FinTech-Consumer-Lending-in-Nigeria

FinTech Consumer Lending in Nigeria
Understanding risk assessment, distribution and innovation
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A note from Evolve Credit
2020 has been a challenging year for Nigeria. The Our vision at Evolve Credit is to make loans and
global pandemic, rising insecurity, and devaluing financial services more inclusive, accessible and
Naira, amidst other issues, have culminated in transparent for individuals and small businesses
another recession, which some experts say will be in Nigeria and Africa. Our online loan marketplace
our most brutal yet. It is not yet clear how long or how aggregates hundreds of personal and SME loan
deep this slump will go. However, what is clear that products in Nigeria and enables tens of thousands
businesses have lost property and revenue; people of people and SME owners to review loan products,
have lost jobs and income; and timely recovery will compare their terms, and submit loan applications
involve deliberate action from public, private, and every month. Our backend loan management software
non-profit sector decision-makers. Demand for loans, enables more traditional lenders, like microfinance
in general, and consumer loans, in particular, is banks, finance houses, and individual money lenders,
certain to skyrocket. People and businesses will need to easily digitize their loan management process end-
more external financing to navigate the pressure to-end, and lend with the speed, automated credit
of the contracting economy, and consumer lenders decisioning, and market reach of a typical fintech
will play an especially important role in availing and company.
distributing this financing. In these times, lenders
across all formal categories – commercial, fintech, When we decided to work on this Fintech Consumer
microfinance, and boutique – must innovate and Lending Report with the brilliant team at Stears Data,
leverage technology to deploy more loans, and wider, our goal for the report was threefold:
faster, and smarter than ever before.
1. Translate granular data for the consumer lending
This report offers the updated statistics, insights, market into a single actionable narrative.
and contextual analysis that any serious consumer 2. Offer an analysis of how innovation and financial
lender, whether fintech or traditional, should consult technology is influencing the consumer lending
as it refines its strategy for 2021. It presents a crash market today.
course on the state of consumer lending in Nigeria. 3. Explore how regulation and innovation trends are
A concise assessment of the regulatory landscape, likely to shape consumer lending in the future.
trends in borrower affordability and riskiness,
distribution channels, and other factors that position The findings support what our team at Evolve Credit
Nigerian consumer lending as a ripening market to have long suspected, intuitively. The regulatory
watch, not only in the context of a post-pandemic environment is improving, albeit slowly. Consumers
economic recovery for the nation, but also in the are increasingly expecting loan application processes
broader context of using innovative technology to that are online, location independent, and built for
enable more financial inclusion and transparency in the mobile phone. The consumer lending market
West Africa and wider continental Africa. leaders of the next decade will undoubtedly be those
who embrace new, innovative financial technology
solutions.
Akan Nelson
CEO, Evolve Credit
Acknowledgements
This report was produced by Stears Data. The views are solely those of Stears Data’s Analysts. The authors
would like to thank the following individuals for the insights and perspectives shared during the preparation of
the report.
• Tolu Omoleye, Head- Legal and Compliance, Branch International

• Temi Sodipo, Risk Manager, Carbon
• Ngozi Dozie, CEO, Carbon
• Chiwete John-Njokanma, CEO, FINT
• Nneka Gbenoba, Credit Analyst, Creditville
• Ife Ogunbufunmi, Fintech Associate, Banwo & Ighodalo
• Yele Bademosi, CEO, Bundle
• Walter Agbongbohielu, Risk Manager, Greenwich Trust Limited
• Davidson Atere-Roberts, Ex-CEO, Advancer
• Agwuncha Chike, Team Lead, Loan Origination, Branch International
• Yvonne Johnson, CEO, Indicina
• Tobi Bolu, Data Analyst, Sterling Bank
• Favour Oyelami, Data Analyst, Page Financials.
Contents
EXECUTIVE SUMMARY 9
Section 1. AN INTRODUCTION TO FINTECH CONSUMER LENDING IN NIGERIA 10
1.1. The basics of consumer lending in Nigeria. 10
1.2. The primary challenges facing consumer lending in Nigeria 11
1.3. The importance of consumer credit for economic growth 13
1.4. The rise of FinTechs in consumer lending 14
1.5. A breakdown of the consumer lending industry in Nigeria 15
1.6. An overview of FinTech consumer lending abroad 16
Section 2. AN INSTITUTIONAL ASSESSMENT OF THE FINTECH CONSUMER LENDING MARKET 19
2.1. Institutional and regulatory framework 19
2.2. Laws and policies governing consumer lending in Nigeria 19
Section 3. RISK ASSESSMENT IN FINTECH CONSUMER LENDING 25
3.1. What are the different customer segments? 25
3.2. How do operators assess a borrower’s risk? 25
3.3. Credit risk assessment: Data 26
3.4. Credit risk assessment: Risk assessment models 28
3.5. Improving credit risk assessment in Nigeria 30
Section 4. FINTECH CONSUMER LENDING DISTRIBUTION CHANNELS 32
4.1. How do borrowers access loans? 32
4.2.A breakdown of the main distribution channels in the industry 32
4.3. Is digital distribution the future 35
4.4. How do borrowers receive loans? 38
4.5. How do borrowers repay their loans? 39
CONCLUSION 41
REFERENCES 42
Figures
Figure 1.1: Credit provided to the private sector by Nigeria banks (13% of GDP) 11
Figure 1.2: Maximum vs. Prime lending rates in Nigeria 12
Figure 1.3: Retail loan asset quality across Nigerian banks 14
Figure 1.4: Financial inclusion in Nigeria vs. peer countries 14
Figure 3.1: Breakdown of maximum lending tenors from operator database 26
Figure 4.1: Number of lenders using each channel 33
Figure 4.2: Number of lenders using multiple channels 33
Figure 4.3: Mobile penetration in Nigeria vs peer countries 37
Figure 4.4: Mobile money transactions 38
Figure 4.5: Number of lenders using multiple lending channels 39
Figure 4.6: Number of lenders using multiple repayment channels 39
Figure 4.7: Number of lenders using each lending channel 40
Figure 4.8: Number of lenders using each repayment channel 40
Tables
Table 1.1: Credit bureau penetration (% population) 12
Table 4.1: Maximum tenor, maximum lending amount, maximum interest rate data for selected lenders 36
Table 4.2: List of Fintech lenders and their USSD codes 37
Abbreviations
AI Artificial Intelligence
APR Annual Percentage Rate
BIS Bank for International Settlements
BOFIA Banking and Other Financial Institutions Act
BVN Bank Verification Number
CAGR Compounded Annual Growth Rate
CBK Central Bank of Kenya
CBN Central Bank of Nigeria
CRA Credit Reporting Act
CRMS Credit Risk Management System
EFInA Enhancing Financial Inclusion and Access
EIS Enterprise Investment Scheme
FICO Fair Isaac Corporation
GDP Gross Domestic Product
KYC Know Your Customer
LDR Loan-to-Deposit Ratio
MFB Microfinance Bank
ML Machine Learning
MPR Monetary Policy Rate
NCR National Collateral Registry
NIFA National Internet Finance Association
NITDA National Information Technology Development Agency
NPL Non-Performing Loans
NSE Nigerian Stock Exchange
P2P Peer to Peer
PEBEC Presidential Enabling Business Environment Council
PSB Payment Service Bank
R&D Research and Development
ROE Return on Equity
SEIS Seed Enterprise Investment Scheme
SSA Sub-Saharan Africa
USSD Unstructured Supplementary Service Data
VCT Venture Capital Trust
Executive Summary
The rise of FinTech operators has transformed the Nigerian consumer finance landscape, boosting financial
inclusion, economic opportunity, and financial depth. At the same time, an industry still in its infancy continues
to wrestle with regulatory and financial sustainability. The Stears Data Fintech Consumer Lending report
analyses the innovations that have enabled Fintech companies to penetrate Nigeria’s previously-barren
consumer lending landscape, and investigates the economic, regulatory and technological patterns likely to
shape the way industry will evolve in the coming decades.
The report is roughly divided into two parts. The first part provides a static view of the FinTech consumer
lending space in Nigeria by highlighting the regulatory & institutional framework and economic conditions
that gave rise to the dominant market features present today. The second part focuses on the dynamics of
the industry and the way lenders solve the fundamental problem of lending to the right borrowers. We explore
the innovations around risk assessment in Nigeria, from the role credit bureaux play in spurring unsecured
lending, to the lessons learned from the use of alternative data like social media accounts in plugging
Nigeria’s credit data gap and the best way to deploy machine learning and artificial intelligence in the
consumer lending industry. Finally, the report investigates the dominant channels of distribution in consumer
lending and presents a picture of the future of digital lending in Nigeria.
The report will be particularly useful for investors and operators looking to understand the relevant success
factors for consumer lending in Nigeria and obtain a view of how the industry may progress in the coming
years. Policymakers may also use the information in the report to craft policies most likely to create the
conditions the industry needs to thrive.
Research methodology
Stears Data undertook a desk-based study to understand the operating methods of the largest Fintech
consumer lenders in Nigeria. In total, we collected data on 41 of the most prominent Fintech consumer lenders
in Nigeria, spanning bank-affiliated consumer credit products, multinational lenders, and local peer-to-peer
platforms.
All the data in this study was collected from company websites, dashboards, and as part of the standard
onboarding process used by each of these firms.
Stears Data also conducted interviews with stakeholders in some of the analysed companies to gather in-
depth financial and operational information.
The complete dataset can be found online here.
Section 1: An Introduction to Fintech
consumer lending in Nigeria
1.1. The basics of consumer lending in Nigeria Although financial regulation has succeeded in
strengthening Nigerian banks over time, regulation
For a long time, Nigeria’s lending environment has
has been less successful in promoting inexpensive
been dominated by large banks focused on high-
consumer lending.
value lending, leaving a large portion of the population
underserved; Nigeria’s private sector credit provided
As at the end of 2018, revenue across the twelve pure
by banks stood at 14% of GDP in 2017, compared to
banks (non-holding companies) listed on the Nigerian
33% in SSA. This feature of the lending environment is
Stock Exchange (NSE) had grown 2.5% year-on-year.
a result of many interacting social, infrastructure and
Over the past five years, the banking industry’s ROE
regulatory factors.
has remained relatively steady despite sustained
increases in banks’ Tier 1 capital ratio, meaning
For example, banks must comply with strict
that banks have increased their capital ratios and
guidelines when it comes to unsecured consumer
still maintained profitability. Despite this, consumer
lending. The Banking and Finance Act (2004) more
lending remains a small share of banking activities;
or less discourages unsecured lending to consumer
in 2019, consumer loans accounted for 8% of the
segments and even recent CBN directives to increase
loan portfolios of eight of the ten largest banks in the
the mandatory loan-to-deposit ratios (LDR) across
country.
banks focuses on secured lending.
The Central Bank of Nigeria (CBN) realised these

There is also a large information asymmetry between
issues a while back and set up the Microfinance
borrowers and lenders which introduces significant
Bank framework in 2005. The policy aimed to use the
friction into the lending market. Nigeria did not have
peculiar features of microfinance (e.g. smaller loan
a formal credit reporting law until 2017, and its credit
sizes, greater accessibility in rural areas) to expand
bureau infrastructure remains nascent. Furthermore,
credit access to small businesses and low-income
registering collateral and securities in Nigeria involved
households.
a considerable amount of red tape, which meant only
about 3% of Nigerians had been registered on the
The microfinance revolution has yielded some
land registry portal.
benefits in Nigeria. Microfinance credit expanded
between 2011 to 2016, dragging the percentage of
This holds a lot of importance as banks would prefer
the population with formal banking accounts from
real estate assets as collateral. As a result, banks have
2.5% in 2008 to 9.0% in 2018. Overall, the policy has
been more willing to lend to higher-income consumers
fallen short of its objectives; an EFInA survey in 2018
who make up a small fraction of the population—in
found that Nigeria’s unbanked population was just
Q4’2019, the Oil & Gas sector accounted for 25% of
14.8% of the population in 2018 (2016: 9.8%). In 2011,
total bank credit, despite accounting for less than
the CBN highlighted a few reasons for this: difficulties
a tenth of economic activity and under 1% of all
with operations, low-quality services, limited reach,
employment. Even when most of the population can
inadequate capital, failures in innovation and user
access a loan, high-interest rates make borrowing
experience, and so on.
prohibitively expensive.
Today, financial inclusion and access to capital no verifiable credit histories, and their continued
remain weak in Nigeria. Between 2016 and 2018, financial exclusion prevents them from building credit
access to financial services declined in Nigeria (in histories.
per capita terms) unlike the rest of the continent.
It is a well-established fact that this type of information
This history is essential as FinTech lenders have asymmetry can lead to dysfunctional financial markets;
risen to fill this gap. FinTech lending services are borrowers are either denied credit or forced to pay
not limited to lower-income groups; the peculiarities exorbitant interest rates as a risk premium. A study
of the Nigerian lending market skews their services from Taiwan shows the significance of information
towards the salaried demographic. Moreover, symmetry; the study found that the better known the
FinTech lenders have aligned their strategy to solve borrower's financial circumstances, the lower the
the structural and information gaps that hamper interest rate required by the bank, and the worse
consumer lending for traditional institutions like the borrower's financial circumstances, the more
commercial and microfinance banks. collateral the bank requires. The results emphasise
the importance of information symmetry and the role it
Section 1.2 highlights the socio-economic and plays in loan contracts when determining the interest
infrastructural issues that explain why consumer rate and collateral.
lending and financial inclusion remain weak in
Nigeria. The same is true in Nigeria. Lenders have almost
exclusively focused on areas with more traditional
Figure 1.1: Credit provided to the private sector by information sources, such as publicly listed companies
Nigeria banks as a proportion of GDP and businesses or sectors with established histories of
high returns. For example, Nigeria’s Oil & Gas sector
accounts for roughly 25% of outstanding loans from
Nigerian banks. Even in instances where consumer
loans are granted, the risk premium is usually very
high (e.g. MPR + 1000bps) which discourages
borrowers.
Credit bureaus play a significant role in bridging this

information gap. In Nigeria, there are three licensed
credit bureaus with aggregate coverage of about
Source: World Bank
13.9%, higher than the SSA average of 11.90%
but way behind coverage in countries like China
1.2. The primary challenges facing consumer
(24%) and the United States (100%). Furthermore,
lending in Nigeria
these credit bureaus were only institutionalised
Information Asymmetry in law around 2017, and for most of their history,
did not have the tools to assess the default risk of
Credit risk management is the bedrock of any lending prospective borrowers accurately. The absence
market, and Nigeria does not have the aggregated of any dependable primary database before the
data records needed to produce credit histories for introduction of the Credit Reporting Act in 2017 meant
prospective borrowers. Nigeria’s lending industry that there was no standardised industry process for
suffers from a vicious cycle as a large share of the assessing the risk of granting consumer loans.
population cannot access credit because they have
Figure 1.2: Maximum vs Prime lending rates in Nigeria
Source: Central Bank of Nigeria
Table 1.1: Credit bureau coverage across countries
Source: World Bank
Although standard credit scores like the FICO are all in line with efforts to deepen information on
score solve some informational issues associated borrowers in an environment where such information
with consumer loans, they generally only cover is scarce.
credit data for people with credit histories or bank
accounts, i.e. the banked population (roughly 40% of
Policy & regulation
adults in Nigeria). Stakeholders in the industry have
highlighted that FICO is a reactive response and does
As indicated in Section 1.1, the combination of a
not do much to identify potential defaulters because
bank-led financial inclusion strategy and regulation
it fails to account for the behaviour of consumers
that prioritised banking stability has squeezed
without any prior loan history. It is only when these
the consumer lending industry. Sometimes, these
borrowers default that their FICO scores reflect their
hindrances are subtle. Nigeria’s strict KYC process
true risk-worthiness.
favours higher-income groups and corporates
over small businesses and poorer segments of the
In recent years, the government has pushed for the
population. In a country where a large share of the
need for banks to request for BVN and other forms of
population is rural-dwelling and illiterate, the KYC
identification from consumers before they can access
documents required to secure a bank loan are
banking products. These measures, however limited,
significant hindrances. This is still true today: the
Targeted Credit Facility set up by the CBN to allow investors. The sheer glut and attractiveness of risk-
small businesses access COVID-19 credit relief free investments have deterred lenders from lending
initially required applicants to have a movable asset their funds to riskier groups.
registered on the National Collateral Registry (NCR)
and two acceptable guarantors. The CBN eventually A study conducted by the CBN in 2014 corroborates
removed the guarantor requirement ten weeks after this idea. The results showed that credit to the
the program started. government crowds out private sector credit in Nigeria
because when faced with the choice of lending to the
That said, there have been attempts in recent years to government through gilt-edge securities or granting
use policy to spur the industry, most notably through loans to private individuals, most lenders usually
the passage of the Credit Reporting Act (2017) and opt to do the former. When government borrowing
the Secured Transactions in Movable Assets Act increases, it reduces allocation to private credit. This
(2017). crowding-out effect often impacts indirectly through
rising interest rates and a preference for short term
Section 2.1. provides a thorough breakdown of policy lending. It also creates a weak link between financial
& regulation in Nigeria’s consumer lending industry. aggregates and real sector variables.
Economics Infrastructure
A simple way of looking at the consumer lending Credit growth is a function of financial inclusion,
industry in Nigeria is that until recently, the numbers did which in turn is a function of infrastructure. In Nigeria’s
not seem to add up. Traditional lenders have usually bank-led market, banking infrastructure is the crucial
considered retail lending to be a risky business and variable.
have therefore priced loans accordingly, leading to
high-interest rates on consumer lending. Traditional Figure 1.4 provides financial inclusion statistics in
lenders have justified this stance by pointing to a Nigeria: the absence of banking infrastructure in rural
higher proportion of non-performing loans (NPLs) areas drives the vast urban/rural divide. Insufficient
among retail borrowers. reach has hampered banks’ ability to serve customers
in more rural areas and affected consumer access to
Nigeria’s underlying interest rate environment has loans. In Nigeria, only about 40% of the population is
also hampered the growth in consumer lending. In banked compared to 80% in South Africa (2018) and
particular, a combination of aggressive government 68% in Namibia (2017).
borrowing and risk-averse investors has led to
significant crowding out—the situation where prolific 1.3. The importance of consumer credit for
government borrowing drives up interest rates and economic growth
disincentivises lenders from giving funds to riskier
entities. The Federal Government in Nigeria has A 2018 study assessed the long-term impact of
sometimes borrowed at interest rates as high as microfinance institutions on per capita income in
15%-16% in recent years, over 2% percentage points Nigeria. It used CBN and World Bank data covering
above the monetary policy interest rate. Naturally, 1992-2016 to investigate the role of microfinance credit
this pushes up the interest rate available for ordinary and asset growth. The results of the study showed
citizens. Also, up until the end of 2019, the central a negative relationship between microfinance bank
bank’s monetary policy regime intentionally drove credit growth and income per capita. However, the
up local interest rates to attract foreign portfolio researchers found a strong positive and significant
Figure 1.3: Retail loan asset quality across Nigerian banks
Source: Company presentations
Figure 1.4: Financial inclusion in Nigeria vs. peer countries
Source: EFInA
relationship between microfinance banks asset subsequently drive growth. This is particularly true
growth and income per capita. Meanwhile, a simple for consumption-led economies such as Nigeria—
comparison of private sector credit and nominal GDP household consumption accounted for 62% of GDP
in Nigeria shows a long-term correlation of about in 2019—as consumer credit has a strong multiplier
90% indicating a strong linear relationship between on the economy.
private sector credit and nominal GDP in the last 20
years. 1.4. The rise of FinTechs in consumer lending
The results support the view that increased credit Given the factors highlighted in the previous sections,
in developing countries in itself is not sufficient for it is no surprise that Nigeria’s consumer lending
growth. It is the allocation, reach and depth of credit market experienced a significant demand and supply
that drive economic growth. Factors like increased mismatch. The growing disintermediation in the
access to finance are what spur growth. When market widened gaps which ultimately encouraged
low-income households have increased access the entrance of FinTech operators into the consumer
to funding, they can boost their spending and lending market.
Furthermore, the regulators missed an opportunity members of the population.
in 2009 when the Mobile Banking Act (2009)
inexplicably prevented mobile operators from Belatedly, traditional financial institutions are also
receiving deposits or converting airtime to funds for looking to deepen penetration in the consumer
transfer, and instead pushed a bank-led financial lending market by adopting similar FinTech products
inclusion model. Financial inclusion statistics have or strategies. These institutions are betting on their
improved since 2009, but at a much slower pace than superior banking experience and the benefits of
SSA peers, many of whom opted for more innovative physical infrastructure. For now, however, these
or diversified financial inclusion strategies. institutions have been more willing to focus on
traditional customer groups like the middle class
According to EFInA, between 2013 and 2018, who are looking to transition from physical to online
FinTech investments into Nigeria increased at a banking. In the last 24 months, commercial banks like
CAGR of 53%. Although most of these investments Access Bank and GTB have launched PayDay loans
went towards improving or expanding payment and Quickcash.
channels, lending clusters have also received a fair
share of investments. For example, Migo and Aella 1.5. A breakdown of the consumer lending
raised $20 million and $10 million in equity and debt industry in Nigeria.
financing, respectively, in 2019.
The global FinTech lending industry is relatively
Considering Nigeria’s infrastructure and data complex. Below, we present a number of useful
constraints, increased penetration of FinTech frameworks for understanding and analysing the
solutions would provide the necessary credit market industry.
depth and reach to help the CBN achieve its financial
inclusion goals. The FinTech lending industry remains
By type: As highlighted in Section 1.4, different
in its infancy, but there are signs to suggest that the
kinds of firms have emerged in the FinTech consumer
digital lending model is well-suited to Nigeria.
lending space. The innovators in the field are pure
FinTech lenders such as Branch and Carbon, but
For one, Nigeria’s median population is age 19.
they are being challenged by digital lending products
Furthermore, mobile and internet penetration stood
run by traditional financial institutions such as Sterling
at 90% and 39%, respectively. Overall, market
Bank (Specta). Although lending activities of mobile
acceptance of FinTech consumer lending products
operators are currently limited by regulation, their
is growing, particularly as traditional channels remain
competitive advantage in distribution makes them a
largely inaccessible to many consumer segments.
relevant stakeholder here.
That said, P2P lending is yet to fully kick off in Nigeria,
perhaps because this product segment requires
greater regulatory clarity and more financially savvy By customer segment: The primary distinction
users. here is between consumers and (small) businesses.

Business lending accounts for a greater share of
Telecom operators also have a role to play here alternative lending in developed markets (68% in the
as the initial mobile money guidelines recognised UK between 2014 and 2017). Lidya is an example of
the importance of leveraging existing mobile a pure SME lender in Nigeria.
infrastructure for payments and financial inclusion.
For example, the adoption of USSD technology By size: FinTech lenders can be classified by size
has been very effective in reaching underserved or loan tenor. Some FinTech operators are essentially
microfinance banks and offer more extensive credit usually provided to the very poor. Microcredit services
facilities for more extended periods, e.g. Page are predominantly accessed by those excluded from
Financials. Other FinTech operators specialise in formal financial institutions (e.g. microfinance and
providing smaller, quick loans for shorter periods, commercial banks). Nigeria’s microcredit industry
e.g. Migo and Quickcash. is largely built on mobile and USSD technologies.
Institutions ranging from banks to telecom companies
have gradually expanded a range of microcredit
By business model: Reflecting the diversity of
services offering to as little as N10,000.
funding models in traditional finance, FinTech lenders
have different business models. The two dominant
1.6. An overview of FinTech consumer lending
models in more developed economies are balance-
abroad
sheet lending—where the operator disburses funds
from its balance sheet like a conventional banking
The volume of loans provided by FinTech firms has
model and a P2P framework where the operator
increased in the order of magnitudes over the past
creates a market (or platform) to match lenders and
few decades, albeit from a low base. The Bank for
borrowers. Another notable model is crowdfunding,
International settlements (BIS) estimated that global
where a pool of investors contribute funds towards
lending climbed from $11 billion in 2013 to $284 billion
a project.
in 2016. However, this growth is spread unevenly
across jurisdictions, depending on factors such as
By technology: Given the importance of technology GDP per capita and regulatory stringencies, which
in FinTech models, it is no surprise that operators are discussed further in Section 2.1.
have adopted different enabling technologies in their
operations. For example, some consumer lenders The United Kingdom is an industry pioneer, with ZOPA
are light on technology in risk assessments and rely (established in 2004) being one of the first prominent
instead on traditional credit histories while leveraging FinTech lenders. ZOPA reached the £3 billion lend-
technology in fund disbursement and repayment. to-date milestone in January 2018. However, by the
Meanwhile, lenders like Branch use AI technology late 2010s, China had grown to become the largest
to create algorithms that predict borrower behaviour market, accounting for 13% of all new lending in the
and QuickCheck runs a digital model based on first half of 2018. The United States followed at a
customer phone records. distance, with FinTech credit volumes amounting to
4% overall net loan originations in 2016.
Microfinance vs. microcredit
Overall, FinTech lending (for both consumers and
Microfinance banks have grown in popularity in the small businesses) remains a small part of the global
past 30 years. These lending institutions differentiate lending industry but has crossed important thresholds
themselves from conventional banks by targeting for market acceptance and penetration. Moreover, it
low-income earners, usually in rural areas. They is important to understand the underlying drivers of
use different loan origination and risk assessment market acceptance and the direction the industry is
processes from conventional institutions when headed.
serving their client base. For example, microfinance
banks are more amenable to unsecured lending. Here, we highlight key features of a few notable
FinTech lending industries and compare their
Microcredit works a lot like microfinance, and the institutional frameworks in Section 2.1.
main difference is the size of the loan; microcredit is
United Kingdom China
The United Kingdom (UK) is arguably the global Statista estimates that the Chinese FinTech credit
leader in the FinTech lending market in terms of market makes up about 80% of the global fintech
infrastructure and institutional framework. P2P loans lending market. Demography is a key enabler in
as a percentage of loans to small businesses stood China. China has a population of about two billion
at 29% in 2018. people, and roughly 40% of its population lives in rural
areas, while digital penetration in China stands at
The UK FinTech lending industry is particularly around 64%. Besides, about 40% of Chinese citizens
strong when it comes to SME lending. Before the were unbanked in 2018. China is also home to the
2008 financial crisis, small businesses in the UK were world’s largest pool of SMEs (c.42 million in 2015),
at the mercy of traditional lenders. P2P and online many of which have historically been underserved by
business lenders emerged after the 2008 crash, the traditional banking system. These demographics
offering additional value which built user loyalty and create a strong case for FinTech companies.
user reliance while improving cost efficiency for small
businesses. As part of its ambition to restructure the economy from
manufacturing-led growth to a services-led economy,
Government policy has also been very supportive the Chinese government has been supportive of
over the last decade. The UK government runs financial and technological innovation. Chinese
a three-tier tax system—with programmes such private sector credit as a percentage of GDP has
as SEIS, VCT and EIS, offering tax incentives for surged in the last decade, rising from 125% in 2009
investing in startups and small businesses. Moreover, to 165% in 2018.
the government partnered with local universities and
schools to promote STEM and tech-related programs In the same vein, the regulatory environment has been
by offering grants to universities. This ensured the supportive of FinTech lenders. 2017 was a significant
nurturing of the right talent to develop a leading tech year for the industry as regulators passed a series
ecosystem. Such schemes have been crucial in of measures to enable the setup of “private banks”
driving the UK FinTech ecosystem. which permitted technology firms to bring FinTech
offerings to market. In June 2017, the Chinese
The fact that the UK is in the maturity phase of the National Internet Finance Association (NIFA) launched
technology adoption cycle has also been a factor. its Internet Financial Registration and Disclosure
Roughly 94% of the population is banked and has Service Platform, which aims to provide more timely
access to the internet or phone. Access to developed information to both the supervisory authorities and the
infrastructure and deep capital markets has also been public. By the end of 2017, 116 platforms had joined
vital as UK FinTechs have leveraged their proximity the system and disclosed operational information.
to an existing global financial market.
The Chinese Government is driving investment in
Lastly, FinTech lenders rely on available public innovation and R&D, with a focus on enabling the
information on potential borrowers from government development of new technology solutions, such as
records, local customer data, and financial institution the third computing platform—based on online cloud
databases to create and optimise risk assessment computing and wireless connectivity—as outlined
and borrower prediction models. This type of in the 13th Five-Year Plan. State-owned institutions
information is available and sophisticated enough in also play a role in providing capital; for example,
the UK to give FinTech lenders an edge. the state-owned Guangdong Technology Financial
Group directly invested in WeLab, a mobile lending Looking at the success factors behind M-PESA, the
platform. Lastly, Chinese FinTechs leverage their most successful mobile-based financial services
access to financial markets which ensures increased provider in Africa, provides a deeper perspective
funding for fintech initiatives. As of 2017, the China here. The regulatory environment at the time of
government had pledged over £4 billion in grants M-PESA’s creation enabled Safaricom to innovate
and with over 750 government-led funds investing in and experiment as the CBK’s leadership allowed
FinTechs. the process to be guided by Safaricom’s technical
expertise. CBK took steps to mitigate critical systemic
The surge in Fintech lending has not come without risks while giving Safaricom room to innovate
challenges, particularly in the P2P space. More than and evolve. For example, the CBK conducted an
2,000 Chinese P2P firms shut down within the last operational risk audit which included engagement
decade, with nearly 250 defaulting in 2018 alone. with customers and agents to balance out the
Although the industry has been hit by an economic perspective of the operators. The spirit behind the
slowdown in China and a wider private debt crisis, CBK’s approach was to ensure that regulation was
loose regulation and fraud have also played a informed by the nature of innovation and did not stifle
significant role. In response, regulators have cracked it.
down on the P2P lending space in the last few years,
restricting P2P lenders’ ability to collect public The approach has been somewhat successful in
deposits and securitise their assets. In 2019, Beijing Kenya and other countries. By 2018, 82% of Kenyans
authorities required all P2P lenders to become small had access to mobile services, up from 42% in 2011.
loan lenders by 2021, a move that would make P2P These days, mobile money operators are using their
firms subject to similar capital and credit requirements existing databases to increase depth in the financial
as other lenders. Some provinces have banned P2P services market by partnering with banks to offer
lenders altogether. By October 2019, the number of banking services further up the financial pyramid.
P2P firms had fallen from a peak of 3,500 to the mid
400s. FinTech lending is a maturing market in Kenya and
regulation will continue to play a key role in how the
industry develops. However, it is important to note
Kenya
that there have also been regulatory missteps in
Kenya as the government initially capped interest
Kenya is a critical case study in FinTech consumer
rates chargeable by banks at 4% above the central
lending because of the success of its mobile-led
bank interest rate in 2016 before repealing the cap
financial inclusion strategy. In 2008, the Central Bank
in 2019. The artificial rate cap was below the interest
of Kenya (CBK) allowed Safaricom—the leading
rate at which banks were willing to lend to many
telecom service driving its mobile-led financial
borrower segments, which curtailed lending to the
inclusion program—to offer its service and even
real economy.
issued a ‘no objection’ letter before the launch
of the service. Kenya has adopted what has been
termed “lean regulation” based on frequent dialogue
between operators and regulators, and this approach
has been key to achieving financial deepening in
Kenya. Other African countries have mimicked this
approach to varying degrees of success.
Section 2: An institutional assessment of
the fintech consumer lending market
2.1. Institutional and regulatory framework while looking to deepen financial inclusion and curtail
reckless lending.
As outlined in Section 1, the institutional framework
governing lending in the country can be a crucial
2.2. Laws and policies governing consumer
enabler for growth in consumer lending. It is important
lending in Nigeria
to note that both state and national laws govern
Nigeria’s credit market, and each state has its own
Nigeria’s credit market is governed by many laws and
lending laws. At the national level, lenders can be
policies, most of which have been updated over time
categorised into three general segments:
in response to changes in economic objectives and
financial activities. In this section, we highlight and
Moneylenders: These are institutions not regulated analyse seven laws and policies that are crucial for
by the CBN but governed by specific state money understanding the nature of the lending market, as
lending laws. well as the constraints and enablers of growth. The
first three regulate lender activities and define the
scope of acceptable lending behaviour in the country.
Finance companies: These are institutions regulated
For example, the low rate of unsecured lending in
by the CBN and permitted to lend money and receive
Nigeria’s formal credit markets is a derivative of the
placements. However, they cannot securitise loans
Banking and Other Financial institutions act.
or take customer deposits.
Banking and Other Financial Institutions Act

Microfinance banks: These are institutions regulated (2007)
by the CBN and permitted to lend money and receive
deposits. They can also pool outstanding loans and
Objectives: The Banking and Other Financial
create products from existing deposits and loans.
Institutions Act (BOFIA) provides guidelines for the
conduct of all banks and financial institutions in
In Section 1, we highlighted how Nigeria’s consumer
Nigeria. The Act outlines the roles, duties, and limits
lending industry has struggled under the prevailing
of all financial institutions in the country.
regulatory regime as many guidelines and frameworks
do not serve the interest of industry stakeholders.
Also, we highlighted information asymmetry as the Key elements: The relevant guidelines for consumer
greatest obstacles for lenders when evaluating the lending can be found in Section 20 of the BOFIA,
default risk of potential borrowers. which makes unsecured lending by deposit money
banks more difficult. The Act explains that officers
Over time, Nigerian regulators have sought to address of the bank that grant unsecured loans are liable to
the information asymmetry and other problems in the prosecution and the directors of the bank will be liable
market. Here, we outline the major laws and policies to indemnify the bank against any losses incurred on
that have either shaped or currently govern the loans.
industry, many of which try to solve concerns relating
to information asymmetry, consumer protection, etc.,
Impact: The BOFIA restrains deposit money Key elements: The framework made it mandatory for
banks from issuing unsecured loans and has been all financial institutions to send information on debtors
highlighted as a major barrier to consumer lending with an outstanding balance (principal plus interest)
in Nigeria. Prior to the establishment of the national above N100,000 (later increased to N1 million). This
collateral registry, real estate was the generally information on borrowers and their credit profiles
accepted form of collateral in the lending industry, and were to be sent to the CRMS and could be shared
this inhibited credit growth due to the bureaucratic with prospective lenders and other stakeholders in
inefficiencies of real estate registration in the country. the form of status reports.
According to the Presidential Technical Committee
for Land Reform, only 3% of Nigeria’s land had been
Impact: The CRMS was expected to facilitate more
registered on the Land registry platform by 2017.
prudent consumer lending. Research on the impact
One notable obstacle in the registration process is
of credit bureaus in Kenya (Gaitho, Nancy Wanjiru,
the requirement for a state governor’s consent when
2013) showed that establishing credit bureaus
registering property.
increased the volume of lending, lowers the cost
of credit, and led to better credit risk assessment
Limitations: The BOFIA restricts unsecured lending as creditors had greater visibility of borrowers’
in commercial lending markets and forces customers outstanding loans. In Nigeria, however, banks largely
to microfinance institutions with higher premiums. ignored the prudential loan guidelines, resulting in
Furthermore, the BOFIA inadvertently ties the persistently high NPLs and a spate of bank failures in
future growth of consumer lending in Nigeria to the the 1990s and 2000s.
performance of the national collateral registry and an
increased use of movable assets in secured lending.
Limitations: The initial CRMS system was
unsuccessful because it only covered the wealthiest
Enforcement and penalties: With regards to the income groups in the country. The CRMS instructed
laws guiding unsecured lending across Nigeria’s lenders to check credit balances above N1 million.
banks, the BOFIA explicitly states possible fines for However, the CBN reported in 2018 that only about
the banking officer or even imprisonment for falling 2% of Nigerians have more than N500,000 in their
short of the law. accounts. The high threshold for credit checks meant
that a significant portion of formal lending activity was
carried out without the required scrutiny.
Credit Risk Management System (1991)
Enforcement and penalties: The 1991 policy

Objectives: The decision to establish a credit
was succeeded by a string of updates—by 2013
bureau in Nigeria was part of a raft of monetary
guidelines regulating the activities of credit bureaus,
policy and financial regulation amendments made
and the enactment of the 2017 Credit Reporting Act.
to the original CBN Act in 1991. The changes were
made after a surge in non-performing loans in the
banking system encouraged the CBN to adopt Microfinance Policy Framework (2011)
stricter credit risk reporting standards. The goal was
to establish a formal credit reporting process that
Objectives: In 2005, the CBN introduced a
would strengthen the risk appraisal frameworks used
Microfinance Regulation and Policy Framework
by domestic financial institutions. The CRMS is now
intended to boost financial access to unserved and
defunct.
underserved members of the population. The move
was rooted in the belief that expanding financial a capital base of N3.5 billion by 2021 and N5 billion
access to these population segments was required by 2022.
for inclusive and sustainable economic growth, and,
crucially, commercial banks were unsuitable vehicles
Enforcement and penalties: The CBN is responsible
to drive this credit expansion. Many microfinance
for enforcing all elements of the microfinance bank
banks shut down between 2005 and 2010 as the
initiative: setting capital thresholds, creating MFB
effect of the global financial crisis weighed on under-
classifications, and overseeing the activities of
capitalised banks. In response, the CBN introduced
industry operators. Failing to adhere to the CBN’s
new guidelines in 2011 to strengthen the capital and
guidelines can lead to large fines and even the
regulatory framework of the microfinance industry.
revoking of a license—in 2018, the CBN revoked the
licenses of 154 microfinance banks.
Key elements: The Act distinguishes microfinance
from other financial services with the following criteria:
Consumer Protection Framework (2016)
(i) size of loans and savings (ii) absence or reduced
emphasis on collateral (iii) simplicity of operations.
Objectives: The CBN released a consumer protection
framework to guide financial institutions on their
Impact: The microfinance industry has grown
interaction with customers and outlined the duties that
substantially in the last decade. The number of
lenders owe to their customers.
licensed MFBs has risen from 600 in 2008 to 940 in
2020. Also, total deposits increased from N59 billion
in 2010 to N182 billion in 2017. Key elements: The framework expands on the
requirements and responsibility of businesses to
uphold high ethical standards. It is divided into nine
Limitations: Although the industry has grown,
sections and covers key issues like Disclosure &
progress on the objectives has been slow. The intent
Transparency, Data & Privacy, and Fair Treatment.
for the microfinance industry was to deepen financial
The framework ensures the following:
inclusion and provide financial services to customer
segments ignored by deposit money banks. The
1. Financial institutions provide appropriate and
microfinance framework ought to expand to include
visible channels for customer complaints.
FinTechs in Nigeria as FinTech operators have made
Financial institutions can be fined as much as
notable progress in achieving the stated goals of the
N2 million for failing to acknowledge a customer
microfinance regulations. For example, EFinA data
complaint.
shows that 14.6% of Nigerians are now in the informal
2. Financial institutions provide fair and visible
banking sector, up from 9.8% in 2016, and FinTech
guidelines for debt recovery and adopt ethical
lenders have enjoyed comparatively more success in
debt recovery practices.
penetrating the informal lending market. One problem
3. Customers must give prior consent before a
the CBN has identified is that MFBs are insufficiently
financial institution shares their data with third
capitalised to achieve their financial inclusion goals
parties.
while maintaining prudential stability. A 2019 CBN
circular increased the minimum capital requirements
for different types of MFBs. State MFBs (the license Impact: The Consumer Protection Framework is
most Fintechs aspire to secure) must now have a similar to other consumer regulations across the
capital base of N500 million by April 2021 and N1 world. It aligns the various duties and responsibilities
billion by April 2022 while National MFBs must have of operators in the financial space. The presence
of a consumer protection framework ensures that their risk assessments. The Act also gives borrowers
businesses’ activities are governed by basic rules the right to request a free credit statement from each
that protect consumer interests. licensed credit bureau once a year.
Limitations: The effectiveness of the policy Key elements: The Act defines the roles &
depends on the CBN’s capacity to regulate the responsibilities of the following groups:
numerous financial institutions governed by the
framework. In addition, financial institutions can take 1. Data subjects: Any person or entity whose credit
advantage of information asymmetry here as many information is collated and administered by a
financial customers are unaware or unfamiliar with credit bureau.
the consumer protection framework. Meanwhile, the 2. Credit bureaus: They create and maintain credit
latest version of the Consumer Protection Framework databases and provide credit reports to credit
was released in 2016. Afterwards, Nigeria signed information users.
its first competition and consumer protection law 3. Credit information users: Any stakeholder
in 2019: The Federal Competition and Consumer (usually a financial institution) that requires credit
Protection Act. The new law empowers an industry- information about data agents.
agnostic Federal Competition and Consumer 4. Credit information providers: Banks & other
Protection Tribunal and should significantly improve financial institutions. They provide credit &
consumer protection practices in Nigeria. financial information about data agents to credit
bureaus.
Enforcement and penalties: The CBN is

responsible for enforcing the consumer protection Impact: The Act is intended to resolve the problem of
framework. Failure to adhere to the guidelines could information asymmetry in Nigeria’s lending market by
lead to fines, apology letters to customers, and even disseminating information that financial institutions can
license suspensions. use in their risk assessments. Credit bureau coverage
has grown in Nigeria since the Act was passed, rising
from 8% in 2016 to 13% in 2019, albeit still way below
Credit Reporting Act (2017)
Kenya’s coverage of 36%, indicating that Nigeria’s
credit information gap remains substantial.
Objectives: The Credit Reporting Act (2017)
was passed as part of the national ease of doing
Limitations: The credit reports provided by credit
business reforms driven by the Presidential Enabling
bureaus are only as good as the data used to
Business Environment Council (PEBEC). The Council
generate these reports. In particular, the current
sought to develop Nigeria’s credit bureau industry by
CRMS only contains information on borrowers with
establishing a statutory framework for the licensing
prior credit histories which means it is much less
and regulation of the operations of the credit bureaus.
useful for assessing the risk of new borrowers. This is
Before the law was passed, credit bureaus in Nigeria
important as Nigeria’s credit bureau coverage is still
were regulated by CBN guidelines, including
low (13%) so many aspiring borrowers do not have
the initial 1991 Credit Risk Management System
recorded credit histories. Section 3 gives a thorough
framework and a later 2013 update. The law seeks to
breakdown of the types of data Nigerian FinTech
strengthen credit reporting in Nigeria by mandating
lenders use in their risk assessments.
financial institutions to provide information to credit
bureaus and use the credit reports they provide in
Enforcement and penalties: Various penalties, In early 2019, the CBN revealed that over 41,000
including fines and imprisonment, are applicable for moveable assets valued at N1.5 trillion had been
infringing on the provisions of the Act. For example, registered, with more than 600 financial institutions
a Credit Bureau or officer that intentionally uploads (including all commercial banks in the country)
misleading data could be fined as much as N10 using the registry. In 2020, the CBN indicated that
million. So far, none of the three licensed credit individuals and SMEs looking to access intervention
bureaus in Nigeria have received public sanctions funds for COVID-19 (e.g. the N50 billion Targeted
for contravening the Act. Credit Facility) could apply for loans with moveable
collateral recorded in the registry. This decision
was a boon for many low-income applicants to the
National Collateral Registry Act (2017)
intervention program.
Objectives: The National Collateral Registry Act

Limitations: The NCR has experienced mixed
(Secured Transactions in Movable Assets Act) was
success. Whilst it is an important vehicle for
passed alongside the Credit Reporting Act (2017)
facilitating credit access across low-income groups,
as part of the national ease of doing business
it is yet to become widely used by other borrower
reforms. Similar to the Credit Reporting Act, PEBEC
segments. As a result, the platform is mainly used
also sought to provide a statutory framework for a
by the microfinance banks that cater to low-income
movable asset collateral registry, which had first been
borrowers.
established by the CBN in 2016. The law intends to
boost financial inclusion by allowing borrowers to put
up moveable assets as collateral for loans, as long Enforcement and penalties: If the debtor defaults
as the asset is uniquely registered on the National on its obligations, the secured creditor has a right
Collateral Registry. to enforce its security interest in the collateral. The
creditor has to give ten (10) days’ notice after the
default on the agreement before remedial action,
Key elements: The Act allows individuals and
which could be a sale of the property.
SMEs to use their movable assets as collateral for
accessing credit. Moveable collateral includes
tangible and intangible personal property (e.g. Payment Service Bank Guidelines (2018)
vehicles and patents), and all rights, interests, and
benefits related to ownership of items other than
Objectives: The guidelines outline the roles of
real estate. An asset is given a unique ID once it is
Payment Services Banks (PSB) in Nigeria. A PSB
registered so that lenders can verify the asset can
is usually a subsidiary of a telecommunications
be used as collateral. One primary benefit of the law
company, supermarket chain or a similar large
is that a security registered on the NCR is deemed
B2C firm that acquires a license to provide
to have been perfected, unlike land registry which
financial services by leveraging its existing
requires a state governor’s consent and stamp duty
telecommunications or distribution infrastructure.
charges.
PSBs are permitted to offer banking services such
as deposit-taking, remittances, payments processing
Impact: Given the prevalence of secured lending in and mobile wallets. The objective of these banks is to
the formal financial sector, the scheme broadens the increase financial inclusion and depth in Nigeria by
scope of potential borrowers as many Nigerians do providing tailored financial products to unserved and
not have traditional forms of collateral like real estate. underserved customers.
Key elements: The guidelines allow mobile network
operators to obtain PSB licenses which would
enable them to receive customer deposits—similar
to guidelines in other mobile-led markets like in East
Africa. However, unlike other markets, the guidelines
prohibit PSBs from issuing loans to customers.
Impact: The CBN has granted approvals-in-principle

to three new PSBs: Hope PSB (a subsidiary of Unified
Payment), Money Master PSB (a subsidiary of Global
telecommunications) and 9PSB (a subsidiary of
9Mobile Telecommunications).
Limitations: The current PSB guidelines are too

restrictive as they limit the range of activities and
relationships that PSBs can enter into, making it more
difficult for them to achieve their financial inclusion
goals. For example, PSBs cannot offer or bundle
certain services that would improve financial inclusion,
such as underwriting or lending. Furthermore, to level
the playing field, the guidelines prohibit PSBs from
entering preferential arrangements with affiliate or
subsidiary companies (e.g. Money Master PSB and
Globacom). PSBs are also not allowed to leverage
the existing infrastructure of affiliate companies, an
industry feature that was key to Safaricom’s success
and the growth of Kenya’s mobile money market.
Finally, the guidelines saddle PSBs with infrastructural
commitment that could make them inflexible and
inefficient. PSBs are mandated to provide ATMs and
issue debit cards, which introduces unnecessary
infrastructure integration costs and prevents them
from adopting a purely digital model.
Enforcement and penalties: Payment service

banks are supervised by the CBN and failure to
adhere to the guidelines will lead to the revocation of
their license by the apex bank.
Section 3: Understanding the borrowers
3.1. What are the different customer segments? For example, a standard ₦100,000 loan from Baobab
would attract an APR of 60% for a 24-month period
The notion that Fintech lenders have provided credit (Source: Baobab loan simulator).
to borrowers that would normally not have access
is correct. Commercial banks mainly give loans Instead of traditional collateral, Fintech lenders have
collateralised by landed property because of the rules directly targeted salaried workers, using the guarantee
governing their operations (see Section 2.1) whereas of future income to de-risk lending. Traditional
Fintech lenders, who mostly operate under a finance financial institutions have noted the success Fintech
company or microfinance license, give loans to those players have enjoyed in catering to this market
excluded from the traditional lending industry. segment and have intensified product rollouts in
recent years. Today, borrowers can access a number
This market feature is different from the observed of salary-based credit facilities across the large
trend in developed markets where Fintech lenders commercial banks, including Stanbic IBTC (Salary
plug into existing credit market infrastructure (97% earner,) Sterling Bank (Specta), and UBA (Instant
of adults in the UK have a bank account vs 38% credit express). Fintech lenders remain a step ahead,
in Nigeria) and compete with larger lenders by however, and have persisted with the approach of
attempting to “disrupt” the business of consumer further segmenting the credit market. Operators
lending. For example, most consumer loans in the UK provide loans targeted at particular occupations
are intended to refinance existing loans while Fintech and have begun to provide financing for specific
lenders in Nigeria often provide credit to individuals products. Creditville offers an auto lease product for
with no recognisable credit histories. Interestingly, salaried workers while Schoolable and Paymyrent are
the success these firms have enjoyed in a short specialist platforms that provide financing for school
time has encouraged larger lenders to adopt similar fees and rent payments, respectively. Finally, many
tactics to penetrate the consumer credit market. Fintech lenders only provide loans to residents in
specific states, usually because the lender operates
The typical loan provided by a Nigerian Fintech under a state microfinance or moneylender license.
lender is to a salaried middle-income earner and must
be repaid within 12 months. Most industry players 3.2. How do operators assess a borrower’s
provide loans without requiring collateral, thanks to risk?
lighter regulations that permit unsecured consumer
lending. Most firms can be classified as short-term A lender will only serve a borrower segment that it
lenders (loan tenor under 12 months): loans that last believes it is able to accurately screen for credit risk.
beyond a year are only explicitly permitted in 25 of the A customer’s credit risk analysis is the process of
41 companies studied by Stears Data. In this regard, assessing the risk that a borrower will fail to fulfil their
there is still a notable gap for long-term consumer repayment obligations. When assessing a borrower’s
lending in Nigeria, which is yet to be filled by either credit risk, the availability of information and the
Fintech lenders, microfinance banks or commercial method used in processing this information are the
banks. Consistent with this, the interest rates offered key factors that help the lender determine the interest
on Fintech loans are only economic for short periods, rate (cost of borrowing money).
with APRs running close to 100% for some lenders.
Figure 3.1: Breakdown of maximum lending tenors from operator database
Source: Company sources, Stears Data
Section 1.3 covers the numerous reasons for high and choosing a model to process the data. Fintechs
interest rates in Nigeria, but the efficacy of credit risk have disrupted the credit assessment process by
assessment processes is a primary driver. In addition, introducing more sophisticated, cost-effective, or
Section 2.1 covered regulatory efforts to address the accurate data and processing models, without
information asymmetry problem in Nigeria’s credit changing the underlying approach to consumer risk
markets. Information about borrowers is not as robust assessment. These innovations—from analysing SMS
as it is in other parts of the world and this information data to using artificial intelligence—have been a
asymmetry ultimately limits the thoroughness of the boon for industry profitability, financial inclusion and
risk assessment process and encourages firms to credit market efficiency all over the world. A similar
only lend to borrowers with the lowest observed risk story is taking shape in Nigeria as FinTech lenders
levels. incorporate non-traditional data and techniques to
improve their risk assessment processes.
Thankfully, this problem has been the subject of
impressive innovation in the industry, led by both 3.3. Credit risk assessment: Data
pure Fintech lenders and traditional banks investing
more in newer technologies. Firms ranging from Data points are used in credit risk assessments to
multinational lenders like Carbon, domestic innovators determine the likelihood that a lender will repay a loan.
like Migo and traditional banks like Guaranty Trust Calculating credit risk is about predicting a borrower’s
Bank have all developed internal credit scoring default probability in the future. To predict future
mechanisms that leverage machine learning (ML) events, we need to look at data about the past and
tools in risk assessments. Other lenders have sought present that gives us information about what the future
to de-risk lending by partnering with insurance firms holds. For credit risk, this is mainly financial data like
or eliminating the borrower altogether in the risk financial statements—if we know somebody’s income
assessment process by directly transferring funds flow, then we can better judge if they can repay.
to a third party (e.g. Fint). Overall, Fintech operators
continue to develop ways of improving risk prediction More generally, the five C's of credit (see section 3.4)
models in the industry. is the standard approach for covering the information
relevant to a borrower’s creditworthiness. But non-
In Section 3.3 and Section 3.4, we break down how financial or alternative data can also be used here.
lenders and other interested parties assess consumer In the past decade, data from sources such as web
credit risk. There are two critical steps in any credit activity, geolocation and social media have been
assessment process: identifying the data to use applied to improve the accuracy of risk assessment
models. Whereas traditional financial data usually
covers activity on a borrower’s financial statement, Notably, traditional lenders classified this market
alternative data provides a wider picture of the segment as high-risk because they did not have the
borrower’s activities to help the lender make a better- financial information to assess them, whereas the
informed lending decision. The use of alternative proper assessment is that this group has an unknown
data in risk assessments has been propelled by rapid risk. Alternative data, which includes any information
improvements in computing power and the birth of not covered in standard credit reports or non-financial
Big Data analytics which enables artificial intelligence data in general, can help address this problem
(AI) and machine learning (ML) applications. A as almost everyone builds up an alternative data
simple application of alternative data would include history that is tracked and recorded by corporates,
geolocation information such as crime rates, GDP governments, and other entities.
per capita, default rates across locations, and so on,
in the borrower’s risk assessment. Unsurprisingly, One example of this is Social Lender, a Sterling
Fintech lenders’ increased use of alternative—and Bank platform that grants access to loans based on
often opaque—data has raised concerns over data a borrower’s social equity score. The user logs into
privacy and bias, amongst others. These issues are the app using their social media profile and grants
addressed further in Section 3.5. the app permission to scrutinise their social media
footprint to assess their creditworthiness. Although
industry experts have questioned the usefulness
Financial data
of crawling social media data when building a
customer’s risk profile, this approach has a clear
Lenders still rely heavily on traditional financial data
advantage: it makes loans available to many more
when making risk assessments. This data is usually
people.
obtained from account statements and credit bureau
reports. This data is then used as part of the five Cs
The potential gains of properly leveraging alternative
of the credit system. The standard credit report in
data are best seen through the rise of Zhima Credit,
Nigeria contains information related to a borrower’s
a subsidiary of the Alibaba Group. Zhima Credit
credit history, with a weighting for each category.
complemented financial data and public records
Across Nigeria’s three licensed credit bureaus, CRC
with large amounts of behavioural data collected
Bureau and Credit Registry Services both adopted
by Alibaba to drive credit growth to low-income
the United States FICO credit score while First
consumers. It should be noted that Jumia, Nigeria’s
Central Credit Bureau uses a similar rules-based
largest e-commerce platform, already has a vendor
credit scoring system. Apart from the credit scores
credit program for its vendors. However, the success
provided by credit bureaus, lenders often include
of the Alibaba and Zhima Credit collaboration—
other financial information related to the five Cs.
in a country whose financial demographics at the
time were relatively similar to Nigeria’s—suggests
Alternative data that Fintech lenders would benefit from working
with institutions that organically aggregate data on
Consumer lending in Nigeria faced a Catch-22 customer behaviour. Naturally, data privacy rules
situation: most lenders refused to extend credit (see Section 3.5) would be important here, but
to Nigerians without preferred collateral or on Fintech operators ought to do more to explore this
low incomes as they deemed them to be high-risk alternative.
borrowers, but their inability to access credit has
prevented many Nigerians from building the credit Some of the firms Stears Data tracked currently use
histories that would validate their creditworthiness. alternative data in their credit risk assessments.
Phone records which often include location data are 3.4. Credit risk assessment: Risk assessment
by far the most popular alternative data analysed. models
Aella Credit collects users’ GPS information to confirm
residence and Migo’s loan contract requests the Most lenders use simple linear models for risk
borrower’s consent to share their data. QuickCheck, assessment where a borrower’s calculated risk
a lending platform that can only be accessed through is a weighted sum of the data criteria used in the
its mobile app, requires users to sign in using their assessment process. Despite demonstrating useful
Facebook accounts. The app then proceeds to scan predictive power over the years, this approach has
the user’s social media and phone activity to perform notable limitations. First, it is unlikely that a borrower’s
its risk assessment. On these platforms, the more risk interacts with the data used to measure risk in a
data access is granted, the better the chances of a simple linear way—for example, the effect of income
higher score. Branch and Carbon, two of the larger on credit risk weakens as income increases. Second,
lenders in the space, request permission to access a linear risk models are monotonous, i.e. they fail to
user’s data, including location, IP addresses, phone account for changes in a borrower’s credit behaviour
records, and so on. Some of these firms combine over time. As a result, simple linear models are
the use of alternative data with more advanced increasingly being replaced by more sophisticated
machine learning (ML) risk assessment models. approaches that allow for greater variety—and, in
Overall, though, most Fintech lenders in Nigeria theory, accuracy—in predicting credit risk.
use traditional financial data like credit reports or
salary as the primary inputs in their risk assessment
Conventional models
processes.
Conventional risk assessment models are criteria

The use of alternative data is relatively new in Nigeria’s
or rules-based, meaning a borrower must fulfil
lending industry but will play a key part over the next
standard conditions to be granted a loan. One of
decade. Alternative data introduces the possibility
these conditions is meeting a minimum credit score
of building credit histories for a larger share of the
threshold. The most widely used credit scoring
population (current credit bureau coverage is 13%)
system is the rules-based American FICO system,
and eliminates the information asymmetry problem
which is used by two out of the three licensed credit
in Nigeria’s credit market. However, alternative data
bureaus in Nigeria. The five Cs of credit (below) are
introduces new problems. For example, alternative
also important in a standard risk assessment process.
data users should be wary of the relevance of the
data used to train ML models that process user data
In Nigeria, there are a few conditions that play a
as some of these models do not apply in all locations.
significant role in the conventional approach to credit
More generally, work needs to be done to gauge more
risk assessment:
useful forms of alternative data to prevent a “garbage
in, garbage out” approach to risk assessments.
For example, one report by Moody Analytics found Collateral: The collateral required by each lender
that web activity and credit card data were reliable mainly depends on its operating license and overall
predictors of credit risk. In contrast, satellite data strategy. The liquidity and quality of the collateral
was less useful in assessing default risk. also weighs on a borrower’s score.
Credit history: Lenders assess whether a borrower

has outstanding loans or a reliable credit history with
other institutions.
Purpose: The purpose of the loan factors into the borrower. Although borrowers are likely to benefit
perceived risk of the transaction and may affect the if unconventional models lead to greater credit
interest rate attached to the loan. expansion, some lenders are wary that the complexity
of these models would make it more likely that lenders
Salary: A borrower’s salary plays a significant role in
fall foul of the clarity guidelines in the Consumer
lending decisions in Nigeria, as lenders use this as a
Protection Framework (see Section 2.1).
gauge of cash flow, which is one of the five Cs. In the
case of commercial banks, if an applicant does not
have a salary account domiciled in the lending bank, Unconventional models
they may be asked to set up a standing payment
order to guarantee interest payments. Eight of the Forty-one FinTech consumer lenders
analysed by Stears Data reported using ML methods
when vetting borrowers. These firms include large
Guarantor: In a situation where the borrower does
multinational consumer lenders like Branch and
not meet the issuing bank's requirements for a loan,
Carbon, bank-affiliated lending platforms such as
the lender requests a guarantor for the loan who will
Social Lender (Sterling Bank), Specta (Sterling Bank),
act as a first contact in the event of a default.
and some indigenous Fintech lenders like Mines and
QuickCheck.
Based on the analysis carried out by Stears Data,
most Fintech lenders in Nigeria adopt the same
The key distinction between the traditional linear
conventional risk assessment models as traditional
approach and ML models is rather than impose an
lenders and often have similar application processes.
assumed relationship between the borrower's risk
For example, Renmoney, one of the larger consumer
and the relevant variables, ML models seek to learn
lenders, uses a FICO-type scorecard and conducts
from (training) data to determine the right fit for the
a similar KYC process as larger financial institutions,
relationship.
such as requesting for a government-issued form of
identification. Likewise. Page Financials requests
Most companies explain that the accuracy of their
borrowers using their platform to grant access to
models depends on the level of consent a user grants
the banks’ statements as part of the risk assessment
for their data to be recorded and analysed. These
process.
models include financial data like transaction history
and debt to income ratios, as well as alternative data
Other Fintech lenders have sought ways of disrupting
ranging from electricity payments to e-commerce
risk assessment, for example, by vetting an applicant’s
information. Analysing a wider range of data more
employer and only granting loans to applicants with
flexibly has so far reduced the number of borrower’s
valid employers. This approach is used by ALAT
excluded from the credit market on account of limited
(Wema Bank), SureCredit, and FInt, a P2P platform.
formal credit histories.
Whilst this streamlines the risk assessment process
and possibly de-risks the transaction, it also limits
The use of AI and ML techniques in credit scoring has
the pool of potential borrowers to the employers with
gained ground in more developed markets. FICO and
established relationships with lenders.
Equifax, two prominent global credit scoring entities,
revealed they had embedded AI technology into their
The use of more sophisticated (non-linear)
credit scoring methods in recent years. Furthermore,
approaches to risk assessment has been slow to
Equifax argued that the use of one particular ML
pick up in Nigeria. One reason is the difficulty of
method improved predictive ability by 15% (Source:
explaining a non-linear assessment to a typical
Equifax) and using this approach earlier would have that this innovation should increase the number of
allowed them to approve applicants that had been loan recipients and drive down the cost of credit.
turned down for being too risky. At the same time, However, Section 3.5 below highlights some of the
FICO warned that these techniques had introduced obstacles that lenders must overcome when applying
opacity into the credit scoring process. One notable unconventional risk assessment models.
player in the ML space in Nigeria is Indicina, an
indigenous credit scoring startup. The company 3.5. Improving credit risk assessment in Nigeria
builds credit scoring models using ML. Indicina
has argued statistically predictive modelling and The use of ML models has come with challenges,
machine learning techniques that financial and socio- both in Nigeria and abroad. Concerns over data
demographic data (e.g. age) are the most powerful privacy, bias in training data, consumer protection,
predictors of credit risk, whereas social media data is and predatory lending have caused controversy
much less useful in credit risk assessment. Carbon is in consumer lending markets in recent years.
another indigenous operator leveraging ML advances Overcoming these hurdles is key to sustainably
in its credit risk analysis. It adopted a fully automated improve risk assessment, which, in turn, is necessary
loan application process in 2017, using training data to solve the information asymmetry in Nigeria’s
with roughly 25 variables and 25,000 data points. consumer lending market. The primary challenges
are highlighted below.
In March 2018, Sterling Bank unveiled Specta, a new
digital lending platform that promised to disburse
Strict Fraud and Risk assessment systems.
loans up to N5 million within five minutes of completing
the application process. Specta uses proprietary data
A few months after Loanbee, a Kenyan Fintech,
and analytics to process and disburse consumer
began adopting ML tools in the loan application
loans to salary earners belonging to pre-approved
process, their NPLs spiked. Fraudulent borrowers
communities without any paperwork or collateral.
had been registering accounts with stolen personal
Pre-approved communities are organisations
information to get past the application screening
enrolled on the Specta platform, but individuals who
process. Lending firms are alert to the risks of fraud.
work for unenrolled organisations can register as
They have often collaborated to detect borrowers who
individuals on the platform. Specta aimed to optimise
move from one platform to another with no intention of
the loan process through automation and digitisation,
repaying the accumulated debt. Ironically, Nigeria’s
thereby reducing human error, increasing speed,
cumbersome KYC requirements in formal lending
and enhancing the customer experience. So far,
has helped Fintech lenders screen customers, for
Specta has been a rare consumer lending success
example by requiring certified documents or proof of
among Nigeria’s commercial banks. Sterling Bank’s
address before authorising a loan.
retail (consumer) loan book has grown from N8 billion
in Q1’2018 to N41 billion in Q1’2020. Impressively,
consumer loan NPL ratio has fallen at the same time: Bias in ML models
from 10% to 4%.
Although ML models are potentially very powerful,
Buoyed by the success enjoyed by Carbon, Specta, their predictive potency hinges on the validity of the
and so on, Fintech consumer lenders can leverage data used to train the models. Too often, the training
AI and ML methods to boost risk assessment and data misrepresents the broader population, and this
loan application processes. The trend observed introduces a bias in the loan screening process. For
in countries like Kenya and South Africa suggests example, most of the Fintech consumer lenders that
deploy ML models in Nigeria use training data based for the permissible period under the law, which is
on the salaried population. As lenders diversify their deemed “reasonable”. Fintech lenders such as
customer base—e.g. to more informal entrepreneurial Branch, Carbon, Quickcheck, Social lender collect
communities—it is likely that the ML models would data in line with the Nigeria Data Protection Regulation
be biased against these new groups, leading to too 2019. The NITDA does not require customers to be
many rejections in loan applications. notified in a situation where their data is breached
or compromised, this is a deviation from what we
An accepted instance of bias in credit risk ML models observed with other countries with similar data
is in the United States where Black and Hispanic protection laws such as Kenya and the UK. In cases
homebuyers have been found to have significantly where the customer’s data is housed by a third party
lower mortgage approval rates even though existing and not the country of origin, the owner of the data
laws prohibit discriminating by race or neighbourhood must be contacted by the lender to transfer the data.
when lending. ML models are trained using sample The data is then subject to the data laws of the host
data on legitimate variables such as income and country and no longer the country of origin.
credit score, but research has shown that minority
groups in the United States are disproportionally The users also have the right to alert the ender in
disadvantaged in credit scoring. This bias is simply a situation where it does not want their data to be
reinforced during the ML screening. processed any longer. The borrower retains the rights
to request for their data to be deleted, they also retain
One common practice ML lenders have adopted the rights to be informed when their data is used
to counter this is to maintain low maximum loan abroad. The key underlying issue with the NDPR is not
thresholds while collating more accurate training data. the absence of a regulation for data protection but the
In Nigeria, lenders like Migo, Carbon and QuickCheck issue of enforcement. In 2018, the NITDA indicated
employ this approach as they incrementally increase that only 94 firms compiled with the regulation which
borrowers’ maximum loan amounts after continued is a far cry from the three million-plus companies that
usage. are registered with the CAC.
Meanwhile, increasing the amount of publicly

available data would reduce the likelihood of bias in
training data as lenders would have access to more
representative samples of the wider population.
Nigeria currently has a significant data deficit and
available public datasets fall far short of what is
required to train unbiased ML models.
Data Privacy
Fintech lenders in Nigeria that use mapping and ML

techniques to collect information on lenders, access
data from the customer. Customers concede to share
their data with lenders when they agree to loans or
download lending apps. Data that is collected is
subject to NITDA regulations. Data retention is only
Section 4. Fintech consumer lending
distribution channels
4.1. How do borrowers access loans? is gaining ground as the preferred financial access
channel for underserved market segments, the
Borrowers in Nigeria primarily access loans through
consumer lenders studied by Stears Data mainly
online applications, based on Stears Data analysis
cater to the low and middle-income borrowers that
of the 43 most prominent Fintech consumer lending
can be reached online. Furthermore, mobile and web
platforms in Nigeria. 77% of analysed consumer
applications are powered by the same technology
lenders offer their products through online web
(both are internet-based channels) but have distinct
applications, while about half offered their products
cost implications for lenders seeking to minimise
through a mobile application or mobile technology
overheads. It is more expensive to build and maintain
like USSD. On the surface, this trend would seem
an integrated phone-app for IOS and Android devices
unusual considering that mobile penetration (90%)
than it would be to build and host a standard website.
is much higher than broadband penetration (45%)
Of the 17 consumer lenders that use both web and
in Nigeria. However, the popularity of web-based
mobile applications, eight are bank-affiliated while
channels reflects the reality that Fintech consumer
most of the others are larger lenders (e.g. Carbon,
lenders favour the salaried segment of the market
Renmoney, etc.). This speaks to the integration cost
(see Section 3.1), and this demographic is more likely
of mobile apps and the advantages enjoyed by the
to prefer online, whereas mobile channels have been
banks or larger financial institutions already plugged
more popular among low-income groups. Of the 41
into this infrastructure. Two consumer lenders studied
lending platforms we tracked, most grant borrowers
by Stears Data use a web portal as their unique
the option of accessing loans through multiple
distribution channel: Nextpayday loan and Easy
channels; only 6 lending platforms operated a single
Loan, a product of Casafina Finance Limited. Both
channel. Unsurprisingly, physical branches are the
platforms emphasise the frictionless self-service as a
least popular distribution channel across Fintech
market differentiator for borrowers.
consumer lenders.
4.2. A breakdown of the main distribution Mobile Applications
channels in the industry

Mobile application technology has been slow to pick
up in Nigeria’s consumer lending space. Apart from
Web applications
the additional cost of building and maintaining apps,
lenders have also been dissuaded by the reliance
As physical branches have been to commercial
on broadband and smartphone adoption in the
banks, online web applications (websites) have
country, both of which have historically been limited
become the primary hub for Nigeria’s Fintech
to wealthier market segments. However, an influx of
lenders, with three-fourths of tracked firms using this
cheaper Android-enabled smartphones has quickly
approach. Consumer lending platforms have focused
widened the addressable market and encouraged
on websites as the primary marketing and distribution
lenders to explore this option. Mobile apps have
channel for their products as more Nigerians
been a powerful differentiator as the user experience
migrate online, driven by increased smartphone and
is enhanced compared to web applications.
broadband penetration. Although mobile technology
Figure 4.1: Number of lenders using each channel
Source: Company Sources, Stears Data
Figure 4.2: Number of lenders using multiple channels

**Carbon is the only non-bank affiliated fintech lender that can be reached through all three virtual channels (website, mobile
app and USSD). This emphasizes the cost of integrating more digital channels and highlights the advantage banks hold
because of their legacy infrastructure**
Based on our study of Fintech consumer lenders, the about 3-5MB. Therefore, USSD offers a cheaper and
use of mobile apps as a distribution channel is split often more reliable channel, particularly in parts of the
between two groups: bank-affiliated or large lenders country with weak or intermittent internet coverage.
and short-term micro lenders. Bank-affiliated lenders
usually include loan products among a wider suite of Under the 2008 CBN guidelines (see Section 2.1),
financial services housed within the app; for example, telecom companies provide the USSD infrastructure
ALAT by Wema Bank offers investment products, loan on which banks and other financial institutions deliver
products and bill payments. On the other end of the financial services. 23 of the 43 consumer lenders
spectrum, there are a few notable app-only lenders studied offer loan products through USSD or similar
such as Jumia One and QuickCheck that focus on technology. Many of them are bank-affiliated lenders,
disbursing short-term loans in small amounts through such as First Advancer (Access Bank) and Social
a mobile app. All of these forms offer loans with tenors lender (Sterling Bank). They leverage existing USSD
under three months and a typical lending amount was infrastructure of a payment company. Nevertheless,
N100,000. These lenders have adopted a strategy other Fintech consumer lenders in Nigeria are
to target lower-income borrowers by lending small increasingly looking to USSD as a distribution channel
amounts for short durations as quickly as possible. for financial services. Platforms like Carbon and Migo
Mobile technology remains the most effective way have taken advantage of existing guidelines and set
of delivering this on-the-go strategy in the Nigerian up their own dedicated USSD channels. Notably,
market. XtraCash is a pure-USSD lending platform birthed
from a collaboration between a telecoms company
(MTN) and commercial bank (Access Bank), which
USSD
is available to borrowers who open bank accounts
through their mobile phone. The idea is to drive mobile
The use of USSD codes in mobile technology is fast
account adoption and improve financial depth across
becoming a key distribution channel for financial
unserved customer groups through USSD technology
services in Sub-Saharan Africa. In its simplest form, a
as that is the channel most favoured by those groups.
user types a code on their phone (e.g. *737#) and the
mobile network sends the request to the financial firm
According to the World Bank, mobile money accounts
via its unique USSD gateway. The process usually
have now surpassed bank accounts in Sub-Saharan
lasts a few seconds and is faster than traditional
Africa. It is also the only part of the world where
SMS. Increased use of USSD technology has been
transactions equivalent to almost a tenth of GDP are
driven by the faster pace of mobile adoption in the
carried out through mobile money (source: WEForum),
region and a growing acceptance of mobile banking
compared to 7% of GDP in Asia, the next-best region.
services. Mobile penetration in Nigeria has grown
As USSD penetration and trust grows in Nigeria,
from 30% in 2008 to 45% in 2019, while since 2012
Fintech lenders will depend more heavily on this
the value of mobile money transitions has grown
channel in their attempts to widen their borrower base
16205% from N31 billion in 2012 to N5 trillion in 2019.
in a competitive industry. In the meantime, regulators
and financial service providers are working to reduce
Another likely reason for the increased adoption of
the risk of fraud and ensure USSD channels are
USSD technology in accessing financial services
robust enough to accommodate large transactions.
is the low cost to the user and the provider. The
At present, USSD channels have been favoured for
respective price floor and cap for USSD transaction
microloans and other small transactions—mobile
sessions in Nigeria is N1.63k and N4.63k. Meanwhile,
transactions accounted for 17% of E -Payment
the average price of data in Nigeria is about 1MB for
volumes but only 3% of transaction value in 2019.
N1 while an internet payment transaction will use up
One primary challenge to overcome is data privacy $17 million from $2 million in 2016. In the same vein,
& security in sim card swaps. To combat this, the Renmoney announced plans to close its direct sales
NCC ordered telecom companies in 2018 to request channel and lay off all its sales agents. The CEO also
for additional KYC documents when issuing new sim revealed that the firm would be launching an app for
cards. customers to access loans as part of their efforts to
create a “scalable, digital lending business”.
In-branch requests
The digitisation of distribution channels reflects a
necessary shift to the origins of fintech consumer
Physical branches are still not unusual across the
lending in the region: using technology to make
Fintech consumer lenders studied by Stears Data,
cheap loans available to a wider demographic.
with 15 out of 43 lending platforms operating some
form of physical distribution location. One reason
In Nigeria, this trend will be helped by the PSB
for this is that lenders operating with a microfinance
guidelines (see Section 2.1) issued by the CBN that
bank license are mandated to open at least one
empower telecom companies especially to offer
physical branch, and lenders like Renmoney and
banking products to their customers. As the PSB
Creditville fall within this subgroup. Nevertheless,
license prohibits consumer lending, these new banks
branch banking still has a role to play in the market,
can instead serve as a powerful distribution channel
if only as a platform for educating less financially
for existing Fintech lenders. A few years ago, MTN
literate target borrowers. The presence of a
Nigeria partnered with Diamond Bank (now Access
physical location could also introduce an additional
Bank) to roll out the Diamond Y’ello scheme which
psychological incentive for a borrower to repay in
allowed Diamond Bank to leverage MTN Nigeria’s
comparison to a strict online model. Yet, it is clear
wider customer base. In Kenya, Safaricom has a
that physical locations are playing a diminishing
partnership with Equity Bank. We expect USSD and
role in the consumer lending space. All lending
other mobile channels to become more prevalent
platforms with physical branches also offer loans to
in Nigeria’s Fintech consumer lending landscape,
customers on a corresponding web application, and
spurred by stronger mobile adoption and the rise
a few others also provide mobile apps. Meanwhile,
of PSBs. This is in line with existing collaborations,
the supremacy of branch banking is dismissed by
such as Ferratum and Interswitch where loans can
the performance of pure online platforms like Carbon
be accessed and managed through Interswitch’s
(2019 revenues: $17 million) and the shift from offline
Quickteller platform.
to online engagement across other financial services
firms.
On the other hand, the prospects for agent networks
are dimmer, despite the important role this channel
4.3. Is digital distribution the future?
has played in driving financial inclusion in other
parts of Sub-Saharan Africa. Data from the World
Web applications Bank indicates that there were 110,000 M-Pesa
agents in Kenya in 2018, 40 times more than the
The way borrowers access loans in the future will be number of available agents in Kenya. The strong
shaped by digitisation and regulation. The former is penetration of agency banking was decisive in the
a noticeable trend already. In 2016, Carbon opted to growth of mobile money in countries like Ghana
go completely digital. After initial teething problems, and Kenya, and consumers in these countries have
the company’s performance has remained robust: benefited from a wider suite of lending products
Revenue has grown by a 3 year CAGR of 104% to made available through their mobile money agents.
Table 4.1: Maximum tenor, maximum lending amount, maximum interest rate data for selected lenders

**Stears Data segmented lenders employing USSD channels by maximum lending amounts. 4 out of 6 analysed firms that
offer loans above ₦100,000 are bank-affiliated**
Agent networks exist in Nigeria; for example, First However, the frameworks governing mobile money in
Bank of Nigeria boasts roughly 50,000 agents for Nigeria have inhibited the growth of agent networks
its 4 million customers and Paga, the largest mobile (see Section 2.1). The use of a bank-led model for
money firm in Nigeria, uses 25,777 agents. Using financial inclusion (compared to a telecom-led model
agent networks as a distribution channel for financial used in Ghana) slowed the development of critical
products still hold strong appeal in this part of the agent infrastructure, some of which may not be
world as target groups tend to live in remote and less corrected by the 2018 rollout of the PSB guidelines.
accessible areas for traditional financial and digital However, while telecom operators (and PSBs) will
infrastructure. Agent networks are also better suited play a decisive role in shaping the way borrowers
to a cash-heavy society, and cash transactions access loans, it is more likely that distribution will
account for a bulk of transactions in Nigeria. Even remain online—through mobile technologies like apps
the rise in digital payments has mainly come in the and USSD rather than agent networks. The primary
middle to high-income market segments. benefit of agents—increased reach—will be met
through greater mobile penetration and increased
Table 4.2: List of Fintech lenders and their USSD codes
Figure 4.3: Mobile penetration in Nigeria vs peer countries

*Mobile phone penetration refers to the number of SIM cards or mobile phone numbers in a certain country. The percentage
can be above 100% because people sometimes own multiple sim cards or mobile phones**
Figure 4.4: Agency banking / mobile money transactions
Source: Central Bank of Nigeria
collaboration between lenders and technology Although most lenders disburse funds to borrowers’
providers. In five years, borrowers will neither go to a bank accounts, 10 of the firms tracked also disbursed
branch nor an agent; they will expect to obtain loans funds to a specific wallet. Of these, Carbon and Aella
directly through their mobile phones. Credit are notable for disbursing consumer loans
to a mobile wallet in their respective mobile apps.
4.4. How do borrowers receive loans? Some of the other firms using the wallet approach
offer voucher financing (SureCredit) and education
Bank accounts are the primary way customers financing (Schoolable) where funds are given directly
receive loans in the Nigerian lending space. This to the merchant. Despite the security benefits of this
makes sense given Nigeria’s bank-led approach to approach, lending platforms have eschewed this
financial inclusion and the increased participation approach in favour of allowing borrowers to retain
of traditional banks in the Fintech consumer lending control over their use of funds. At the same time, this
landscape. 33 out of 41 firms analysed disburse loans trend is consistent with weaker penetration of mobile-
to bank accounts, more than double the number that based technology in Nigeria’s financial services
provide funds through a separate e-wallet or card. landscape; so far, only the largest financial institutions
Bank accounts also play a significant role in the KYC have adopted a strong omnichannel strategy in their
and risk assessment processes (see Section 3.3) business models.
used by many Fintech platforms. Moreover, as many
lenders target the salaried market segment and often The least popular disbursement channel is a platform
provide unsecured loans, access to bank accounts or credit card. Apart from bank-affiliated lenders,
and borrowers’ transaction history is a key part of the only Page Financials offers borrowers a card that
process. allows them to access loans. Credit card penetration
in Nigeria 2.6% vs 3.2% in SSA is low despite the
prevalence of debit cards (debit card issuance in method. Remita is one of the top payment gateways
Nigeria is 31% higher than the wider SSA region for issuing direct debits in Nigeria, with an estimated
with 17%). We are sceptical about the role cards will market share of 12% in 2019. Cash or bank transfers
play in driving financial inclusion and depth. Card still account for a fair share of repayment channels
maintenance fees in Nigeria are relatively high and used by Fintech lenders, while a number of the larger
the effectiveness of card technology is linked to wider lenders also allow borrowers to repay their loans
banking infrastructure (e.g. ATMs, POS terminals) through mobile apps (e.g. Branch, Carbon, Page).
that makes it a comparatively cumbersome channel Finally, although USSD channels are becoming an
compared to e-wallets. Moreover, the global shift is increasingly important way for customers to access
towards e-wallets and mobile payments. Although loans, uptake for this technology is limited when
bank accounts will continue to play a critical role as it comes to repayment. Some platforms permit
the hub. borrowers to repay using USSD codes. Notably,
Migo enables payments through bank transfer, card
4.5. How do borrowers repay their loans? payment, USSD codes, cash, and ATM deposits, and
offers the most diverse repayment channels across
In line with the focus on salaried customers, direct the analysed businesses.
debits are the primary means of fund repayment in
the industry as up to 36 of the studied firms use this
Figure 4.5: Number of lenders using multiple lending channels
Figure 4.6: Number of lenders using multiple repayment channels
Figure 4.7: Number of lenders using each lending channel
Figure 4.8: Number of lenders using each repayment channel
Section 5: Conclusion
Fintech consumer lending in Nigeria has grown in local talent which would improve the efficiency
considerably in the last decade, helped by an influx of of new technologies. For example, more local data
cheap smartphones, notable credit reporting reforms scientists will help reduce the likelihood of bias in AI-
and a willingness to venture where few traditional models imported from abroad. Artificial intelligence
financial institutions had dared previously. The and machine learning models have proven to be
industry has also diversified and now boasts a mix of very powerful in accelerating financial inclusion and
sophisticated international lenders, mobile-led micro- financial deepening in other parts of the world, and
lenders, and consumer loan platforms developed by their potential is exciting given the size of the Nigerian
the country’s biggest banks. market.
Despite the increased competition, there is room Regulation will play a key role in enabling this
for everyone and more. Nigeria’s fintech consumer transition. Policymakers have begun to use fintech
lending industry is still in its infancy considering the regulatory sandboxes in Nigeria and this should
size of the total addressable market. In 2018, only assist innovation in the industry. Yet not all regulation
5.5% of the Nigerian adult population (less than 6 has been positive. The increase in minimum capital
million people) had borrowed or repaid a formal loan requirements for microfinance banks—the license
within the last 12 months. The EFInA target for 2020 held by many fintech lenders—is a laudable attempt
was 40% (42 million adults) and Nigeria remains very at ensuring market stability but could stifle growth
far from that. So far, fintech consumer lenders have and competition, particularly as it hands an edge to
focused on Nigeria’s underserved young professional the platforms created by larger financial institutions.
population, with salaries playing the role of collateral Nigeria may explore the option of creating a new
in the industry. This has happened because license for fintech consumer lenders as existing
fintech consumer lenders have encountered similar frameworks are unsuited to the fintech industry.
infrastructural challenges in Nigeria’s credit markets
as those that long since discouraged larger lenders Given the failure to hit the 2020 financial inclusion
from growing their retail loan portfolios. goals and the speed required to hit the revised
targets for the next five years, regulators are likely
The good news is that fintech lenders are also at to become more open to the changes requested by
the centre of the push to address these long-term fintech lending operators. Recent reforms in credit
challenges, particularly with technology. This ranges reporting and mobile money point towards a more
from the use of USSD technology to disburse micro- enabling environment over the next decade. Amid
loans in rural areas to the deployment of machine this reality, Nigeria’s consumer lending market looks
learning techniques in credit risk assessment. For ripe for the taking.
example, the use of machine learning to extract and
analyse data from users’ phones will help deepen
available data for credit scoring and address the
problem of asymmetric information between lenders
and borrowers in the credit market. We expect the
role of technology to be enhanced by improvements
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FinTech Consumer Lending in Nigeria

Understanding risk assessment, distribution and innovation

To learn more about CoreData, contact fikayo_akeredolu@stearsng.com or ahmed_oyeleke@stearsng.com.

Data & Economic Advisory

Surveys & Data Collection

For business related enquiries, contact fikayo_akeredolu@stearsng.com or ahmed_oyeleke@stearsng.com.

• Tolu Omoleye, Head- Legal and Compliance, Branch International

Section 1. AN INTRODUCTION TO FINTECH CONSUMER LENDING IN NIGERIA 10

1.1. The basics of consumer lending in Nigeria. 10

1.2. The primary challenges facing consumer lending in Nigeria 11

1.3. The importance of consumer credit for economic growth 13

1.4. The rise of FinTechs in consumer lending 14

1.5. A breakdown of the consumer lending industry in Nigeria 15

1.6. An overview of FinTech consumer lending abroad 16

Section 2. AN INSTITUTIONAL ASSESSMENT OF THE FINTECH CONSUMER LENDING MARKET 19

2.1. Institutional and regulatory framework 19

2.2. Laws and policies governing consumer lending in Nigeria 19

Section 3. RISK ASSESSMENT IN FINTECH CONSUMER LENDING 25

3.1. What are the different customer segments? 25

3.2. How do operators assess a borrower’s risk? 25

3.3. Credit risk assessment: Data 26

3.4. Credit risk assessment: Risk assessment models 28

3.5. Improving credit risk assessment in Nigeria 30

Section 4. FINTECH CONSUMER LENDING DISTRIBUTION CHANNELS 32

4.1. How do borrowers access loans? 32

4.2.A breakdown of the main distribution channels in the industry 32

4.3. Is digital distribution the future 35

4.4. How do borrowers receive loans? 38

4.5. How do borrowers repay their loans? 39

Figure 1.2: Maximum vs. Prime lending rates in Nigeria 12

Figure 1.3: Retail loan asset quality across Nigerian banks 14

Figure 1.4: Financial inclusion in Nigeria vs. peer countries 14

Figure 3.1: Breakdown of maximum lending tenors from operator database 26

Figure 4.1: Number of lenders using each channel 33

Figure 4.2: Number of lenders using multiple channels 33

Figure 4.3: Mobile penetration in Nigeria vs peer countries 37

Figure 4.4: Mobile money transactions 38

Figure 4.5: Number of lenders using multiple lending channels 39

Figure 4.6: Number of lenders using multiple repayment channels 39

Figure 4.7: Number of lenders using each lending channel 40

Figure 4.8: Number of lenders using each repayment channel 40

Table 4.2: List of Fintech lenders and their USSD codes 37

APR Annual Percentage Rate

BIS Bank for International Settlements

BOFIA Banking and Other Financial Institutions Act

BVN Bank Verification Number

CAGR Compounded Annual Growth Rate

CBK Central Bank of Kenya

CBN Central Bank of Nigeria

CRA Credit Reporting Act

CRMS Credit Risk Management System

EFInA Enhancing Financial Inclusion and Access

EIS Enterprise Investment Scheme

FICO Fair Isaac Corporation

GDP Gross Domestic Product

KYC Know Your Customer

LDR Loan-to-Deposit Ratio

MFB Microfinance Bank

MPR Monetary Policy Rate