, said commercial banks are not doing more consumer lending because tracking non-performing borrowers is difficult.

“Besides, consumer transactions are too small and expensive to manage. There is difficulty managing millions of borrowers and nonperforming loans, fear of multiple identities and fraud. There is also the issue of wrong lending model, lack of expertise, technologies and unique borrower identity,” he said.
Apart from the forgoing, certain risks also militate against consumer lending in the country.

“Non-performing loans (NPL) is one of the biggest challenges facing lenders in Nigeria. NPL jumped from 5.3 per cent in December 2015 to 11.7 per cent in June 2016. Information asymmetry continues to be an issue for lenders. Consumer lending continues to be done by emotions, instinct, personal knowledge and relationship with the customer and judgement,” he said.
Popoola added that consumer transactions too small and expensive to manage, just as there is the fear of multiple identities and fraud, wrong lending model, lack of expertise and technologies, lack of unique borrower identity and poor data quality.

A Boost from New Law
Although most operators and stakeholders are trying to see how to overcome some of the challenges and deepen the consumer lending space, the federal government has made a commendable move that would boost credit reporting in Nigeria.
It is the signing of the Credit Reporting Act 2017 that was signed into law by acting President Yemi Osinbajo in May.

According to S. 3(1) of the Act, one of the functions of a credit bureau is receiving, collating and compiling credit and credit-related information from credit information providers; credit information users, and such other persons as the central bank may prescribe.

Credit information providers are banks, leasing companies, insurance companies, cooperative societies, utility companies, assets management companies, suppliers of goods and providers of services on a post-paid, deferred or installment payment basis and other entities that in their ordinary course of business have relevant information that complies with permissible purposes and serves the purpose of the credit bureau.

Speaking on the new law, Popoola said: “One thing that government has done and we must commend them is the enactment of the Credit Reporting Act. Before now, we did into have an enabling legislation that is providing cover for our industry. The Credit Reporting Act is just a very excellent way of support from government. The second support is the issue of Bank Verification Number (BVN), with BVN the means of identification is becoming easier and easier and that is assisting the efficiency of processing data because we now can identify people with their BVN rather than with their names. Before, when you put a name, so many people come up on the system. But today if you use their BVN only one name comes up. That is also good.”

The CRC Credit Bureau boss, however, added that the government should ensure that as many people as possible have the BVN coverage.
“Secondly, the National Identity Management Commission is our national means of identification. Government should ensure that every Nigerian has a national identity number. That is one key infrastructure that Nigeria needs to focus on by government. If every Nigerian has a national identify number, then you can relate to people with their numbers, and it become easy for us to be able to reduce fraud, people bearing other people’s names and identity and so on. It becomes cheaper for financial institutions to be able to onboard consumers and customers and so and so on. It is only government that can drive that,” he said.

Introducing FICO Score

While the government is making efforts to address the low level of consumer lending, CRC Credit Bureau Limited and Fair Isaac Corporation (FICO), an American company with over 50 years of experience in data and analytics have partnered to introduce FICO Score in the country.
FICO Scores is meant to help banks and other retailers to be able to appropriately dimension the risk on borrowers who are basically individuals

Popoola explained that FICO Scores will know the risk level of every borrower and able to dimension whether it is good, excellent, average or bad, adding that with that, you can now have dimension of relationship you want to have with such an individual.
According to him, this product is to promote access to credit for consumers for individuals not for companies, but for individuals.

He said: “To make it easy for lenders, commercial banks, microfinance banks, retailers, to allow access to credit for consumers. Before now, it has been very difficult for them to do that because they don’t know to how to evaluate the risk that is inherent in every consumer. As far as they are concerned it is a black box, they see your application and they are judgemental.

“They used sentiments, personal experience and relationship they have with you to be able to come up with whether you are good candidate for a loan or you are bad one. So what the FICO scores that we have introduced is trying to do is to put a scientific method on how to analyse a particular customer based on a particular information about that customer and now recommend the per cent the risk that customer carries with just three digit number, which ranges from 300 to 850 based on the information that is available.

“A score will be calculated and based on the some parameters that have been put in the system. Once, the results come up, the lower the score the higher the risk of that particular customer. The higher the score the lower the risk of that customer. So customers that have high scores, have the tendencies to get loans easily, while those that have low scores have tendencies not be able to have access to credit.”

According to Popoola, the introduction of FICO Score will change the face of consumer lending in Nigeria as it will give opportunity for financial inclusion and private individuals who don’t have opportunity will now have opportunity to borrow and also give opportunity to lenders to give loans to people who have credit worthy based on the information they will get from FICO.

“No institution will give money to somebody with low scores. And once you have the scores (as lenders) you can now decide to differentiate who you want to lend your money to, whom you want to give your product to and the kind of condition that you want to attach to such relationship between lenders and borrowers and buyers of products and makers of products. Those who score between 700 and 850 are excellent people and such people you sell to them at very reasonable price or rate and probably without any condition attached,” he said.