Financial Inclusion and the Promise of Access to Credit

For over a decade, financial inclusion advocates have over-promised and under-delivered on the the benefits of having a bank account

Photo by Towfiqu barbhuiya on Unsplash

The promise of financial inclusion is simple:

Having a bank account is a gateway to a world of other financial services like pensions, insurance, wealth management, and credit/loans. 

The biggest use case for financial inclusion, second only to the enhanced ability to send and receive money, is access to credit. Owning and using a bank account builds your financial transaction history, making it easier for credit providers to assess your credit-worthiness and offer loans with reasonable rates. 

Credit is also the key to unlocking the under-performing micro, small and medium enterprises (MSME) sector. With approximately over 39 million MSMEs in the country, according to a joint report by SMEDAN and the National Bureau of Statistics (NBS), access to credit can help millions of these small and medium scale traders increase inventory, ramp up their operations and transition out of vicious cycles of poverty.

However, that promise of increased access to credit may have been exaggerated. 
According to EFinA, between 2014 and 2021, 10 million Nigerians were financially included. But that did not impact their access to credit because the number of people taking loans remained the same at ~3% of the adult population (it even dropped to 2% in 2018). Another report by RPA revealed that only 2% of Nigerian women have ever taken a loan from a formal institution as of 2021, suggesting that ‘inclusion’ is not translating into increased access to credit.

The disparity reveals that included citizens are yet to reap the ‘promised’ benefits of opening bank accounts.

So what exactly is going on?

Giving Credit to Whom Credit is Due 

Access to credit has never been straightforward or easy, whether you’re seeking a loan from public institutions ( the Federal Government, the Central Bank of Nigeria, etc) or private institutions (commercial and microfinance banks, fintechs, etc).  

On the supply side, the retail credit business is tough because of the risks of default. And the lower down the pyramid you go, the higher the risks grow. 

Take TraderMoni, for example. 

TraderMoni is a public sector loan product under the Government Enterprise and Empowerment Programme (GEEP). TraderMoni targets petty traders and artisans (whose inventory ranges between N2000 - N5000) with zero-collateral soft loans to expand their business. By 2022, 1.9 million traders were reported to have received TraderMoni loans. For most of these traders, this was their first time accessing a formal loan. 

Trademoni beneficiary

However, the government has struggled to recover the almost N10 billion disbursed via the TraderMoni program. Obviously, there are bottlenecks in trying to recollect the loans, which is unsurprising when dealing with the informal sector. 

On the other side of the road, commercial and microfinance banks have a reputation for being tight-fisted with loans to retail customers. Unless you’re upper middle class or rich, accessing a business loan was also a hassle, requiring months of paperwork, bureaucracy (and prayers). 

The emergence of fintechs with their value proposition of "apply and get a loan in minutes; no paperwork, no bullsh*t", changed the landscape and compelled legacy institutions to shift their stance on retail loans. Today, banks and fintechs now compete for customers in the credit market.

This market evolution has been led by two main loan products - payday loans and buy now, pay later (BNPL).

The Retail Credit Battlefield 

A payday loan is a short-term, small loan that you repay when you receive your next paycheck. No documentation or collateral is required. A payday loan is designed for salary earners and people with regular sources of income, so by design, it is an exclusionary product i.e. inaccessible to low-income workers, wage earners, and anyone who experiences income volatility. 

Buy Now Pay Later (BNPL) is the newest kid on the block. Also known as installmental payments, BNPL is a form of financing that lets consumers pay for their purchases over time. 

So, if you wanted to buy a new phone through a BNPL company (like Carbon and CredPal), you sign up with the BNPL company. The company assesses your financial status and if everything checks out, they notify you of their different partner merchants where you can pick up the phone. Your loan repayment plan will be managed by the BNPL company. 

BNPL flips delayed gratification on its head

Highly suited to e-commerce and consumer goods, innovative providers are also extending the business model to other industries like education (paying for travel and tuition fees) and healthcare (paying for major surgeries, expensive medications and treatments, etc).

Buy Now Pay Later (BNPL) and the retail sector

‘Buy now, pay later’ is not a novel idea to Nigeria. Market women have been “buying now and paying later” as long as memory serves. Merchants are also familiar with the concept of asset financing for high ticket purchases. 

But this is the first time formal credit would be available to the mass market for small retail purchases like laptops, phones, groceries, etc. 

Though in its current form, BNPL is only accessible to specific types of customers, time and competition will compel BNPL companies to diversify or niche down within and beyond the middle class.

This is why I believe it holds the biggest potential for extending credit to people who are underserved or completely excluded, especially MSMEs. For example, extending the BNPL model to the agriculture sector is a no-brainer because the opportunity for adoption and the potential impact on the sector is massive. 

This is something that would happen eventually, but the journey will be turbulent. 

Danger signs and the need to invest in consumer education 

The mass market is not familiar with formal credit. 

The advent of ATMs led to the adoption of debit cards across the economy. But credit cards have been the purview of the upper middle class and rich. 

Today, the conversation is changing as the concept of formal credit has entered the mainstream via products like payday loans and BNPL. 

Payday loans have come under scrutiny by the Central Bank of Nigeria (CBN) and consumer protection agencies, due to unsavory business and debt recollection practices, breach of data privacy laws and more. Several have been shut down due to possible violation of consumer rights. 

BNPL companies may be next. 

Low literacy levels and poor financial education puts the underserved and financially excluded at risk of misusing credit. Afterall, access is often just an app download away. 

I’ll also share a personal example. 

Some months ago, a friend shared how his ward, who’s a cobbler’s apprentice, got a new smartphone through a BNPL company. The problem was, his ward, age 19, is unable to read, write or speak English (he grew up in the village). 

So imagine my friend’s surprise when the boy came home with a brand new phone. How did he get it? Apparently, the salespeople at the phone shop convinced him to buy the phone because “he can pay later", “he gets to pay in batches” and “it would cost him just "12k for 6 months" (he explained all these in yoruba). 

However, when my friend reviewed the terms of the payment plan the boy signed up for, it said N12,000 every month, for 6 months = N72,000 (and not N12,000 spread over 6 months like the boy interpreted). 

A language barrier problem. 

Illiteracy and language barriers are demand-side bottlenecks

But even without a language barrier, a simple analysis of the boy’s creditworthiness would have revealed his inability to repay such a loan. 

BNPL companies should not be targeting a teenage apprentice, earning less than N5,000 a month, and unable to read, write or hold a conversation in English.

Whether deliberate or not, the scenario comes off as predatory and breaches the CBN’s responsible business conduct guidelines. 

The CBN's “Responsible Business Conduct” guidelines requires all regulated credit providers to evaluate customers’ credit history before issuing a loan. I believe this should extend to BNPL. The guideline also requires financial service providers (FSPs) to educate the customer of his expected obligations within the period of the loan. 
Literacy and language barriers are major hurdles if loan providers intend to uphold the duty of care to customers and also honor the CBN’s guidelines. 

Providers therefore face two scenarios: stop targeting vulnerable customers with language and  literacy problems, or invest in financial literacy programs to help customers understand the terms and obligations of their loans. Applicants can also be required to pass a short test/quiz in their local language to confirm their comprehension of the terms. 

Regardless of how these checks will be designed, it’s important for them to be integrated into the loan process now while the consumer credit industry is nascent. 

Epilogue

Despite the growing popularity and adoption of consumer credit products, their impact on newly included citizens is yet to be seen. 

This could change through customer-led innovations that help FSPs to reimagine and design fit-for-use credit products for the customers who need them the most (informal workers, wage earners, MSMEs). The knock-on impact of that is it enlarges the pool of customers able to access credit which in turn grows the economy. 

We may also witness an evolution of the Nigerian retail sector where consumption becomes credit-driven. But the road to Eldorado requires appropriate regulatory oversight to ensure the most vulnerable are protected. 

After all, the future should not be built with the blood of the weak. 

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