Big banks join fintech loan party in boost for economy
Some of Nigeria’s largest banks are aggressively making inroads into the personal lending space after years of neglect in what holds the promise of having a transformative effect on Africa’s largest economy.
To succeed, the banks would
be competing against fintech companies who currently dominate the segment. A lower cost of capital and higher liquidity stand the banks in good stead in their quest while the bravery of the fintech companies means they may continue to s er ve risky borrowers.
Guaranty Trust Bank (GTB), the country’s largest lender by market value, Friday, sent out emails to people with salary accounts domiciled at the bank, intimating them with some loan products.
The loan offer ranges from N100,000 to as high as N30 million, depending on the borrower’s cash flow. It comes with an interest rate of 23 percent per annum and has a repayment period of up to three years that can be structured monthly, quarterly or yearly.
The loan only requires a copy of the borrower’s staff ID card and duly signed application forms. The process takes 48 hours, according to information provided in the email. A GTB official declined to provide details on the uptake of the loans but simply said it was “generating interest”.
GTB is not the only bank to have sent out emails in the past three months offering personal loan products to Nigeria’s working class.
Access Bank, Nigeria’s largest lender by assets has been offering payday loans to some salary account holders. Stanbic IBTC, the local unit of South African bank, Standard Group, has been sending text messages saying people could access a quick 30-day loan in less than a minute and without any paper work. GTB also offers a similar quick credit product that offers up to 5 million instantly at an interest rate of 1.75 percent per annum.
Businessday’s interactions with some of the users of these loan products show that the money is largely being channelled to acquiring assets or running a small business.
Strong uptake of the loan offerings would spur financial inclusion and could potentially stimulate consumption, boost aggregate demand and create jobs in an economy reeling from low growth and rising unemployment.
“Technology has made it easier and cheaper for banks to assess the credit worthiness of borrowers unlike in the past when it was so difficult and as such made the banks to focus more on lending to big corporates and high net worth individuals,” said Taiwo Oyedele, an economist and head of tax and regulatory services at Price Waterhouse Coopers (PWC).
“With that out of the way and banks willing to grow their retail loan books, it means credit will be more affordable and that can stir up productive activities in the economy,” Oyedele added.
The renewed drive from the banks to boost retail loans is coming on the back of a push by the Central Bank of Nigeria (CBN) to get banks to create risk assets, rather than binge on Federal Government Securities.
In late June, the CBN ordered the banks to lend at least 60 percent of their deposits to the real sector before the end of September. The target would require creating an additional N1.5 trillion in loan assets within three months.
Commercial banks rarely lent money without collateral until now, which explains the preference for big organisations and high net worth individuals.
The result is that only 350 Nigerians are said to be responsible for more than 80 per cent of the N5.4 trillion debt portfolio of AMCON, the ‘bad debt liquidator’.
Banks are however now convinced that retail lending is the way to go for future growth.
Segun Agbaje, the chief executive officer of Guaranty Trust bank said the tier-one lender will make a big push to grow its retail loan book this year and reduce the dominance in upstream oil and gas institutional lending.
“We want to grow our retail loan book in an orderly manner without picking up Non-performing loans,” Agbaje said during an investor conference call at the start of the year.
“We want to push more consumer products- from car loans to mortgage financing- into the market to attain the retail lending growth,” Agbaje said.
Zenith Bank’s CEO, Peter Amangbo also said in an interview that the country’s second biggest bank by assets plans to expand retail loans as a percentage of total credit to about 4 percent this year from less than 1 percent in 2018.
Micro-finance banks and more recently fintech companies took up the responsibility of serving the retail space when it was snubbed by the commercial banks. Currently, platforms like Credit Direct, Paylater, Lydia, Kiakia, Zedvance, Branch, and Renmoney are among emerging credit providers that are helping individuals and businesses with the cash flow required to meet urgent obligations.
Most of these platforms even claim to disburse loans without collateral and within 24 hours, although when interest rates are considered, it could be quite a steep price to pay.
While low interest rates are available, this is often subject to the credit rating of a potential borrower, and could be as high as 60 percent. Ordinarily, such high interest rates would be discouraging for individuals or even businesses.
But speed to market and convenience is attracted people to them irrespective of the cost, something the banks have taken note of and are borrowing a leaf from by offering quick credit using short codes.
While the renewed drive by banks to grow their retail loan books would have a positive knock on effect on the economy, it is balanced with some level of risk.
“Most of these loans are unsecuritised and could easily go bad if Nigeria enters another recession that brings job loses,” Wale Okunrinboye, Head of Research at Sigma Pensions told Businessday.
The head of retail loans at one of the banks argues that the bank has adequate riskmanagement strategies in place to reduce the risk of bad loans to the barest minimum.
“The fintech companies have been playing in that space and have recorded minimal default rates, so we are not overly worried by alarming default rates,” the banker who did not want to be named as she is not authorised to speak publicly said.