Access to credit is a crucial aspect of any thriving economy, allowing households to grow wealth and seize opportunities. It also provides a safety net during economic downturns, such as job loss or unexpected health issues. However, despite its significance, data from the Financial Inclusion Secretariat indicates that as of 2017, only 5.3% of Nigeria’s adult population had access to formal credit.
So why is it so difficult to secure loans in Nigeria? One reason is that banks are often reluctant to engage in retail lending due to two factors: their limited risk appetite and the cumbersome process of obtaining a traditional bank loan, which involves lengthy paperwork and processing times.
This has created space for digital lenders to thrive. These platforms simplify the borrowing process, offering quick, paperless loan approvals. A significant advantage of digital lending is the ability to access and analyze diverse data to make faster, more accurate loan decisions.
Leveraging Digital Data for Smarter Loan Decisions
For digital lenders, having quick access to data is not just convenient—it is central to their operations. These platforms utilize a wide range of digital data points—such as phone records, GPS data, and SMS exchanges—to evaluate a borrower’s creditworthiness. While the specifics of what data is used may vary, key factors often include a borrower’s location, social connections, and even the type of mobile device they own. Each data point helps lenders assess the likelihood of repayment, particularly in terms of a customer’s willingness to pay.
The Challenge of Assessing Willingness to Pay
A major concern for digital lenders is ensuring that borrowers understand the responsibility of repayment, particularly for small loans. If customers perceive the amounts as negligible, they may delay or avoid repayment, which could put the lender’s business at risk. Therefore, the accuracy of loan decisions is critical for sustaining operations.
One solution is gathering more data points to build a robust profile, especially when dealing with customers who have little or no credit history—known as “thin files.” In these cases, data such as utility bill payments or rent history can offer valuable insights into a borrower’s financial habits. While the data currently available is helpful, lenders believe that more comprehensive data could improve decision-making even further.
The Role of Credit Bureaus in Nigeria
In 2008, the Central Bank of Nigeria established regulations for credit bureaus, and since then, three credit bureaus have been licensed to operate in the country. Lenders are required to submit loan information to at least two of these bureaus before issuing credit. In 2018 alone, over 20 million records were sent to these bureaus, with the bulk of the data originating from deposit banks.
However, despite the significant amount of data these bureaus collect, digital lenders still require more granular data to make precise loan decisions. One challenge is the cost of accessing this data. Deji Peters, Chairman of the Credit Bureau Association of Nigeria, noted that many startups hesitate to pay for data from the credit bureaus, which can be expensive in the short term but beneficial over time.
Some fintech startups argue that the lack of pricing flexibility from the bureaus stifles innovation, leading them to seek alternative solutions for data gathering.
Innovation on the Horizon: New Startups Revolutionizing Data Sharing
In response, new startups are emerging with innovative ways to gather data that may benefit digital lenders. One such startup is CARMA, a Kenyan-based data marketplace that offers a peer-to-peer model for sharing customer data. Lenders can upload customer data to a shared platform and, in turn, access other lenders’ data for a fee. This setup allows digital lenders to access more accurate data points while reducing the cost compared to traditional credit bureaus.
CARMA’s approach is designed to address the reluctance of companies to share their databases with external organizations. By incentivizing data sharing with revenue generation, CARMA offers a model that may appeal to digital lenders looking for more affordable and flexible data solutions.
Migo: Building the Infrastructure for Smarter Lending
Another startup addressing the need for more effective loan decision-making is Migo, which began as Kwikmoney in 2014. Unlike other fintech companies, Migo does not directly lend to consumers. Instead, it helps banks and fintechs build better loan origination algorithms using a combination of data points that assess the risk level of potential borrowers.
Migo’s approach is designed to bypass traditional credit bureaus entirely. Instead, they focus on creating algorithms that banks can trust to assess low-income customers. This means that partner banks and fintechs do not need to consult credit bureaus for credit data before issuing loans. However, the full details of Migo’s operations remain somewhat opaque, leaving some questions about how they manage and protect customer data.
Despite the uncertainty around Migo’s methods, the company remains confident that its data-driven infrastructure can help banks make more informed lending decisions without the need for credit bureau intermediaries. This reliance on technology and data analytics could be the future of retail lending in Nigeria.
