In February, * Lolu was in desperate need of a soft loan to keep him going until payday. He asked two of his friends, but it was one of those months where everyone you know is broke and clinging to financial fingertips for payday.
Almost out of options, he remembered that someone at work had mentioned that he could get a loan without going through the bank. He did a quick Google search and found almost a dozen digital lenders.
Today there are over twelve apps that promise loans to Nigerians with “zero documentation and collateral”.
Lolu is like many Nigerians, facing a rising cost of living and difficult access to credit facilities. With rising unemployment and poverty, more and more people are turning to quick loan apps to meet their needs, wait for payday, and fund impulse purchases.
Access to credit has always been difficult in Nigeria. While credit scores are largely non-existent, the biggest problem is, there are no real consequences for defaulting on loans.
To show how risk-averse traditional Nigerian banks are, credit cards are rarely issued to individual account holders.
MSMEs face the same problems, with many banks choosing the risk-free activity of buying treasury bills or lending to large players.
The market for individual loans has always existed, but it has always been high risk.
When family and friends weren’t able to extend credit, people turned to pawn shops who charged up to 30% interest per month. These money lenders also needed an intermediary who would also act as a guarantor.
Despite these security measures, the retail lending business remains risky. Stories of people running away with borrowed money are all too common.
Technology is at high risk
After a cursory analysis, Lolu was satisfied with KwikMoney, who promised him a loan of 20,000 naira without any form of guarantee. If he read the loan terms, he admits he didn’t, saying, “Who’s reading these things these days? ”
The availability of lending options has evolved over the past few years with the arrival of technology lenders. The new generation of technology lenders employ a range of data-driven approaches that often combine machine learning and data-driven risk assessment.
It is difficult to chronicle the early days of technological solutions to credit facilities. But, one of the first players was the company backed by SeedStars, QuickCheck.
Launched in July 2016, the company claims to have disbursed 3,000 loans over a period of 6 months.
Apps like PayLater (Carbon), Zedvance, Branch, PalmCredit, OKash have now joined the fray. If you’ve ever doubted the powers of technology, imagine telling someone five years ago that getting a loan would be as easy as dialing a USSD code.
The unique proposition of these digital lenders is simple; if you want a loan, you can get one. No embarrassing questions, no guarantees.
Guarantee refunds with cold and hard data
Operating in a society where there are no real consequences for refusing to repay debts raises a question: how do these companies grant loans without asking questions?
The answer is quite simple. Today, digital lenders make lending decisions with more revealing and harder to mine information: personal data.
All digital lenders have algorithms that help them assess personal credit risk. Call records are checked to find frequently called contacts, SMS records are fair game.
If you know a lot of defaulters, your chances of getting a loan will be affected.
Your GPS data is also to be entered, as people with more predictable and stable routes are less likely to miss out.
Here’s what’s for sure: Every lender has a mix of algorithms and data points that they take into account. These different data points then constitute the secret sauce of its lending approach.
These are just a few indicators that lenders are ready to talk about. The exact determination of the credit rating will remain a trade secret for a long time. An interesting point is that while technology has the power to disrupt, societal values remain ingrained.
This is one of the reasons why, despite using machine learning to assess risk, default rates remain high. The Nigerian attitude towards debt is curious.
Nowhere is this more evident than in the failure of the federal government to collect thousands of loans paid to farmers under the Anchor Borrowers Scheme.
GTB’s QuickCredit, available only to GT account holders, fixes the loan at a percentage of an employee’s average monthly income. He introduced an interest rate of 1.75%, the lowest in the industry.
Most digital lenders offer rates between 3% and 21% for loans under 60 days.
Digital lenders oppose annualized interest rates, arguing that many of the loans they disburse are short-term.
What happens when people don’t pay anyway?
While the majority of players in the digital lending space favor all apps, KwikMoney uses a low fidelity model, abandoning the app route for a simple USSD model.
Like other players, they inform you that your personal details will determine loan offers. Yet they go even further, reaching out to your contacts when you default on payment.
Societal shame as a means of debt collection is certainly not new. In Kenya, many lenders use this method to shame defaulting debtors for repaying their loans.
It’s easy to see how this potential loss of face can strain the hand of a defaulter. Yet unlike Kenya, Nigeria does not have a strong credit bureau, so when that asset fails, what happens next?
Lenders will find some hope in any of the central bank’s new regulations. On October 3, the CBN granted depository banks permission to debit bank accounts belonging to defaulting debtors at all banks across the country.
Confidentiality concerns
Does KwikMoney follow through on its threat to contact your contacts by default?
We asked Uche, whose loan had a term of 2 weeks and an interest rate of 15%. A week after defaulting on the loan, he received this reminder:
Ekechi Nwokah, Managing Director of Mines, the parent company of KwikMoney, explains their approach:
“What we’re doing is looking at your data and figuring out who’s close to you, so we can influence them to talk to you. If you see the messages, it doesn’t say “this person has a loan”, that’s a privacy breach.
We’re just saying we’re trying to reach them, please tell them to call us. It’s not from us, it’s from a bank, so they know it’s a serious thing.
Ekechi Nwokah, Director General of Mines
Nigerian Data Protection Regulation 2019
Data protection and regulation, still in its infancy, still seems to address some privacy concerns.
With digital lenders having to deal with at least five regulators, the Nigeria Communications Commission is giving the clearest indication where we should look.
The NCC refers data protection issues to the National Information Technology Development Agency (NITDA).
“The agency is legally mandated by the NITDA Act of 2007 to develop regulations for electronic governance and monitor the use of electronic data interchange and other forms of electronic communication transactions as an alternative to paper-based methods in the government, commerce, education, private and public sectors, labor and other areas, where the use of electronic communication can improve the exchange of data and information.
when it comes to assessing whether consent is freely given, the utmost account is taken
determination of whether the performance of a contract, including the provision
of a service, is subject to consent to the processing of personal data
which is not necessary (or excessive) for the performance of this contract;2.3 (d)
The obvious question arising from the above section is: is collecting your phone contacts necessary for the loan granting process?
For digital lenders, the answer is an unequivocal “yes”. Without a traditional credit infrastructure, this data-driven approach gives them a risk assessment methodology. This in turn increases their ability to provide loans to the “financially underserved”. They further claim that their products meet a real need, change lives, and will serve as a starting point for a proper credit history for those taking out these loans.
For consumers, where the possibility of quick credit exists, privacy is a seemingly low price to pay and even a careful reading of the terms and conditions is a difficult (unnecessary?) Question.
Yet economic data shows that the bulk of small loans taken by financially underserved people are used to finance consumption, and the future of credit infrastructure is still uncertain. It remains to be seen whether these low-value loans, with their high interest rates and somewhat invasive data use practices, are a costly stopgap or a real ladder to financial inclusion for borrowers.