Consumer Credit and Prosperity of Nigerians
‘Tunde Popoola
One major policy initiative of President Bola Ahmed Tinubu is to boost consumer credit in Nigeria. It is not as if there was absence of consumer credit before now. However, this is the first time that a government would identify access to consumer credit as an enabler of economic prosperity and took a deliberate action towards improving access to it.
Consequently, the government created the Nigerian Consumer Credit Corporation (CREDICORP) within its first year in office. CREDICORP aims at enhancing access to credit to 50 per cent of all working Nigerians by 2030. This is just about six years away. It is estimated that about 122 million Nigerians are of working age with over 60 million employed as at 2022. About N100 billion have been released to the corporation for the first phase of the scheme.
Can access to consumer credit improve the prosperity of Nigerians?
Consumer loan is a facility granted by a creditor, normally a financial institution to individuals to finance specific types of expenditure. Typically, it is meant to assist the borrowers to have access to products, services and events that could improve their comfort and live meaningful lives. Consumer loans are of many types but the commonest of loans referred to as consumer loans include auto loans, mortgage loans, student loans, personal loans, and credit cards. With auto loans, consumers can access and use vehicles of their desire and age and pay for it over a stretched period. For mortgage loan, it is used to acquire or maintain a landed property such as a home, land or chattel. Student loan is granted to a student to have access to education in courses and institutions of choice that the student or guardian may not be able to pay for. Credit card is much more interesting and represents access to a pegged sum of money from a creditor at no cost provided repayment is made before a due date, usually within one month. Normally, credit card attracts interest payment only when repayment was not made before or on due date. Personal loan is granted to a borrower with a flexibility of usage and can typically be used to meet personal obligations. Certain types of loans especially to small businesses mostly to acquire movable assets and for working capital also fall within the description of consumer loans.
Consumer loan is a major feature of a capitalist economy. It is designed to enable and encourage consumers to purchase and consume what they do not readily have financial capacity or means for. Though consumer loans have been in existence for several thousands of years, modern day consumer loans started in the early twentieth century in the United States. The automotive giant, Henry Ford first produced their Model T automobiles in 1908, to make vehicles accessible to the “great multitude” of people, but the vehicles were too expensive to buy with cash for most families. Consequently, demand was low. By 1919, General Motors (GM) thought through the challenge of low demand by granting loans to consumers to buy the new cars. General Motors founded the General Motors Acceptance Corporation (GMAC) and popularized the idea of instalment plan financing. Consumers could now get a new car with a 35 per cent down payment at time of financing. This innovation in financing acquisition of automobiles was subsequently copied and extended by manufacturers of a number of other household materials such as furniture, washing machines, refrigerators, and radios.
By making funds available to people to buy today, what would ordinarily take them a long time to save for or may not even be able to save for, the system inspires and activates effective demand. The whole objective is to improve demand for goods and services, which ordinarily should enhance the living conditions of the consumers and engender greater prosperity. Increase in demand by consumer should lead to increased production and demand for factors of production. Hence, at the level of the firm, consumer loan accentuates increase in production activities leading to increase in employment opportunities. The cycle expands to making financial resources available by financial institutions to producers and other related businesses to finance working capital and acquisition of capital assets. All of these widen the cycle of prosperity and economic progress.
Truly, consumer loans deserve a deliberate boost and special attention to deliver the various benefits they are capable of conferring on the lenders, borrowers and the economy. Nigeria is still a far cry from what obtains in most part of the credit-driven economies around the world. As the operator of the foremost credit bureau company in Nigeria, the latest data in our repository indicate that over forty-one million Nigerians have borrowed from formal financial and non-bank financial institutions as at date. Of this figure, over seventeen million consumers have taken loans from commercial banks while twenty-four million people have taken loans from microfinance banks and other microlenders. These have significant implications. Many more Nigerians patronize microlenders to secure accommodation for their credit needs than the commercial banks. They find the terms and conditions for accessing consumer credit from microlenders easier to meet than the commercial banks. In addition, the turnaround time for disbursement of loans by microlenders is faster; they are smaller institutions and recently, most of them have adopted the use of technology to improve on their lending model. What is worrisome is the fact that loans by microlenders are more expensive and the unorthodox collections techniques by some of them could be humiliating for a lot of their defaulting customers. Notwithstanding, more Nigerians could not resist their patronage.
Our investigation of the reasons and types of facilities taken by consumers who patronize the microlenders show that they are basically to meet very urgent short-term emergencies and consumption. Some others collect the loans for working capital purposes to support their nano and micro businesses, which ordinarily would not meet the requirements of commercial banks.
Further analysis of the data at our disposal shows that the core of what is known as consumer loans is not practised in Nigeria. Mortgages, auto loans, credit cards and personal loans are largely the constituents of consumer loans. However, these types of loans are still low in Nigeria. Of the forty-one million consumer loan beneficiaries in commercial, microfinance and mortgage banks, most of them are classified as personal loans. Credit card holders are less than six hundred thousand people; less than one hundred thousand persons enjoy auto loans, and just about thirty thousand are enjoying mortgage loans. It is indeed very disturbing statistics.
For one thing, microlenders, who give out most of the loans do not give mortgage and auto loans because of the amount involved and the tenure. They are also not allowed by law to venture into such areas. Their capital base cannot even support such loans. Microlenders are primarily meant to support the active poor, and gran them reasonable small business loans within their capacity to repay and to manage their businesses. Microfinance is about providing banking services to low-income individuals or groups who, ordinarily would not have access to financial services.
The tenure of mortgage loans is always long and can span between ten and thirty years. The amount involved is huge. For auto loans, the devaluation of the Naira has shot up the cost of automobiles and the income of most Nigerians cannot support the monthly repayment that would be required to liquidate the loans in about four years, the normal tenure of such loans. Finally, finance charges de-motivate the quest to take a loan. In view of the cost of funds of banks and inflation rates, interest rates on most banks’ credit products are above twenty per cent. Finance charge is a source of disincentive for consumer loans in Nigeria.
Indeed, the Nigeria Consumer Credit Corporation has its work cut out for it. As we go ahead to excite our citizens with the beauty of consumer credit and encourage them to access loans, we need to put in place serious financial and credit education for them. Responsible lending and responsible borrowing must be promoted if consumer credit would not become a nightmare for both the lenders and borrowers. For lenders, responsible lending would involve providing loans for legitimate purposes and at reasonable costs. Some borrowers are gullible and can be fed with consumer loans under unreasonable terms and conditions because they lack basic credit education. Other borrowers with little or no financial literacy may run into problems of accumulated debts and debt trap, which could make them perpetually in debt and force them to be seeking loans all the time and for most of their financial needs.
There are significant challenges that could militate against realising government objectives and desire of promoting access to consumer loans in our country. The first is the cost of access to the facilities. With interest rates at above 20 to 30 per cent for short-tenured, small amounts, it is doubtful if it would make sense to purchase household items on credit with such high rate of finance charges. Most of the items on which consumer loans are spent are not earning or economic assets that are utilised to generate revenues or make a living. They are mostly consumables and items use at home or for comfortable living.
In fact, the inflationary spiral influenced by increase in interest and foreign exchange rates have led to significant increase in the cost of most of the items which people would want to use consumer loans to purchase. Without any significant increase in earnings and disposable income, it is doubtful if an average salary earner would be able to repay the required monthly sums from their emoluments. A new Toyota Corolla car now costs about N50 million. Together with the finance charges, the total payment for leasing the vehicle could be up to about N60 million. Monthly repayment of this over a four-year period translates to over N1.2 million every month. This is not within the reach of most salary earners.
Perhaps the greatest threat to our economy with the adoption and success of consumer credit is the fact that our economy may not be the major beneficiary, after all. Nigerians consume things we do not produce. We import automobiles, furniture, household items such as television, air conditioners, generators, motorcycles, etc. Increase in demand for these items fuelled by access to consumer loans would not necessarily translate to increase in local production and productive activities in our economy. The tendency is to further heighten the demand for foreign exchange and worsen the exchange rate situation.
Following from this analysis, it is important for government to take additional steps in policy initiative if the consumer credit programme is to meet the stated objectives.
It is hereby proposed that policy initiatives should be toward improving access to the business loan component of consumer loans for nano and micro businesses. It is recognized that a lot of Nigerians take loans from various sources including unconventional sources to support their businesses. Most of these businesses are nano and micro businesses. From the SMEDAN account of MSMEs in Nigeria, more than 99 per cent of the 39.6 million MSMEs are micro enterprises. It is imperative to encourage a high proportion of the consumer loans to support nano and micro enterprises.
Finally, consumer credit would thrive and become successful where credit scores become a practice. The implication of this is that the credit bureaus have very important roles to play to unleash consumer credit. CREDICORP has to work with the licensed private credit bureaus and those in the business of consumer and retail lending to develop a framework to accelerate the reporting of all credits granted to the credit bureaus. Credit scores can only be generated with availability of credit information. It is only those who have secured credit that can have credit scores. But with the existence of AI and ML, some other algorithms can be developed to use deposit account information, telecommunications and social media data to determine the creditworthiness of those with thin files. With the debut of Open Banking, account aggregator platforms have been established to develop scoring solutions for those with thin files.
.Dr. ‘Tunde Popoola is the Group Managing Director/CEO, CRC Credit Bureau
