Report: Payroll Lending Gaining Prominence in Nigeria

Agusto & Co, a leading pan-African credit rating agency has noted the rising prominence of payroll lending activities in the country.

The Lagos-based agency which stated this in a report obtained by THISDAY, attributed the development to the unmet demand for small-sum short term credit by low to middle income individuals

It stated that prior to the emergence of core payday lenders in the country, commercial banks dominated the financial services sector, providing loan facilities and savings to corporate clients and to a significantly lesser extent, retail customers.

According to the report, retail financial services offered were primarily tailored to the upper tiers of the country’s income categories, focusing on high net worth individuals and high earning employees of prominent organisations in the country.

“Although alternative lenders such as community banks and credit unions existed, these organisations were often left to operate in the periphery due to the dominance of commercial (and merchant) banks.

“In recognition of the dearth of financial services available to the impoverished and lowincome earners, the Central Bank of Nigeria (CBN) over the last two decades made various attempts to enhance the delivery to financial services to the Nigerian populace,” it explained.

Furthermore, the report pointed out that the introduction of a microfinance policy in 2005, was expected to fill the void created by commercial bank operators’ apathy towards individual lending.

“In spite of this, overall penetration remained low, attributable to inherent challenges including poor access to finance, weak risk management practices and poor understanding of microfinance banking.

“As MFBs focused on the economically disadvantaged and low-income earners, the needs of formally employed individuals were largely unmet.

“Thus, many low to middleincome earners in active employment often sought loans from alternative channels such as family and friends, loan sharks and informal lenders.

“Since the 2010s, payroll lending activities have grown in prominence mainly attributable to the unmet demand for small-sum short term credit by low to middle income individuals.

“Borrowers often seek these loan facilities to pay recurring bills such as utilities and rent, as well as other expenses such as school fees, medical bills and other unexpected expenses that need to be settled before the next payday,” it stated.

Furthermore, the report noted that the loans typically attracted high interest rates ranging from three to six per cent a month, which it stated reflects the risks associated with the average salary earner, as well as the absence of collateral requirements.

“Core players such as Renmoney, Credit Direct and Zedvance have grown business volumes over the last few years due to the overall gap in the supply of short-term microcredit.

“In contrast to traditional lenders, industry operators provide customers with a quick and convenient process for obtaining loan facilities, with disbursement typically within 48 hours of submitting all required documents or the meeting of all conditions.”