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Fintechs: huge price of democratizing financial services for SMEs

by Goddie Ofose
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Due to its resilience, Opay, after its ride hailing business in Nigeria was truncated by government ban on Okada in 2020, saw another opportunity in the financial services sector, where fintech companies were already using technology and innovation to facilitate loans and other banking services for micro, small and medium scale enterprises (MSMEs) and private businesses in the country.

The company was no doubt entering an industry that had, over the years, been known to be in the forefront of democratizing financial services for SMEs by providing easy and convenient access to loans, which had being a daunting challenge for the SMEs. No thanks to the critical attitude of the Money Deposit Banks (MDBs). So, by the time Opay, which is owned by Opera and founded by Telnet Nigeria, joined the financial fray in August 2020, it met an already bubbling industry.

Between 2014 and 2019, the Nigerian fintech industry, comprising about 250 fintech companies, provided about $600 million, as credit facilities to SMEs. In 2019, Nigerian tech space appropriated $122 million, about 25 per cent of the entire $491.6 million raised by African tech startups, which was the second highest, after Kenya at $149 million. This impressive run by the Nigerian fintech industry is not showing any sign of slowing down because more and more startup incubators, with the aim of liberalizing the financial ecosystem have emerged since Opay’s arrival into the financial market.

Meanwhile, associated with the ease and speed of opening businesses by fintech companies is also the challenge of engaging in a system or operation that is practically online, without an identifiable physical face or structure. For example, the growing incidence of loan defaults among customers is a sore point for this wonderful initiative targeted at promoting financial inclusion or citizenship within the financial system. Tech companies complain of their customers taking undue advantage of the lax and flexible structure of the tech companies, and defaulting on the payments of their loans.

Speaking on this disturbing trend, a financial expert, Titilayo Akinlade, said the news about the rising cases of loan defaults in the fintech space is though not cheering, it should be expected.

He said:”The despicable acts of ingratitude by customers who failed to make payments on the loans they secured from fintech companies is lamentable”. This is quite deplorable because these companies are just out to help individuals, business owners and entrepreneurs that had always complained of inability to raise funds from commercial banks to pursue their business aspirations and goals.

Evidently, the tech companies under-estimated the guile and trickery of their customers in Nigeria, and the lack of veritable mechanisms for loan recovery compounds the problems of the tech companies. No doubt, this kind of arrangement can work in civilized climes, but not in Nigeria, where our loan repayment history and records are most unimpressive. “We are always fond of abusing concepts or models that are meant to rescue a situation for us, and this is not any different”.

 He asserted that it is obvious that the models adopted by some fintech companies in their loan services to borrowers are not working, and should be reworked, if they are to remain in business and continue to offer opportunities for more customers.

A poultry farmer, Mr Funso Adenekan, a borrower that promptly paid back his loan, however does not feel comfortable with the negative tag of perennial defaulter being placed on borrowers.

He said, “I don’t agree with the generalization that Nigerians are wired to be serial loan defaulters, as a lot of factors could be responsible for their inability to pay back their loans”. Don’t forget that last year the global impact of COVID-19 was felt by many companies, and some had to lay off some of their workforce. It is most likely that some of those affected by the job loss could have been among those who had secured loans from the fintech companies. And with the worsening economic situation in the country, it is unreasonable to expect them to be able to meet up with their payment obligations to the creditors, he said”.

Available statistics from the National Bureau of Statistics (NBS) shows that unemployment rate in the country has been worsen by the economic downturn, as the unemployment figure, which stood at 27.1 percent in Q2 2020 shot up to 33.3 per cent in Q4 2020. The total GDP of the country also fell by 14.27 per cent in Q1 2020 to stand at 16.74 trillion naira, while in Q2 2020 it fell further by 7.97 per cent to 15.89 trillion naira, with just few sectors recording real growth. As a result, lenders including fintech companies are expected to be more circumspect in their lending, and firmer in their loan recovery methods, if they are to stay afloat and remain relevant.

However, when compared with other lenders, including microfinance banks and MDBs, the fintech companies have the easiest and the least stringent processes for loan application as everything can be done by the touch of a button from the comfort of the home. In some cases, all that is required to secure a loan from a fintech company is just the presentation of such documents as utility bill, passport, identity card and account statement. This is unlike the microfinance banks and MDBs, which compel applicants to go through enormous hurdles including request for collaterals before giving out loans.

But, when it comes to the recovery of loans, in relation to the microfinance banks and MDBs, the fintech companies have the most daunting task. For instance, the Central Bank of Nigeria has a regulation that allows commercial banks to link their loans to the Bank Verification Number (BVN). As such, a commercial bank can recover a loan from the account of the customer in other banks. The fintech companies do not enjoy this luxury and so could wait till eternity for its loan to be recovered. So, it is time for the fintech companies to review their lending models by customizing and localizing the solutions, while considering the prevailing conditions and the emerging economic realities in the country.

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