Making credit work in Nigeria

Analysts have always reckoned that the low financial inclusion in Nigeria is an opportunity of extending banking services to more people in Nigeria. This prospect was further highlighted after the GDP was revised in April.

Though private credit is sputtering, a weak fiscal discipline is the major threat to the economy – increased spending expected as elections draw near. The stock of credit to the corporate/household sector in Nigeria increased to 15 trillion naira in 2012 from 5.05 trillion naira in 2007.

During the same period the banking sector’s average loan-to-deposit ratio – a measure of liquidity and banks’ loan generation ability – was 84 percent. That is, for every 100 naira in the banking sector 84 naira was extended as loans to customers. But when, for example, it was higher than 100 naira, as in 2008, it showed banks either borrowed money for on-lending at a higher rate or an indicator that banks were illiquid. 

Though the banking sector is in a better shape the level of financial inclusion is dismal: 46.3 percent or 39.2 million adults do not have access to financial services (payments, insurance pensions, credit and bank accounts). With the formal market almost saturated, traders (business owners) and farmers are considered the next frontier.  

Large companies and some households find it easier than small and medium enterprises (SMEs) to get loans because they have a track record of profits and performance. Their track record makes it easy to assess their creditworthiness and price their risk of defaulting. (One of Nigeria’s largest banks gives loans only to staff of its corporate clients.)  

The need for better access to finance is vital because SMEs are drivers of growth and employment. The small size of loans to households or small businesses should benefit from the law of large numbers, if loans can be backed with collateral. 

In Nigeria, the asymmetry of information and a short credit cycle are binding constraints to transactions between borrowers and lenders. These are loosened when a borrower pledges a property or some other substitute for information e.g. credit history.

For instance, prior to the banking crisis in 2009, the lack of information was an incentive for banks to expand their balance sheets to boost profits. Most of the loans were given to petrol importers. Oil prices were high, the naira stable and Nigeria’s foreign exchange reserves were large enough to support the demand for dollars to import refined crude oil, until the global economic crisis wreaked havoc. 

Consequently, the central bank licensed three credit bureaus to bridge the information gap and provide banks with the credit history of customers to prevent serial loan defaulters from taking loans from several banks. 

Credit is essential for economic growth. According to Godwin Emefiele, the CBN governor “the CBN will work towards reducing the effect of information asymmetry in the credit market. In this regard, we shall enhance the operation of credit reference bureaus”. We welcome the zero-tolerance policy of the central bank. 

The introduction of Bank Verification Numbers (BVN), a biometric database of bank customers that captures their picture and their ten fingerprints, should improve the work of credit bureaus. BVNs of account holders, tied to accounts held with other banks, will be a uniform and single identity acceptable by all banks. Introduced last year, it’s also expected to improve the credit culture in Nigeria’s highly informal economy (with its own mechanism for extending and contracting credit). 

We call on the CBN, the banks and credit bureaus to work together to improve data collection and sharing. Without sufficient information the quality of a bank’s lending decision can be rational individually but collectively it can be sub-optimal.