Expanding access: Consumer credit is increasingly important to the national economy

Although credit to corporates and households rebounded strongly after the 2009 banking crisis, from N9.7trn ($61.11bn) in 2010 (28.2% of GDP) to N15.28trn ($96.26bn) in 2012 (35.1% of GDP), Nigerian individuals and enterprises remain relatively under-leveraged.

Outstanding consumer loans at the end of 2012 stood at a mere $7.29bn, according to Lafferty Cards and Consumer Finance figures quoted by Diamond Bank, far lower than the $19.11bn in Egypt, $142.59bn in Turkey, $228.61bn in Malaysia and $293.29bn in South Africa. Some 93% of Nigerians could not access a loan in 2012, according to figures from the Central Bank of Nigeria (CBN), while roughly two-thirds of Nigerians only have access to informal moneylenders, and some 71% of loans are granted through family networks. As banks seek to raise their loans-to-deposit ratios beyond the 50-65% range, structural reforms to promote greater bank intermediation could unlock credit flows to the under-leveraged real economy.

CONSUMER CREDIT: Despite a total of around 42m adults in employment, Nigeria only has 8.2m active borrowers, of whom a mere 1.6m held loans from banks in 2012, according to credit bureau CR Services. Yet an African Development Bank report in 2011 estimated the Nigerian middle class, defined as those with disposable incomes of between $2 and $20 a day, accounted for 23% of the population (or slightly less than 40m people), although only about 25m hold bank accounts.

Challenges associated with identification and collateral have hampered growth in leverage, however, while most bank customers only use their accounts for transaction banking. A 2011 survey of the Nigerian middle class by Renaissance Capital found some 60% of respondents claimed it was impossible to borrow small amounts from formal institutions, while 84% said they had never applied for a loan. In fact, a mere 20% of respondents saw banks as providers of loans.

Surprisingly, growth in Nigerian consumer lending has outpaced its peers from 2005 to 2010, according to Diamond Bank, with a compound annual growth rate of 35.4%, as compared to 29.2% in Kenya, 29.1% in Turkey, 13% in Egypt, 11.6% in South Africa and 10.5% in Malaysia. However, this has resulted in an increase of just 8.4% in total consumer indebtedness over the period. Russia’s Renaissance Capital established an unsecured consumer lending firm, RenCredit in November 2012 to target this lending gap, while larger banks were also moving into this space in 2013 as traditional profit sources, such as money market yields, decline. “Banks like ours are eager to expand our consumer lending since it is less price sensitive than corporate deals and is more granular, spreading risk to a much larger number of borrowers,” Kehinde Lawanson, executive director at First Bank, told OBG. “We are also expanding our unstructured lending to smaller firms.”

CREDIT INFORMATION: Three credit information bureaux have emerged since 2008: Credit Reference, Credit Registry Services and XDS (linked to South Africa’s Xpert Decision Systems). The CBN has required all commercial banks to share information with two of the three bureaux, which pool data among themselves. Over the past five years the trio have invested a total of N5bn ($31.5m) in their systems, according to the Credit Bureau Association of Nigeria (CBAN). Of the roughly 100 active users of the bureaux, deposit money banks account for 90% of data supplied, with the largest three banks accounting for half of all requests, according to the association. This high concentration on the narrow formally employed bank customer base, however, is becoming increasingly saturated: while the number of credit reports sold to banks doubled annually in the three years to 2012, the association reports growth plateauing in 2013 with fewer than 20,000 reports sold per month in the first half of the year.

IDENTIFICATION: Efforts to launch a national ID scheme by the National Identity Management Commission (NIMC), established in 2007 to extend ID card ownership to the estimated 100m Nigerians without, are just starting, with around 554,000 Nigerians in total registered as of July 2013. The MasterCard Prepaid payment functionality has been selected by the commission as the technology to be used for 13m national ID cards to be issued by Nigerian banks in the pilot scheme for the project, due to start in 2013. The technology company in conjunction with the South Africa Social Security Agency (SASSA) also enabled banks to run a similar scheme in South Africa where about 10m debit cards have been issued to social grant recipients, most of whom are being integrated into the formal financial sector for the very first time. The Nigerian ID cards are set to double as electronic prepaid payment cards, with Access Bank acting as the initial partner issuing the cards, although more banks are expected to join.

An initiative to establish a bank ID card is underway by the CBN and the Bankers’ Committee, which, along with the implementation of the regulator’s new “know-your-customer” guidelines in 2013, seems likely to bear fruit faster. Although past attempts have failed, the CBN expects the use of biometric data and the rationalisation of bank ID tracking under a New Uniform Account Numbering Scheme will enhance banks’ visibility on account-holders and reduce barriers to credit extension. Having pre-selected three companies to manage the system, the aim is to issue all 25m cards (one for each account) within a year of roll-out, expected in the fourth quarter of 2013, using 6000 branches to register account-holders’ biometric data. “You need credit data to encourage consumer lending, and the bank ID cards will be a significant step in fostering this,” First Bank’s Lawanson told OBG. “This will add to the ecosystem of information alongside credit bureaux.”

SME CREDIT: SMEs, classified by the CBN as holding an asset base of between N5m ($31,500) and N500m ($3.15m), have historically faced challenges far beyond financing, including access to transport and utilities like power. The IMF has long highlighted the “significant lag” in access to finance for Nigerian SMEs compared to their emerging market peers. While Nigeria’s 20m SMEs account for some 80% of all businesses and employ a total of 31m people, 75% of the workforce, currently they only contribute around 10% of GDP and 3% of export earnings, according to CBN data. “The time is ripe for diversifying into lending towards SMEs, an important segment, for several reasons,” Reginald Ijejiahi, Fidelity Bank’s managing director, told OBG. “The power situation is improving, access and cost of credit are gradually improving, while larger corporates are increasingly outsourcing to mid-sized service providers.”

SME SOLUTIONS: Access Bank, for example, secured a N3.5bn ($22.05m) risk-sharing facility from the International Finance Corporation (IFC), an existing Access Bank shareholder that extended an additional N7.7bn ($48.51m) loan, in March 2013. Since July 2012 First Bank has rolled out 9% annual interest loans through the Nigerian Association of Small Industrialists under the CBN’s risk-sharing scheme. During a trip to Beijing in July 2013, First Bank signed a $100m credit facility with China Development Bank to support its SME lending. Mid-sized banks have also been gearing up their SME lending. FCMB won a partial risk-guarantee from the US’s Overseas Private Investment Corporation (OPIC) on a $20m, three-year loan from Citi to finance its SME lending in October 2012. Other mid-sized lenders like Diamond Bank have also been making a push in SME credit, with the bank claiming in April 2013 to have extended N71bn ($447.3m) to some 30,000 SMEs in the four years since 2009. Meanwhile, the state-owned Bank of Industry (BOI) administers the CBN’s N200bn ($1.26bn) SME Credit Guarantee Scheme, as well as the N300bn ($1.89bn) Power and Aviation and the N200bn ($1.26bn) Manufacturing Refinancing and Restructuring Funds. Under the SME scheme, the BOI extends single-digit loans for maturities of several years, in partnership with state governments. At the announcement of a N750bn ($4.73bn) recapitalisation of the BOI in June 2013, the bank claimed to have disbursed a total of N238bn ($1.50bn) in credit to SMEs since 2010.

Although increasing sums have been disbursed, the effect on broader SMEs’ financing capacities remains limited. “Banks’ lending under the CBN’s credit guarantee schemes have accounted for most of the recent credit growth,” Bismarck Rewane, CEO of Financial Derivatives Company, told OBG. “Many of the recipients under these schemes are well-known businessmen active in other sectors.” Whilst the risk-guarantee schemes are due to expire in 2013, bankers expect two-year extensions. “A bank ID card will help to extend financial access, as will the creation of a movable asset public registry and reform of the legal system, which would encourage more trust in the system,” Niyi Yusuf, Accenture’s country managing director, told OBG. The IFC is also partnering with the Pan-African University in Lagos and IBM for its advisory SME Toolkit.

NEW START: With freshly sanitised balance sheets Nigeria’s banks – both larger and mid-sized – will need to significantly expand their creation of risk assets to counter-balance falling sources of traditional profits like the money and fixed-income markets. An emerging middle class is increasingly banked, but not leveraged. Unlocking access to credit for both individuals and SMEs will be integral to expanding economic growth.