Dearth of credit facilities has over the years remained the bane of business growth. This cuts across micro, small and medium scale businesses. In this report, Ebere Nwoji writes that deposit money banks have evolved ways of breaking this jinx through launch of an array of credit- facilitating products and simplification of credit processes for Nigerians
The portion of a country’s individuals and businesses with access to credit facilities from financial institutions has a direct relationship with the growth rate and development of that nation’s economy. Development increases with increased availability of credit. The ratio of active borrowers (individuals and businesses) to the total number of eligible borrowers is usually measured by economists as a measure of credit penetration. Economists also measure loans against gross domestic product (GDP). In both cases a higher ratio is desirable.
Putting it simply, credit availability fosters economic development by enhancing both the production and consumption of goods and services. Access to finance by businesses drives growth by funding investments in physical infrastructure, working capital, and human capital, which are factors that increase production and create efficiencies that boost productivity. On the other hand, when finance is made available to individuals it drives consumption growth as the beneficiaries are able to procure goods and services. This sustains their productive capacities and also sustains the investments by the businesses.
Credit penetration is still low in Nigeria. Analysts at Proshare, a financial information service hub report that Nigeria’s private sector credit to GDP ratio was 17.02 per cent for April 2018 compared to the Average ratio for sub-Saharan Africa at 45 per cent and a global average of 129 per cent. The USA and UK have ratios in excess of 200 per cent.
The Nigerian financial services sector has been doing its bit to improve credit penetration in Nigeria. For instance, the Central Bank of Nigeria (CBN) has consistently sought to improve financial inclusion while also making special interventions to improve credit availability in critical sectors such as agriculture and manufacturing in line with the federal government’s diversification efforts. The CBN also introduced credit bureaus to reduce the risks to lenders while constraining borrowers to consciously imbibe creditworthy behaviours.
Deposit Money Banks, Microfinance Banks and other lenders also continue to deepen their credit offerings with new products and improved conditions that aim to improve the eligibility of borrowers as well as the borrowing experience.
As earlier noted, making loans available to individuals is just as important as lending to businesses as the former completes the cycle by increasing the consumption of the outputs from businesses. Individual borrowers are either employees or self-employed business owners. Self-employed business owners may obtain personal loans based on the salaries and allowances they are entitled to from their businesses or yet authorise that repayment for any loan facilities are deducted from company earnings. For employees, who may be employees of public or private establishments, their monthly salary is usually the primary yardstick for credit extension.
Generally, the loan types available to employees include the typically short term offerings of credit cards, salary advance and salary overdrafts as well as the medium to long term asset acquisition loans and home loans.
Asset acquisition loans enable employees to procure personal assets such as cars, generators, and other household appliances and spread repayments over periods from one year to as much as seven years. As they enable the borrowing of substantially larger sums compared to the short term facilities and also address critical funding of lifestyle improvements, asset acquisition loans are in this wise more useful to employees and accordingly more desired. Usually no additional security is required from the borrower as the asset that is financed serves as collateral.
Some factors however affect the availability of this facility chief of which is the usual requirement that the borrower makes a part contribution to the acquisition of the asset. This equity contribution which may range from 10% to 30% of the cost of the asset oftentimes portends a challenge of its own for intending borrowers as the many pressures on their monthly salaries make it difficult for most to save up the equity contribution. This problem which increases with the cost of the asset(s) has also worsened lately as inflation has lowered the disposable incomes of employees.
Another factor which has affected the performance of asset acquisition loans is the inability or difficulty for borrowers to make up funds in good time for the insurance premium. Usually in securing the facility the assets acquired are comprehensively insured to the benefit of the lender while the annual insurance costs over the course of the loan facility are borne by the borrower. A lot of borrowers who may be able to save up the insurance premium along with their equity contribution in the first year struggle in subsequent years to pay the premium. This delay poses a serious risk to the facility as any damage, destruction, or theft of the asset during this time means a total loss of the collateral securing the loan. It also leaves the borrower with an unpleasant experience.
Furthermore, some beneficiaries of asset acquisition loans have in some instances realised that they purchased substandard items from some not so scrupulous vendors while prospective borrowers also have a hard time locating vendors they can fully trust.
The recently introduced asset acquisition offering from Stanbic IBTC for instance is an example of how Nigerian DMBs are making improvements to the credit process in Nigeria. This facility, christened Personal Asset Acquisition Scheme (PAAS) enables employees whose salaries are paid through Stanbic IBTC bank to acquire assets including cars, generators, laptop computers, and other household appliances but also redresses the aforementioned problems.
Unlike regular asset acquisition loans, PAAS does not require borrowers to make any equity contribution (or part payment) to the purchase being funded by the facility. The asset is financed 100 per cent for the borrower which enhances loan availability.
The cost of comprehensive insurance over the duration of the facility is also financed along with the total cost of the asset(s). This ensures that there are no lag periods during which the bank faces the risk of asset loss due to delayed insurance premium payments, and also obviates for the customer, the unpleasant practice of setting funds aside each year to make up the insurance premium. In this way the objective of providing uniform and manageable monthly repayments for the customer is kept as the annual premium is oftentimes, substantially larger than the monthly loan repayments.
The facility raises the bar further on availability and convenience as all an intending borrower needs to do to get a loan is obtain the proforma invoice for the item(s) from a prequalified vendor and submit same at any branch of the bank upon completion of the application form. The request is appraised, the customer gets and executes the offer letter, and the asset is delivered in 24 hours.
Furthermore, the robust list of prequalified vendors that PAAS provides leaves any intending borrower with several options to procure any items along with the added comfort that there is no risk of buying fake or substandard items. The provision of this facility has literally given to the middle class and new entrants to the labour market what football pundits call a “through pass” as it efficiently slides through previous hindrances to provide a clear opportunity to score the goal of convenient acquisition of lifestyle improvement assets.
Overall, the finance industry continues to explore ways to broaden the credit availability. New operators have introduced financial technology (Fintech) to provide financial services to individuals and businesses in ways that continue to make it easier to save and transfer funds, obtain advisory services as well as access credit.
Banks still hold the primary responsibility of intermediation between the surplus and the deficit sectors of the economy, at least for now. Consequently they work in tandem with the CBN to deepen financial inclusion through various means which include readjustment of “know your customer” requirements for certain categories of customers, creation of special products, adoption of new technologies, use of agent banking etc so as to bring more people into the financial system and thereby make more funds available for lending.
Banks have also invested heavily in technologies that automate the lending process for a faster and yet more efficient system and also cooperate by making timely and updated information available to credit bureaus to enable lenders make informed decisions on the credit status of prospective borrowers.
Other personal loan offerings from banks include Salary Advance which acts as a bridge for customers to access a portion of their salary when they experience unforeseen expenses and repayment is taken from their salary. This may be one-off or made available (revolve) over 12 months. Customers may also be allowed to overdraw their salary accounts through an overdraft facility and their accounts will be normalised when the salary is paid in. Credit cards also provide a revolving line of credit to customers.
School Fees Loans are designed to enable customers to access funds to meet up with school fees payments while Rental Loans address the funding need for the payment of house rent. In addition, there is an array of credit cards
Home Loans for customers to buy new homes or to refinance their current homes with flexible payment options and repayment periods that can be up to 20 years are also available from some banks.