Kuni .G. Isaac

We are living through a period of profound changes which affect all of us as citizens of Nigeria and as a people. These changes have been very rapid with the continuous improvement of technology and making decisions based on smart data. This has been more evident post Covid-19 pandemic, as consumers and businesses alike are being catapulted into speedy transformations and revolutionized methods of transacting. Access to consumer credit is not an exception. It has been influenced by the transformation riding on the back of technological and communication advancement.

The group Managing Director and CEO of CRC Credit Bureau Limited Dr. Tunde Ahmed Popoola expressed happiness and passion while addressing and answering questions from Journalists on the role of Credit droving economic prosperity. with a focus on the importance of consumer credit for economic growth, the role of credit reporting generally in strengthening access to credit and the importance of credit scores in facilitating consumer credit.

WHY CREDIT MATTERS

An economy is basically about transactions. Transactions are the backbone of an economy. However, transactions as we have seen, can be in cash or on credit and can be to buy goods, services or financial assets. The total spending in an economy is a combination of cash and credit and this helps to determine the vibrancy of the economy. An economy cannot run on only one of these. If it runs substantially on a cash basis, there will be a limit to the level of transactions that can take place and economic growth may be difficult to achieve. Credit matters.

Credit is often defined as the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. Since about 4,000 B.C. when the Sumerian people began to establish the first world cities, credit was extended for what might have been the first time and has come to stay since.

A strong credit system promotes credit to consumers (individuals) and credit to businesses, especially the micro, small and medium enterprises (MSMEs).

With access to credit, effective demand is stimulated. And this propels an increase in demand for goods and services. If an economy is supported by access to credit also for commercial enterprises, production is enhanced. Access to credit for businesses is productive credit and it certainly helps to promote economic growth.

WHY CONSUMER CREDITS MATTER

The group Managing Director and CEO of CRC Credit Bureau Limited said, Consumer credit is an important element of any economy. A consumer’s ability to borrow money easily allows a well-managed economy to function more efficiently and stimulates economic growth.

A consumer credit system allows consumers to borrow money or incur debt, and to defer or spread repayment of that money over time. Having credit enables consumers to buy goods or assets without having to pay for them in cash at the time of purchase. Today, most successful economies are driven by credit. In the press release dated May 10, 2022, the Federal Reserve Bank of New York’s Center for Microeconomic Data, issued its Quarterly Report on Household Debt and Credit in the USA stating that there was a solid increase in total household debt in the first quarter of 2022, increasing by $266 billion (1.7%) to $15.84 trillion. They highlighted that “balances now stand $1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic”. It was highlighted that the report is based on data from the New York Fed’s nationally representative Consumer Credit Panel.

Central Bank of Nigeria’s monthly economic report for October 2021 indicated that the growth in consumer loans was driven by a 52 per cent, year-on-year increase in personal loans, and rose to N1.57 trillion in October 2021.

The provision of consumer credit has a key economic function and is a largely beneficial activity, propelling spending and thereby increasing income levels of a country. It enhances productivity and leads to higher Gross Domestic Product (GDP). It has been proven repeatedly that an economy with strong credit culture improves standard of living, stimulates growth, and ensures prosperity of many of its inhabitants, by enabling borrowers to purchase goods and services and spread repayments over time. This makes it possible for consumers to purchase items they need without having to fully save to purchase these items. For example, they can enjoy reasonable access to basic and good things in life such as food, shelter, education, commuting, etc and some relative luxuries. Many items from motor vehicles, to houses and even television, air conditioners, etc are too expensive for most people to pay for all at once, with their own earnings or savings. 

ACCESS TO CONSUMER CREDIT IN NIGERIA

Giving the availability and ease of access to credit is represented by the level of credit penetration. This is measured by the ratio of total credit to the private sector to the GDP. This is relatively low in Nigeria, and it underscores the challenge of access to credit in Nigeria.

The expert  said in 2020, from the World Bank Data, domestic credit to the private sector as a percentage of GDP stood at 12.1%, up by 2.1% in 2018, which was a mere 10.2% in Nigeria. Comparing 2020 and 2018 in four other economies showed that by 2020, it was 32% in Kenya, 96% in Morocco, 70% in Brazil and 134% in Malaysia.

Private Sector Credit as a Percentage of GDP      Credit Bureau Penetration in 2019

Access to consumer credit in Nigeria has grown astronomically over the years. Credit bureau penetration has also grown over the years, but it is still relatively low when compared with other countries. Credit bureau penetration indicates the number of adults’ population covered by credit bureau. It is a database of the number of consumers and businesses enjoying credit in an economy. Nigeria’s credit bureau penetration in 2019 was 14 percent, compared with 30 per cent in Kenya, 25 per cent in Morocco, 79 percent in Brazil and 83 per cent in Malaysia. Of course, credit bureau penetration will certainly be low where credit to the private sector is low. It is just an expression of the fact that only few consumers and businesses have access to formal sources of credit in Nigeria.

The low access to credit in Nigeria is practically demonstrated in various ways, apart from through credit penetration and credit bureau coverage. First, only few Nigerian consumers and SMEs enjoy credit facilities from Nigerian banks. According to statistics, Nigeria could boast of over 41 million micro, small and medium enterprises (MSMEs). In a report jointly released by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS) on January 12, 2022, the MSMEs represent over 96.7 percent of total businesses in Nigeria; they contribute about 46.31 percent to GDP and 6.21 per cent of gross exports during the year under review. However, less than 5% of Nigeria MSMEs have access to credit.

Furthermore, Nigeria has been characterized by significant disproportionate allocation of credit to different sectors. The sectors that contribute the most are denied credit while credit goes to the sector with relatively little contribution to the GDP. For example, while agriculture contributed over 21 per cent to GDP in 2018, the share of bank credit to agriculture was the lowest at 3.8 per cent. On the other hand, while oil and gas received 23 percent of bank credit, its

contribution to share of GDP was less than 10 per cent. In addition, the cost of borrowing is very steep in Nigeria, and this serves as a disincentive to borrowing to a lot of businesses especially the SMEs.

In appreciation of the challenge of low credit penetration, a significant number of actions have been taken by the government and creditors, mostly financial institutions. Overtime, since independence, Nigeria has established many specialized banks to mitigate the gaps in access to credit. Today, we have the Bank of Industry, established in 2002 to support access to credit for SMEs and manufacturing companies; Bank of Agriculture established in 1973 to enhance access to credit for agricultural purposes; the Nigeria Export Import Bank (NEXIM) was established in 1991 to encourage production for exports. In recent time, the Development Bank of Nigeria was founded in 2011 to provide wholesale credit to microlenders for on-lending mostly to micro enterprises while The Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) was incorporated in 2013 by the CBN as a dynamic, holistic US$500 Million public-private initiative to catalyze the flow of finance and investments into fixed agricultural value chains.

In addition, the government has established several initiatives and intervention Funds to support access to finance for specific sectors. Examples include the N200 Billion Small and Medium Scale Enterprises Guarantee Scheme (SMECGS) launched in 2010; N200 Billion SME Restructuring and Refinancing Fund under the management of the Bank of Industry; N100 Billion Cotton, Textile and Garment (CTG) Fund established in 2019, etc.

Dr. Popoola stated that in the past, the government has directed deposit money banks to set up special funding schemes to encourage access to finance especially for SMEs and the agriculture sector. Most of the schemes met with limited success and impact. In 2019, the government directed deposit money banks to give out a minimum of 65 percent of their total deposit and other liabilities as loans under a LDR scheme orchestrated by CBN.

In line with the trend to promote access to finance through an efficient financial system, most governments now adopt tools of monetary and fiscal policies and financial reforms that enhance access to credit and promote overall development of the financial markets for all.

HOW CREDIT REPORTING FACILITATES IMPROVED ACCESS TO CONSUMER CREDIT – THEORETICAL JUSTIFICATION

Beyond grants, subsidies and other forms of special packages, most governments in emerging economies seem to have agreed that credit infrastructure can really be deployed to enhance access to finance for consumers and SMEs.

An effective credit reporting infrastructure for a strong Credit Risk Management System (CRMS) will usually have credit bureaus, credit rating agencies, collateral registry, sound bankruptcy laws and an efficient judicial system. Each of these could have a significant impact on access to credit, especially for consumers and SMEs. For the purpose of our discussion here today, it may suffice to briefly examine how the presence of a credit bureau impacts access to finance for Consumers and SMEs.

The objectives of credit bureau or registry are to reduce information asymmetry between lenders and borrowers, facilitate information sharing among creditors, reduce the incidence of lending in the dark and enhance informed credit decision making. The credit bureau also provides social impact by shaping borrowers’ behavior to engender honoring agreements and obligations.

The presence of credit bureaus promotes strong credit system and a strong credit system promotes a productive economy by enhancing the quality of life of people through credit to consumers. A strong credit system normally and usually has a strong credit risk management system (CRMS) to fill the trust gap with reliable information. A strong CRMS makes it easy to determine the capacity to pay and the willingness to pay by borrowers, two major important pieces of information required by creditors.

Having a good credit record means that a person has an established history of paying back 100% of his/her debts on time. A person with good credit record will be able to borrow money more easily in the future and will be able to borrow money at better terms.

On the other hand, having a bad credit record or history means that a person has had difficulty in the past with paying back all of the money he/she owes, or with making payments on time. Lenders are less likely to advance more money to a person with bad credit history, making it difficult for that person to buy a car, a house, or obtain a credit card. Access to credit is a valuable benefit, which a person should protect and manage wisely.

It has been established that banks will continue to increase the amount of credit to SMEs and consumers where they could better predict the payment probability by their potential borrowers. This information theory of credit asserts that when lenders have adequate information about prospective borrowers, it will deepen the credit market. Empirical evidence has shown that countries with private credit bureaus enjoy higher financial penetration with higher credit to the Gross Domestic Product (GDP) ratio.

Furthermore, the presence of credit bureau mitigates the pains of access to credit, especially for consumers and small businesses. The World Bank in a study of 5,000 firms in 51 countries conducted as far back as 2003 revealed that the percentage of small businesses reporting high financing constraints reduced from 49 per cent to 27 per cent with the introduction of credit bureau. The same study also confirmed that the probability of obtaining a bank loan by small firms increased from 28 per cent to 40 per cent with the introduction of credit bureau in a country. There has been research on country-specific evidence of how credit bureaus led to lower cost of credits in Ukraine and how there was a significant increase in the number of micro entrepreneurs that obtained a loan by 1,098 percent from 60,000 to 719,000 in Ecuador (IFC, 2006). McKinsey and Company (2009) also showed that non-performing loans (NPL) ratio reduced from 6.67 percent to 4.52 per cent in banks in Shanghai at the end of 2002, just one year after the launch of a credit bureau; whereas in Argentina, default rates dropped by 79 per cent in small banks.

Credit reporting has enabled credit bureaus to develop various products and services that enable credit grantors and companies from other sectors of the economy e.g. human resource recruitment firms to make informed decisions ranging from recruitment, background checks, credit evaluation and assessment, credit monitoring, credit scores to skip tracing, etc.

THE JOURNEY SO FAR ON THE IMPACT OF CREDIT REPORTING IN NIGERIA – THE CRC STORY

Nigeria licensed three private credit bureaus in 2009 and the impacts on volume of loans and reduction in the rate of non-performing loans (NPLs) have been remarkable. Loans to the private sector rose from N7.7 trillion in 2008 to over N12 trillion in 2015 and over N36 trillion in March 2022. Special products for SMEs and the introduction of credit cards became possible with the advent of credit bureaus. Furthermore, NPL ratios declined significantly from about 32.8 percent in 2009 to a single digit of 9.3 per cent as at June 2019 and hit the lowest in ten years to below 5 percent at the end of December 2021.

Loan to the Private Sector Growth                                NPL Ratios

The healthy loan portfolios were made possible, among other factors, by the continuous stress tests by the Central Bank of Nigeria on the Banks solvency and liquidity ratios, the presence of private credit bureaus and the establishment of the Asset Management Corporation of Nigeria (AMCON).

CRC has improved access to credit for consumers. When it commenced live operations in 2009 as a credit bureau, it had only six commercial banks which invariably successfully submitted credit records. In its first month of live operations in June 2009, only 49 credit reports were sold to two banks. CRC now operates as a group structure, with the credit bureau company having about 1,600 institutions/customers with over 60 million credit records successfully processed. Today, millions of searches are conducted on the platform of the company through various media such as web, direct connection via API and batch processing.

In effect, over 1,600 corporate entities use the services of the company, cutting across all types of financial institutions, insurance companies, telecommunications (telcos), electricity distribution (discos), cooperative societies, pharmaceuticals, retailers, conglomerates, travel and hospitality businesses etc. CRC Credit Bureau is the largest credit reporting agency in Nigeria, responsible for over 95% of the nation’s recorded credit data.

CRC sets out to empower, enable and strengthen the capacity of lenders and creditors. CRC has developed a variety of products and services to help lenders decide with trust and confidence. The value proposition to our customers include assisting them in identifying credible customers to grant loans or sell to on credit, manage existing credit facilities or receivables, and manage collections and bad debts. The company which took off with only credit information report (CIR) to help profile potential borrowers and debtors has developed over thirteen

products including Credit Information Report, Credit Scores, Portfolio Monitoring Report, Prospecta, Self-enquiry, Dud Cheque Verification Platform and Delayed Propensity Score.

In highlighting these various products that showcase the impact of credit reporting, it is imperative to mention two of these products specifically. The first is the CRC Score and the second is the Delayed Propensity Score, because they are purely focused on facilitating access to credit for consumers.

As an introduction the CRC Score enables lenders under the risk associated with doing business with the consumer, while the Delayed Propensity Score provides lenders with information on how factors, environmental or otherwise, will affect the probability of the consumer repaying a loan or credit line taken.

THE CRC CREDIT SCORES

Determining the level of customer reliability with regard to the timely loan repayment is one of the key elements of credit risk assessment. This is done on the basis of a credit history analysis and scoring, based on the customer’s characteristics and data provided in the loan application from the lender. Information on how the customer has repaid and continues to repay their dues is often provided and analyzed by the CRC Credit Bureau while the customer assessment itself is based on credit scoring models.

CRC Credit Bureau’s credit scoring system provides lenders a 360-view of their customers, pulling from financial records to determine borrowers who are low-risk, medium-risk or high risk.

This in turn has reduced the number of people with persistent credit card debt, provided individuals with greater control over credit limit increases and ensured that lenders intervene to help customers with persistent debt, including providing options to switch to cheaper loans and show forbearance.

Credit scoring results are usually presented in numbers, also known as a credit score, and the number allows for assigning the customer to appropriate risk categories (e.g. reliable customers or customers who may have problems with loan repayment). Credit scoring, regardless of how it is calculated and what characteristics it takes into account, eliminates the human factor and ensures objectivity in the process, which reduces risk and speeds up the credit process.

The CRC Score ranges from 300 to 850 with scores closer to 300 highlighting that the consumer is high risk and those closer to 850 as low risk. Once a lender determines acceptable risk levels, they are able to use these scores to offer consumers various lending products based on risk-based pricing.

Using credit scores assists lenders prequalify volumes of credit applications thereby enabling them to focus on the intended recipients.

Through the API devices, institutions are connected to CRC making lending decisions possible within seconds and for several customers. This phenomenon has democratized access to credit, taking away emotions from lending decisions and making it possible to grant credits in a few seconds all year round.

DELAYED PROPENSITY SCORE

The world during the Covid 19, began to see a rise in non-performing loans. This was expected with economies shut down, movements restricted and offices, markets alike non-operational.

Institutions were therefore charged with restructuring loans as very few consumers and businesses were able to keep up with the loan payments. To assist institutions, anticipate and better understand their customers’ needs, CRC developed the Delayed Propensity Score. This enables credit granters review their performing customers and using our algorithm predict those who would have challenges experienced during the pandemic. The focus here was not on the already defaulting customers as they were already defaulting customers. The focus was on the performing customers. Post the pandemic, we have reengineered the algorithm to take into consideration performing customers whose repayment trends may become affected due to other factors – economic, social, etc. This enables credit granters to focus on and support these customers to ensure they do not go into default, and they can remain their loyal customers.

With credit reporting, it has become possible to trace and track old customers with bad or abandoned facilities thereby assisting to address the challenges of adverse and haphazard selection. The bureau warehouses all addresses, telephone numbers and contact details provided to all credit granters by consumers or their customers.

It has also become possible to submit data as credit is granted. This has become exceedingly important with the advent of automated lending via apps and other online mediums.

Without mixing words he said to deliver quality services to all stakeholders and indeed Nigeria as a country, CRC leverages and partners with the best solution providers in the world, the Dun & Bradstreet (DnB), a global risk management solution company with over two hundred years’ experience in the provision of data management and analytics while our credit scoring solution technology is powered by Fair Isaac Corporation (FICO), the pioneer and global leader in credit scoring solutions in the world.

CRC is in partnership with Nova Credit, to enable Nigerian emigrants to the United States, Canada and some other advanced countries to access their data in the CRC repository in Nigeria. With the partnership, these emigrants can use their international credit history to apply for credit products. The partnership enables creditworthy Nigerian newcomers to gain access to credit opportunities previously unavailable to them because of the lack of credit history in the US, Canada, etc. The whole idea is to assist more than 16,000 Nigerians who move to the US and Canada each year to pursue new opportunities to settle down faster and have access to credit to continue their lives and lifestyles. Emigrants can now use their credit reports from Nigeria to obtain student loans, mortgages and even automobile loans.

CRC prides itself with the impact it has made on the lending space in Nigeria. We have changed the way lending is done. We are now able to go past our previous limits to play a deeper role in unlocking hidden avenues by creating additional insights that enable our customers optimize business operations, achieving customer loyalty, incremental revenue, optimized costs, and free cash flows for businesses. The services which are rendered with the highest level of credibility engendered by trust have enabled customer profiling, loan application assessment, portfolio management and know your customer services (KYC).

In effect, CRC has assisted in generating growth in loans both to consumers and commercial entities and stimulated the emergence of new loan products and services. It has also improved the quality of credit offered and loan processing through the introduction of customer profiling and loan monitoring. It has positively impacted the financial environment in Nigeria by making substantial contributions to access to credit and the change in the business models of lending.

ISSUES CONFRONTING CREDIT REPORTING IN NIGERIA

That the rate of credit penetration is still relatively low in Nigeria, despite all the policies of the government and the presence of credit infrastructure that have helped other economies to deepen access to credit, is an indication that there are some fundamental challenges that require ruthless and focused attention.

We started by mentioning that in the last few years Nigeria has undergone profound changes due to the advancement of technology and smart data. Digitization has helped the financial system to improve access to consumer and retail loans. Today, virtually all commercial banks have online banking, USSD, and other tools to improve their capacity to be able to lend to consumers as well as special desks for SMEs. They have also developed applications for automated lending processes and with this development, there has been a significant increase in access and speed of processing loans, most of which are small amounts to meet urgent needs. Artificial intelligence, machine learning and blockchain technologies will continue to propel ease of processing loans and deepen access to credit.

We have also seen the rise of fintechs, micro lenders and shadow banks competing with and complementing the banks in granting consumer loans in particular.

A significant issue still affecting access to credit in Nigeria remains the full coverage of a unique identifier for every inhabitant. The country has multiple forms of government issued identifiers for individuals including National ID, BVN, Drivers’ License, Voters Card and International Passport. In most countries with successful Credit Bureau infrastructure, there is always a single means of identification. In Europe and America, it is the social security number. In a country like Egypt, it’s the National Identity Card. India commenced deployment of unique identifier in 2009, today about 1.4billion Indians have government issued unique identification numbers. Nigeria also needs to embrace a unique identifier. The current situation makes data matching very tedious, cumbersome and expensive for the bureaus. This is because a bureau relies on identification of data subjects to be able to match and merge data and develop innovative products for the market. We continuously urge the government to speedily implement a unique identifier for every Nigerian. It is pertinent to note that the BVN introduced by the CBN does not fully solve the unique identifier challenge as data providers have been unable to fully

provide BVN’s for legacy accounts. In addition, BVN numbers are issued to those who have active bank accounts. Several people are still unbanked in Nigeria.

The National Identity Management Commission (NIMC) continues in their efforts to increase the number of Nigerians with NIN numbers with over 77.7million NINs issued as at March 2022. The National Population Commission has published that Nigeria has a population of slightly over 216million people as of today. Therefore, only 32.7 percent of Nigerians have NIN as of today. We need to speed up the adoption of NIN to full coverage of the country to improve credit penetration. This Unique identifier will further enhance the efficiency of blockchain and machine learning technology and their deployments to ease access to credit.

Another major issue is the judicial system. Prompt dealings and disposal of commercial cases, especially those between lenders and borrowers help the system. The judicial system should engender confidence and boost a credit economy with prompt resolutions of cases. A few initiatives have been introduced in this sphere as well including the Alternative Dispute Resolution (ADR) mechanisms, but more still needs to be done.

The issue of low financial inclusion remains a limitation to access to credit in Nigeria. Only those who are players in the financial system could have access to credit. Financial penetration in Nigeria is still below 70 per cent.

For MSMEs, formalization and the adoption of basic governance practices will improve their access to finance generally. Simple financial record keeping, auditing of financial records, putting structures around the day-to-day running of the business can go a long way in building the confidence of financial institutions and other providers of funds in dealing with them. In Nigeria today several MSMEs take loans in their personal names as their businesses are sole proprietorship.

THE FUTURE OF CONSUMER CREDIT AND THE ROLE OF CREDIT REPORTING

Emerging technologies and data analytics will continuously change the way consumer credit is granted. Today there is a growing number of fintech companies challenging the norm. The evolution of smart data will continue to heighten the quantum of data used for credit decisioning and shortening the turnaround time for processing loans.

I foresee a time when we will walk into our neighborhood supermarket and access credit on the spot, students will take student loans to pay for their education and in the near future individuals can pay their rentals monthly. I am aware that the Lagos State Government commenced a scheme December 2021, that allows qualified individuals to pay their rent monthly. I foresee that with the growth in data reporting the private sector can continue with this, thereby enabling tenants to pay rentals to their landlords directly monthly. I also foresee the total adoption of credit scoring system for granting consumer loans. Individuals would become conscious and be mindful of their credit rating and score. Where an individual has not accessed credit in the past,

alternative data would be used to generate a score to determine or indicate his or her creditworthiness.

Access to credit for consumers in the future does indeed look promising, putting the control in their hands and no longer in the hands of the credit grantors.

 In his conclusion he spoke on the challenge of access to credit confrontng consumers and MSMEs, much more than the large enterprises. Large firms have easy access to credit. But to stimulate economic growth, reduce poverty and engender prosperity, there must be significant improvement in access to credit and other forms of finance for consumers and MSMEs. It is instructive to note that government interventions through grants, subsidies and other special arrangements and incentives will help, but they cannot unleash the required exponential access required to stimulate economic growth. The focus must be more on policies and programs that provoke market-driven initiatives which should be addressing the issues constituting bottlenecks and militating against free flow of credit to consumers and MSMEs.

There is no doubt that the journey towards improved access to credit especially for consumers and SMEs has been helped with the establishment of credit bureaus, collateral registry and digitization. It can only get better. The situation today is different from what it used to be several years ago. Significant improvement in access to credit is being experienced. New players are also coming into the system, especially those that can be classified as shadow banks, mostly fintechs, money lenders and telcos. They process loans with speed. This phenomenon has influenced most of the commercial banks to also change their lending model, embrace technology and build the capacity of their personnel to enable them service consumers with low value loans. As technology is assisting in addressing the challenge of financial inclusion, it will rub off on lending and improve access to credit for consumers and small businesses.

It is also important for us to touch on the unpleasant, unethical, and embarrassing practices of loan sharks some micro lenders and fintechs. A lot of Nigerians have gone through harrowing experiences in their hands. Their rates are usurious, and their debt collection management are barbaric, evil, embarrassing, and stressful for their customers. We are also beginning to witness fraudulent deployment and use of Apps, leading to loss of funds, unethical lending practices and usurious charges. The Nigeria government embarked on a clampdown of some of them not long ago. But this has not stopped them. Our regulators such as the CBN, CPC, and SEC need to do more. They need to be firm and decisive. There must be a way to bring these operators under regulation and high-level scrutiny.

Finally, the Central Bank of Nigeria released the guideline for Open Banking recently. This, when fully operational will also help access to credit for consumers and MSMEs. While there is no doubt that the ease of access to credit for consumers is more visible now than ever, it can only get better as he advice both government and private sectors to key into programmes that will bring development to the nation.

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