… Says an economy with strong credit culture improves standard of living…
… Explains how Credit Bureaus impact access to finance for consumers, SMEs
The Group Managing Director and Chief Executive Officer of the CRC Credit Bureau Limited, Dr. Tunde Popoola has called for deliberate plans to boost consumer credit in Nigeria so as to stimulate economic growth.
Popoola who made the call in a paper titled, “The Role of Credit Reporting in Facilitating Consumer Credit”, which he delivered at a Forum organized by the Finance and Business Online Publishers (FiBOP) in Lagos on Tuesday stated that consumer credit is an important element of any economy.
He also said that a consumer’s ability to borrow money easily allows a well-managed economy to function more efficiently and stimulates economic growth.
He pointed out that a consumer credit system allows consumers to borrow money or incur debt and to defer or spread repayment of that money over time adding that 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”, he said while observing that 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.
He continued, “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.”
While maintaining that the availability and ease of access to credit is represented by the level of credit penetration, he added that his is measured by the ratio of total credit to the private sector to the GDP even as he submitted that this is relatively low in Nigeria and underscores the challenge of access to credit in Nigeria.
He recalled that as of 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 noting that 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.
Acknowledging that access to consumer credit in Nigeria has grown astronomically over the years and that credit bureau penetration has also grown over the years, he, however, insisted that 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 to 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”, he quipped.
He went on to posit that 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 saying that 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 micro-lenders 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.
“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”, he further stated.
Dr. Popoola, however, disclosed that 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.
He advanced that 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.
According to him, 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 even as he maintained that each of these could have a significant impact on access to credit, especially for consumers and SMEs.
On how the presence of a credit bureau impacts access to finance for consumers and SMEs, he said, “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.”
He further explained that having a good credit record means that a person has an established history of paying back 100% of his/her debts on time adding that 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.
He continued, “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.”
Photo: Dr. Tunde Popoola, GMD/CEO, CRC Credit Bureau Limited.
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