Nigeria runs on cash. For many years, the government has been working hard to make it credit-based. The Cashless Policy which encourages electronic transactions and the BVN (Bank Verification Number) policy which links biometrics with bank account numbers are some initiatives government has used to drive this redesign [electronic transactions have records which can be used to anchor credit-based systems]. Through Nigeria Inter-Bank Settlement System (NIBSS), the financial institution can build a good chart of any Nigerian banking customer through its BVN. When you add NIMC (National Identity Management Commission) Identity Number to it, you have a new dawn.
Yet, it is possible that the new dawn will come from fintech, not necessarily banking institutions, because the BVN is not open, with no structure at the moment to anchor any service beyond validating account ownership. The fintechs have to use alternative means to drive this new age in the economy.
The State of the Ecosystem
In a copyright-free piece in APO newsletter, Oradian made this observation which I have adapted.
More than 2.5 billion people around the world – many of them in Africa – lack formal identification that enables them to access financial and government services, according to the United Nations and the ID2020 project. What’s more, less than 10% of adults in low and middle-income countries are on file in public credit registries.
The result is that millions of people in Africa are paying punitive interest rates for credit or are frozen out of access to financial services. Microfinance institutions (MFIs) in the region charge their borrowers notoriously high interest rates, often up to 30% per year. This is partly because these lenders face a higher risk of loan defaults than mainstream banks due to a lack of borrower data to support lending decisions.
MFIs in frontier markets have traditionally needed to make lending decisions without access to the sort of customer data and documentation commercial banks take for granted: credit scores, identification documents such as passports or government ID cards, bank statements, lending history and collateral.
Fintech providers, financial inclusion companies and digital finance applications are filling this information gap with alternative credit data. Credit scoring applications collect masses of data about phone owners and use these data points to produce accurate credit scores.
This alternative credit data could help the credit officers at microfinance banks (MFBs) and MFIs who make lending decisions to make more accurate predictions about loan performance. This could, in turn, help improve collection rates and profitability for institutions and make credit more affordable for lower-risk customers.
With smartphone ownership in Africa rising as the average selling price falls, an unprecedented amount of credit data is expected to become available in the years to come.
This is certainly a huge opportunity when combined with BVN in Nigeria.
Building Effective System
While it is vital to innovate, it is also important that Nigeria makes sure that the privacy and security of citizens’ data are protected by all the players in the credit scoring business. I have noted how such a system can be built in the nation.
The alignment of the interests of the banks, credit bureaus and citizens will be catalytic in establishing a functioning credit ecosystem in Nigeria. This is not included in the current CBN’s guidelines for establishing credit bureaus in Nigeria. We cannot do it the way the Americans have done it. We need a system that provides a citizen element so that credit bureaus have clear incentives to deliver good services. You cannot be selling people’s data and yet have no incentives to serve the people and protect their data. With this proposed model, the oligopolistic system that runs in the credit bureau industry will be dismantled in the Nigerian model. The outcome will be a virtuoso credit bureau system that secures customers data as it serves its core customers, the banks.