BY SEUN TIMI-KOLEOLU AND SHARON OKPO
In spite of the rapid growth in the financial sector in Nigeria with various Fintechs providing more accessible and efficient services, the credit system in Nigeria is still very under-developed. Nigeria’s poor credit system adversely affects the growth of the economy and the people’s standard of living.
Credit cards and loans (to a certain value) are made easily available to citizens of many developed countries including Britain and the United States once these citizens have good credit ratings. Nigeria, however, does not have a credit rating system strong enough to: guide lenders on who to grant unsecured loans to; and deter borrowers from defaulting on loans. Notwithstanding this, certain local and international lenders are setting up digital unsecured lending services in Nigeria to solve the credit issue (“Lenders”). They are, however, faced with the challenge of frequent defaults in repayment of loans by borrowers on the one hand; and poor systems in place to recover debts and deter borrowers from defaulting on the other hand.
In view of the foregoing, this newsletter aims to guide digital Lenders and non-digital Lenders offering unsecured loans on steps that can be taken in Nigeria to reduce the defaults and recover the debts more easily.
The following steps may be taken to protect against default:
1. Domiciliation of proceeds– A Lender may request that the borrower should pledge or mortgage his income or funds inflow in its favour, thereby making the Lender the first beneficiary of any cash inflow on such domiciliated account. The cash inflow could be income and sales proceeds from business activities or salaries due to such borrowers from his employment, etc.
In order for this to be effective, the borrower will be required to present an undertaking signed by the source of income (e.g the borrower’s employer or purchaser) to pay in favour of the Lender, to the full amount of the loan granted.
2. Retention of Title– Where the facility is being given for the procurement of goods for use by the borrower, the Lender may retain the title in such goods until such time that the borrower repays the loan facility.
A retention of title clause should be inserted in the loan agreement to preserve the Lender’s ownership rights in the goods, and its priority over other creditors with regard to the goods. This clause will also give the Lender the right to repossess (and resell) the goods upon default in repayment by the borrower. In addition to a retention of title clause, the Lender may go a step further to have its name clearly stated as the owner of the goods on the receipt for the purchase of the goods.
3. Guarantees– Lenders may request that borrowers provide guarantors prior to granting the loan. The guarantor will be required to sign an undertaking, guaranteeing the repayment of the loan amount by the borrower where the borrower defaults on repaying the loan. It is important to ensure that where the guarantee is issued by a corporate entity, such entity is permitted by its articles of association to issue such guarantees and to such value as stated on it.
Prior to granting loans, Lenders may also consider taking the following steps:
1. Alternative Data and Credit Scoring- Lenders can rely on technology and big data analytics, to access a broader range of information beyond traditional credit reports. This includes alternative data sources like utility payments, rent payments, social media activity, education and employment history, information on phone usage, and even online behavior.
2. Proper assessment of the borrower’s credit-worthiness– although they are not prevalent in Nigeria, there are a few credit rating institutions in Nigeria who Lenders can liaise with to ensure easy and quick access to the borrower’s reports when necessary. This will aid the Lender in assessing the borrower’s credit worthiness, and the probability of the loan becoming a delinquent loan.
3. Conducting identity verifications and due diligence- Lenders may also use identity verification tools to confirm certain details provided by the borrower (and Guarantor where applicable), such as name, address, date of birth and other personal information supplied; employment information; existence and location of assets used as security; confirmation of any existing legal encumbrance on assets used as security; etc. Startups such as Prembly provide such verification services.
While the above measures and strategies are not failproof in ensuring that all loans facilities are repaid, it would help to reduce the number of delinquent loans recorded by a Lender when properly applied. We also encourage regulators such as the Federal Competition and Consumers Protection Commission (FCCPC) and others to work towards balancing the need to protect the borrowers and a need to protect the interest of Lenders so as to ensure the credit system flourishes in Nigeria.