ALP Seminar 2019

Online Micro-loan: Robbing Paul to Pay Peter



This is not news. Lending rule has it that only responsible borrowers should have access to credit. Obviously, this will prevent instability in the financial system, instability that could deny genuine borrowers from gaining access to credit. But the online microloan platforms have democratized lending and made access to credit very easy for every Tom, Dick and Alibaba.

Because of this easy access to credit, a borrower does not need to have collateral or guarantor to get loan of up to N4 million from the online micro-lenders. What a borrower needs is the mobile phone, and there are over 10 online micro-lenders in Nigeria that will give a borrower quick cash without demanding collateral.

Some of these players such as Paylater, Kiakia, Lydia, Palm credit, Branch and Grofin do not request collateral before giving you credit. What you need, after the preliminary mobile checks and balances, is to repay the loan within four weeks, four days or 12 months. This depends on your credit score and social reputation index. If this is so, why then do we have more loan defaulters? Wouldn’t these defaulters bring instability to the system? What is the implication to the players, and millions of Nigerians who survive on loan daily?

Before the questions receive attention, let us trace the roots of this challenge. The banks would not grant you unsecured micro-loan. If a bank considers it, everything would be high, the rate would be high, collateral would be high, so that your interest would be low.

An insider in one of the banks hinted that our banker friends deliberately hike loan conditions because of the high-risk environment wherein they operate. To corroborate his words, media reports have it that non-performing loan ratios have crossed 20% for some banks. That is why the banks have resorted to higher yields in order to place premium on the risk they bear when they give out loan.

Micro loanMicro-Loan

With such roadblocks, no wonder young executives, homemakers, artisans, undergraduates and fresh graduates who are the target of the micro-lenders have jettisoned the banks and flocked to the micro-lenders. As observed, majority of these loan applicants request credit for personal consumption or business-to-consumption [B2C], which include mobile phones, data, clothes, shoes, rents and school fees etc.

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On the other hand, microfinance banks cannot help the group above. An insider in one of the microfinance banks said MFBs have pegged interest rate at 3 to 5 percent. According to him, this depends on the “loan you are applying for and tenure. Besides, you are also expected to provide a house, a car or something tangible as collateral to secure the loan”.

After meeting those conditions, he emphasized, the loan is not instant. You see, that is the gulf the plethora of online micro-lenders has come to fill by lending to people who do not have collaterals; people who do not have high credit scores and but own expensive mobile phones. These people, funnily, get instant credit from the micro-lenders through their mobile phones.

Because of the above scenario, market dynamics have changed. According to research the micro-lenders charge 14% interest rate per month on unsecured loan. To verify, a colleague borrowed N8, 500 from one of the operators. He repaid N10, 500. That is N2, 000 difference; at 23 per cent interest.

This is high. Could that be one of the reasons the borrowers are drowning in debts and had to device a crafty means to repay the loan? A source in one of the micro-lenders told me that the company has over 20 employees dedicated to monitoring loan defaulters through phone calls daily. This company has discovered that some of the defaulters had changed their SIM cards in order to evade the calls.

Some debtors who have not abandoned their SIM cards and are “magnanimous” to answer the incessant calls from the lender, had applied for another round of loan from another micro-lenders, and used the new credits to defray the previous loan; and this practice now becoming popular in Nigeria is like borrowing from Paul to pay Peter.

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However, research showed that the practice of borrowing from Paul to pay Peter is not restricted to Nigerians only. A report by Financial Sector Deepening Kenya (FSD- Kenya) discovered that many Kenyans are in a web of mobile loans that forced them to jump from one micro-lender to another.

The survey showed that 14% of the digital borrowers are balancing loans from more digital lenders, and this points to a “refinancing crisis in which one borrows from Paul to pay Peter”. To borrow from Paul to pay Peter is using the resources that legitimately belong to one party to satisfy a legitimate need of another party, especially within the same group, to solve a problem in a way that makes another problem worse, producing no net gain.

That is the news from the micro-lending ecosystem. Who would help sanitize the lending system and ensure only responsible borrowers get access to credit, and in the long run, restore stability to the system?