Rising Prominence of Payroll Lending Activities in Nigeria – Agusto & Co. Report

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Prior to the emergence of core payday lenders in the country, commercial banks dominated the financial services sector, providing loan facilities and savings to corporate clients and to a significantly lesser extent, retail customers. Retail financial services offered were primarily tailored to the upper tiers of the country’s income categories, focusing on high net worth individuals and high earning employees of prominent organisations in the country. Although alternative lenders such as community banks and credit unions existed, these organisations were often left to operate in the periphery due to the dominance of commercial (and merchant) banks.

In recognition of the dearth of financial services available to the impoverished and low-income earners, the Central Bank of Nigeria (CBN) over the last two decades made various attempts to enhance the delivery to financial services to the Nigerian populace. Most prominently, the introduction of a microfinance policy in 2005 (and subsequent licensing of over 1,000 operators) was expected to fill the void created by commercial bank operators’ apathy towards individual lending. In spite of this, overall penetration remained low, attributable to inherent challenges including poor access to finance, weak risk management practices and poor understanding of microfinance banking. As MFBs focused on the economically disadvantaged and low-income earners, the needs of formally employed individuals were largely unmet. Thus, many low to middle-income earners in active employment often sought loans from alternative channels such as family and friends, loan sharks and informal lenders.

Since the 2010s, payroll lending activities have grown in prominence mainly attributable to the unmet demand for small-sum short term credit by low to middle-income individuals. Borrowers often seek these loan facilities to pay recurring bills such as utilities and rent, as well as other expenses such as school fees, medical bills and other unexpected expenses that need to be settled before the next payday. These loans typically attract high-interest rates ranging from 3% to 6% a month, which reflect the risks associated with the average salary earner, as well as the absence of collateral requirements. Core players such as Renmoney, Credit Direct and Zedvance have grown business volumes over the last few years due to the overall gap in the supply of short-term microcredit.

In contrast to traditional lenders, industry operators provide customers with a quick and convenient process for obtaining loan facilities, with disbursement typically within 48 hours of submitting all required documents or the meeting of all conditions. Unlike personal loans offered by major financial institutions in the country, payday loans are widely recognised for the absence of collateral (and in some cases, guarantor) requirements when granting loans to customers. Lenders typically use the customer’s wages as a basis for lending, with the loan repayment(s) typically a percentage of the borrower’s monthly salary/income.

In correspondence with the rising fortunes of the Industry, intensifying competition amongst industry operators and external players, such as commercial banks and nano (micro) lenders, remains a threat to the retail dominance enjoyed by prominent industry operators. Commercial banks are increasingly offering salary advances and quick credit facilities to individuals that may not typically meet the bank’s risk assessment criteria for traditional products. With a growing number of banks adjusting their respective business strategies to capture the retail segment, we expect competition to remain elevated going forward.

Overall, demand for payday loans should remain high, with a continued influx of new entrants seeking to provide services to the underserved market. With the burgeoning impact of big data and AI-driven tools, digital financial solutions are expected to play a larger role within the Industry as current operators and new entrants seek to boost efficiency and improve service delivery amid the heightened competitive environment.

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