Retail Banking: Taking a Cue from Dominican Republic’s Model

The Dominican Republic is to the Caribbean what Nigeria is to Africa- the second largest economy in the Caribbean with huge potential for growth. Like Nigeria, this country located in the Latin America, faces looming developmental hurdles. Poor public services, corruption, wealth inequality, among other things, have made ascending the economic ladder a formidable challenge for those at the bottom of the pyramid. But the tide appears to be changing after economic managers in the country realised that the way out is to extend financial credit to ordinary Dominicans, who will rapidly boost economic activities. Nigeria can borrow a leaf from this initiative, Bamidele Famoofo reports

Economy

The Dominican Republic has achieved growth rates that rival those of the world’s most promising emerging markets. According to available data, GDP per capita has increased five-fold in the last thirty years. Foreign Direct Investment inflow has increased 40- fold in the same time span.  The nation has transitioned from agriculture to manufacturing, services, and tourism. Though the DR’s economic strides are impressive, the nation still faces looming developmental hurdles. Poor public services, corruption, and wealth inequality, among other things, have made ascending the economic ladder a formidable challenge for those at the bottom of the pyramid.

Real Issue

Access to finance was a persistent challenge for the DR’s working poor. On paper, the nation’s credit system seems healthy: The DR scores six out of six in the World Bank’s Credit Depth of Information Index, and 60 per cent of people are covered by public credit bureaus. Compare that to 50 per cent in Brazil, 30 per cent in Peru, and just one percent (1 per cent) in Haiti, the DR’s island neighbour. Like many development metrics, however, these numbers are heavily skewed towards the top of the economic pyramid. “Indeed, as you move down the economic ladder into the nation’s poorer communities, the numbers paint an altogether different picture. More than 90 per cent of the population is employed by small and medium enterprises, but less than 10 per cent of those enterprises have access to formal finance. Limited credit information in this segment, as well as stringent collateral requirements have precluded many businesses from accessing the working capital they need to grow,” Jared Miller, Chief Executive Officer, Entrepreneurial Finance Lab (EFL) said . EFL is an innovative financial technology company, which employs psychometric and nontraditional applicant data to create credit scores to measure risk and potential among new and existing small businesses.

Game Changer

The turnaround came for Dominican Republic, when it was able to establish basic credit infrastructure, which has helped SMEs that are in dire need of credit to access funding.

Part of what DR did was to get local banks to be familiar with how data can be collected, managed, and leveraged.  But beyond these, “they also became aware of the opportunity in responsibly lending to the working poor, knowing that the market is huge, the opportunity is understood, and the appetite is fierce,” Miller added.

Meanwhile, the tripartite engagement between EFL, MasterCard and BancoBHD, a leading commercial lender in DR was what actually sparked off a revolution in DR some four years ago. According to Miller, the partnership was geared towards micro and small business entrepreneurs in need of working capital.

 “Already a leading commercial bank with a reputation for innovation, corporate social responsibility, and customer-centric policies, BHD is using EFL’s credit scoring technology to measure the credit potential of small businesses with the aim of growing their loan portfolio. To the high potential borrowers identified by EFL, BHD will issue not only loan products, but also credit cards developed by MasterCard, helping to mitigate the risks and inefficiencies of conducting business in paper currency”, he said.

The EFL-MasterCard-BHD partnership, which was launched in 2014 was meant not only to increase the number of entrepreneurs with working capital but change the way that working capital goes to work. “We believe our shared passion for financial inclusion and innovation will help unleash the entrepreneurial potential of tens of thousands of small businesses in the Dominican Republic. It’s a partnership we’re proud to be a part of, and a challenge we’re thrilled to take on,” Miller added.

A New Experience

Managing Director/CEO, Dun & Bradstreet Credit Bureaus, Miguel Llenas, based in the Dominican Republic, relished and shared the new experience in his country with participants at the CRC Credit Bureau industry forum themed “Growth & Innovation in Retail Banking: Building Sustainable Business Models” held recently in Lagos.

According him, 50 per cent of the about 10 million population of Dominican Republic now enjoys credit facilities from about 40 banks, which operate in the country. He noted that new loans have increased on annual basis. He disclosed that about 43 million credit card transactions with a total value of US$15billion (about N5.4trillion) was recorded in 2017 in the Dominican Republic as about 1.6million people in the country carry at least one credit card in their pocket for various transactions that do not attract the interests normally incurred from physical borrowing from banks. “In the Dominican Republic, a taxi driver will visit a gas station with his credit card in his pocket to refill his car without incurring charges that comes from borrowing in the banks,” he added.

Llenas disclosed that the operations of credit bureaus have enhanced retail banking in his country, with loans becoming more accessible to the people. He presented figures from the country’s Central Bank that showed that non-performing loans (NPLs) portfolio is reducing even banks dole out more credit to borrowers.

What Nigeria Must Do

According to Llenas, a former banker with over 30years experience, Nigerian banks must lend money to consumers if the economy of Africa’s most populous nation must leapfrog. “You don’t develop a nation when you lend money only to corporates and not the masses.”

He noted with nostalgia that Nigerian banks offer credit facilities mostly to the public sector and a few corporates, which he said constitute only about two percent of the entire population. “The banking system in Nigeria only has its focus on only about two per cent of the population.  What happens to the remaining 98 per cent?,” he queried.

Llenas, who argued that Nigeria’s concentration on the bond market cannot translate into economic development, further argued that lending money to small people will grow the economy. “Lending to small people that will engage in productive activities that will grow the economy is more profitable than giving a $100million to a large oil corporation”, he added.

He, however, called on Nigeria to learn from the Dominican Republic, where lending to the micro segment of the economy has helped the economy to grow appreciably.  “Loan from banks to the public sector in the Dominican Republic is almost zero as the bulk of credit facilities from financial institutions are targeted at consumers”. According to Llenas, 50 per cent of the population of Dominican Republic enjoys credit facilities from banks with new loans increasing on an annual basis.

He recommended that Nigeria should embrace the services of credit bureaus, which, he said, has enhanced retail banking in his country with loans being more accessible to the people. He said figures from the Central Bank shows that NPLs portfolio is reducing as against growing lending in the country.

Also, Senior Consultant, EMEA, Fair Isaac Corporation (FICO), Peter Old, who spoke about the new trends in global credit scoring, as well as the need for banks to embrace the mandatory IFRS 9 reporting system, said technology and digitalisation is the way to go. “For efficient lending, automated processes to make decision in a matter of seconds and not days as well as the urgent need to make use of machine learning modules are very essential”.  For Old, the key messages for credit lenders were the need to identify real untapped potentials in data and knowing that the key to unlocking the key values from big data is balancing artificial intelligence with human intelligence.

Cheery News

Managing Director/Chief Executive Officer, CRC Credit Bureau Limited, Tunde Popoola, gave the assurance that Nigeria will soon take its place in the comity of nations as regards retail lending.

“Following the enactment of the Credit Reporting Act, 2017 and our launch of a global scoring platform, it is expected that the value of consumer loan would grow exponentially”, he said.

Popoola disclosed that CRC Credit Bureau was positioned to help banks and other institutions to successfully manage their retail lending business on a scale that enables exponential financial growth.  “From just over one thousand customer base in 2009, repository records show that it has grown to about 17million in Nigeria”. He mentioned that CRC targets millions of Nigerian consumers and tremendous untapped opportunity to grow asset size and profits.

“Our goal is to grow bank assets and profitability in a healthy way, prevent systemic risk by diversifying loan portfolio and grow Nigeria’s GDP,” he added.

Popoola, who disclosed that Africa’s retail banking revenue had been estimated to grow to US$ 53billion (about N19.08trillion) by 2022, said the figure represented 41 per cent of the total banking revenues in the region in the next four years.

This, he said, was according to a 2018 African banking report recently released by McKinsey, that hinted that expected growth in revenues will come from South Africa, Egypt, Nigeria, Morocco, Ghana and Kenya.

McKinsey, in its report, noted that Africa’s banking markets are among the most exciting in the world as the continent’s overall banking is the second fastest-growing and second most profitable of any global region, and a hotbed of innovation.

“Africa’s banking revenue pools to grow at 8.5 percent a year between 2017and 2022, bringing the continent’s total banking revenues to US$129billion,” McKinsey said.

McKinsey added: “Africa’s retail banking markets are ripe with potential and present huge opportunities for innovation and growth.”

But Nigeria still has a big task before it as available information showed that banking institutions in the country still provides less than 10 per cent of its credit facilities to consumers and MSMEs compared to other emerging economies like Indonesia, which disbursed 18 per cent of its banking sector credit facilities to consumers and MSMEs; Brazil 33 per cent; and South Africa far ahead of them all at 45 per cent.

“Following the enactment of the Credit Reporting Act, 2017, and our launch of a global scoring platform, it is expected that the value of consumer loan would grow exponentially,” Popoola said.