Nigerian Fintechs Struggle With Rising Debt Defaults Due To Economic Problems
Nigeria’s default rates are on the rise due to growing economic uncertainty in the country. According to reports, fintech startups in Nigeria are hit the hardest as they struggle to keep default rates at tolerable levels.
The fintech model of providing a convenient and easy way to access loans has grown the industry at breakneck speed over the past year. However, the economic effects of the pandemic which has led to an increase in defaults are forcing startups to reconsider their business models.
Loss of jobs and economic hardship
The main cause of the rise in defaults, according to the findings, is the high number of job losses during the pandemic. The loss of jobs has prevented many people from meeting their payment deadlines.
Before COVID-19, Nigeria’s unemployment rate was already very high at 23.1% while underemployment stood at 16%, according to the National Bureau of Statistics (NBS).
The epidemic made matters worse as at least 42% of Nigerians surveyed said they had lost their jobs, while 79% reported loss of income, according to the World Bank.
Likewise, businesses and entrepreneurs struggled during this period. The snowballing effects of the COVID-19 pandemic on the country’s economy have made it difficult for them to obtain funds or repay loans.
The country’s total GDP fell 14.27 percent in the first quarter of 2020 to reach N16.74 trillion. In the second quarter, GDP fell a further 7.97 percent to N15.89 trillion, with only 13 of 46 sectors recording positive real growth.
The general decline has made lenders more cautious in their lending campaign while stepping up their loan collection campaign. However, the current situation has significantly affected fintech more than other players in the sector.
Fintechs Vs Microfinance
When comparing loan models, fintechs generally have flexible loan application terms and processes that allow easy access to loans. Most applicants can follow the process from the comfort of their own homes.
FinTechs typically require a few documents such as passports, utility bills, account statements, and ID cards. Often, borrowers are credited without a confirmed address (residential or official).
Favor, a business owner, explained that obtaining loans for microfinance banks is tedious and time consuming. He said that he had to provide the object of his loan, collateral and that he also had to open a bank account with the bank.
However, while the fintech mode of loan appraisal is easier, it is difficult for them to recover loans from defaulters. The usual reminders and tactics to freeze employee accounts are often insufficient.
Microfinance, on the other hand, has a loan recovery system that relies on both “technological and diabolical” means. An eyewitness shared with TechNext that a microfinance bank once used police to arrest a defaulting borrower who was on the run from church. The fact that the church address is not a piece of information included in loan applications shows how crude loan collection models for microfinance banks can be.
“Nigerians have a bad attitude towards debt,” said Emmanuel, a financial expert speaking on the increase in defaults. He explained that many Nigerians find it difficult to repay their loans quickly. He added that many take out loans to survive without any concrete plans on how to repay them.
Fintechs vs banks
Like microfinance, money deposit banks (BMDs) subject loan applications to rigorous and irritating scrutiny. But they also have options for quick loans.
Although these quick loans often have no collateral and require minimal documentation, the borrower must have their salary account in the bank. This makes it easier for the bank to recover the loan in the event of default.
The CBN also has a regulation that allows a bank to connect a loan to BVN. This allows any bank to collect loans from any bank account under the BVN
Fintechs don’t have this leverage. A borrower can continue to collect their salary from banks and decide to put money in the mobile fintech wallet. This makes it difficult for fintechs to collect loans unlike the case of banks which can simply deduct it directly from any account linked to the borrower’s BVN.
Find a new loan model
While the current fintech model is not bad, it may not have the success rate it wants in terms of profitability due to the economic environment in Nigeria. Experts say the informal approach to loan facilitation puts them at greater risk, especially in countries like Nigeria where identification is a challenge.
The additional effects of the pandemic and increasing job losses making it harder for borrowers to repay their loans are calling on fintechs to find a way to survive.
Some lenders seem to have started using new processes. A marketer for a loan application revealed that fintech now collects physical collateral like car papers, which are easily collectable in the event of default.
In summary, the default rate is increasing faster than companies initially anticipated and fintechs must adapt their solution to the country’s current situations if they are to survive.
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