“Banking is necessary but banks are not” Bill Gates (1995)
Over the years, commercial banks have been criticised for the high-interest rate on their loans. In 2019, the Central Bank of Nigeria (CBN) reduced the benchmark interest rate in Nigeria to 13.50% from an all-time high of 14% in July 2016. Between the years 2007 - 2019 interest rates in Nigeria averaged 11%, with a record low rate of 6% in July of 2009.
These rates are particularly discouraging, especially for individuals, start-ups and Small-to-Medium Enterprises (SMEs). Although, Nigeria derives her largest source of revenue from crude oil, SMEs make up at least 85% of the economy as recorded by the National Bureau of Statistics. With so many individuals seeking funds for business purposes, other traditional sources of financing such as private equity, venture capitalism, development banks/ special purpose banks; seem to have taken dominance over the financial industry. Nevertheless, these alternative sources of finance are ill-suited to the needs of the unsophisticated SMEs and unbanked individuals. Also, the catch in their financing of start-up businesses sometimes come in the form of demands for a change in the modus operandi of the business, a reduction of the proprietor’s equity in the business, or an appropriation of the other assets belonging to the proprietor and so on.
Financial innovations hinged on the Fintech movement ride on the speedily growing access to the internet all around the world. A KPMG survey evidenced that there are more than 148 million mobile telephone subscribers and at least 92 million of them access internet data services on their devices. According to the survey, 77% of Nigeria’s banking customers now use social media for personal purposes, but only 42% of Nigerian banking customers use online banking platforms for one or more banking activities. The problem is that Nigerian banks have been unable to convert this passion for the internet and social media into increased adoption of internet and mobile banking solutions.
Nonetheless, the Nigerian government is making efforts to promote financial inclusion. In 2012, the CBN launched the Nigerian National Financial Inclusion Strategy (NFIS) and set the target to reduce the percentage of adult Nigerians excluded from access to financial services from 46.3% in 2010 to 20% in 2020. But as at 2016, the percentage of the financially excluded only dropped to 41.6%.
A combination of the already stated shortfalls of the traditional financing methods, especially their inaccessibility to the unbanked, has given way to a reliance on the broader reach of the Fintech movement to provide small, easily accessible loans at more friendly interest rates.
An example of Fintech enabled lending innovation is Peer to Peer (P2P) lending. P2P lending is an online, non-banking activity that enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the intermediary. P2P lending has garnered popularity because the online nature of the business allows for the swift connection of lenders with borrowers. They are particularly favourable to SMEs and individuals because of the incredibly low interest rate on loans and timely approval of these loans. Loans can be approved anywhere from a few hours to a few days.
This report aims to examine the lending capabilities and potentials of the Fintech industry in Nigeria. Firstly, it examines the benefits of Fintech backed loans over the traditional commercial banks and provides a brief overview of the regulations governing this industry. It also enumerates the reforms in the Nigerian loan market concerning creating a more secure lending environment via Fintech lending platforms. Finally, it evaluates the financial technology loan market in the United Kingdom and Singapore with the aim of drawing useful lessons for Nigeria.
B. BENEFITS OF FINTECH LOANS AS OPPOSED TO COMMERCIAL BANKS LOANS
1. Mobility of the internet:
The most advantageous aspect of Fintech is the mobility of the internet. Fintech participants can commence and conclude transactions anywhere and at any time. Time is an invaluable asset and people all around the world are reluctant to spend it frequenting brick and mortar banks or financial institutions to conduct routine business activities that could be conducted in the comfort of their offices. Merging artificial intelligence, technology and finance to create digital applications is the way forward and traditional banking institutions are implementing strategies in order to remain competitive.
2. Wider range of consumers
P2P lending has made it easier for investors to find their next investment due to the easy accessibility of the internet. Another reason for its popularity is the fact that individuals with poor creditworthiness i.e. bad credit scores and/or no credit scores, are eligible for loans on Fintech platforms. The loans granted to these individuals enable them etch their way towards financial freedom without further reducing their credit rating.
3. Low lending rates and high investment turnover
It would seem impossible that Fintech investors could offer lower loan rates than traditional banks and still be able to receive a high turnover on their investments. This is mostly because Fintech companies are not subject to the operational costs involved in running a traditional bank with multiple branches. The costs include: the fees incurred on the properties, the employee wages, cost of infrastructure maintenance, the regulatory costs imposed in the banks to mention a few.
These costs are then relayed into the loan rates offered by the banks in order to break-even and still turn a profit. Whereas, a P2P lender does not have to incur such costs whilst still possessing the ability to offer a higher return on stakeholders’ investment than a traditional bank would.
C. REGULATORY OVERVIEW
Nigeria is still devoid of specific regulations to guide the stakeholders in the Financial Fintech market/industry. Nonetheless, there are several regulators that that provide general and in some cases sector-specific regulations for Fintech companies to adhere to prior to the commencement of business and during the operation of the business. These regulators include:
- The Central Bank of Nigeria;
- Nigerian Communications Commission;
- Securities and Exchange Commission.
The primary regulator for all financial institutions is the Central Bank of Nigeria (CBN), which is authorised to grant a license to any company that intends to offer financial services. Such licenses applicable to digital banking include licences granted to Mobile Money Operators, Payment Solutions Service Providers and so on. The CBN also has the power to publish circulars and rules as the need arises, amongst these rules are the Guidеlinеѕ оn Mobile Money Sеrviсеѕ; Guidelines on Operations of Elесtrоniс Payment Chаnnеlѕ; Guidеlinеѕ on Intеrnаtiоnаl Money Trаnѕfеr Sеrviсеѕ. In addition, a Fintech company will be subject to the applicable Money Lenders Law of the state in which it operates.
The Nigerian Communications Commission (“NCC”) also regulates Fintech services offered through a mobile network provider pursuant to the Licence Framework for Value Added Service (“VAS”).
The Securities and Exchange Commission (SEC) oversees entities providing asset management and securities-trading services. In the past, the SEC was reluctant to engage in digital financing activities such as crowdfunding but in 2018, it affirmed that it would create an inclusive regulation that would cover a variety of Fintech activities and/or ensure that the next amendment to the Investment and Securities Act is inclusive of such market activities in order to make the Nigerian market more globally competitive and protect the interests of the stakeholders.
D. REFORMS IN THE NIGERIAN LOAN MARKET
The Nigerian loan market has strategically evolved since the country came out of recession in the second quarter of 2017. Since then, a series of policy measures have been implemented by both the monetary and fiscal authorities to restore growth trajectories. One of the significant milestones is the CBN’s partnership with the International Finance Corporation to establish a National Collateral Registry which allows lenders to register their security interests over movable assets owned by borrowers through its centralized system. The Credit Reporting Act 2017 is another significant reform that has increased confidence within the lending industry. Section 2 of the Act authorises the establishment of licensed Credit Bureaux which maintain a database of an individual’s credit and credit-related information. Thus, a prospective lender can determine the creditworthiness of the borrower and the level of risk attached to the transaction.
In addition, there is a proliferation of Fintech participants who being conscious of their inability to physically interact with themselves or receive hardcopy documents as a traditional bank would, have adopted credit scoring tools to mitigate the risks associated with digital banking. These tools include use of:
- Socio-demographic data such as customer gender, age, civil status, business experience, time residing at current residence, type of residence, etc.
- Behavioural data which reflects the history of a customer with a financial institution and may include variables such as: maximum number of days a client was delinquent, average number of days a client was delinquent, number of times client was more than 30 days delinquent; number of times client was more than one-day delinquent, etc.
Recently, the SEC began accepting applications from businesses and individuals that intend to launch innovative products, services, business models and delivery mechanisms relating to the capital market through a regulated sandbox. A regulated sandbox is a platform provided by a nation’s regulatory agency to enable companies experiment with new business models that currently do not have a legal framework. A regulatory sandbox allows businesses to test innovative prepositions in the market with real consumers. The United Kingdom was the first country to initiate Fintech regulatory sandbox in 2015, since then other countries have launched similar initiatives.
E. OVERVIEW OF FINANCIAL TECHNOLOGY LENDING IN OTHER JURISDICTIONS
The notion of merging artificial intelligence, technology and finance is still such a phenomenal concept globally. The Fintech market is fast evolving and developed countries endeavour to undertake extensive due diligence and safety measures to ensure that the stakeholders are adequately protected. Useful lessons for Nigeria can be drawn from these countries.
The United Kingdom (UK) is a part of the elite club of countries that have well-developed and highly profitable Fintech industries. The UK pioneered the concept of a regulated sandbox via the launch of its Project Innovate through the Financial Conduct Authority (FCA) which derived its power by virtue of Section 1 of the Financial Services and Markets Act, 2000. Furthermore, the Bank of England created a Fintech Hub which merges the developments in artificial intelligence and distributed ledger with the financial sector.
The UK is devoid of a singular legislation governing the operation of the industry, therefore participants in the regulated sandbox are mandated to restrict their operations to the limits prescribed by the FCA for each cohort. These rules are confidential and available to the participants only and the FCA has the liberty to modify and retract rules for each cohort.
Since the launch of Zopa, the first company in the world to offer P2P loans, back in 2005, hundreds of other platforms have emerged in the UK. According to their Peer-to-Peer Financial Association, lending volumes amongst the nation’s biggest P2P platforms increased by two thirds in 2016, and by the end of 2017, the cumulative total surpassed Eight Billion Pounds (£8 Billion) with SMEs being the recipients of majority of the money lent.
The UK’s P2P industry is authorised by the Financial Conduct Authority (FCA), with a regulatory framework designed to provide additional consumer protection and promote effective competition. There is a strong emphasis on transparency and availability of information in a bid for consumer protection.
Furthermore, a year after the first sandbox cohort was initiated, the FCA released a “Regulatory Sandbox Lessons Learned Report” wherein it was proposed that P2P lenders and crowdfunding platforms should improve their transparency so that investors have a clearer sense of the higher risk lending they are taking on. The Report also added that P2P lending platforms should offer more information about the creditworthiness of the borrowers on their platforms and take extra steps to protect investors in the event of a collapse.
The UK continually takes measures to re-affirm its title as the Fintech capital of the world by setting ground-breaking financial records. In August 2018, the FCA collaborated with 11 financial regulators from around the world to oversee cross-border Fintech firms. The Global Financial Innovation Network - which includes regulators from the US, Canada, Dubai and Singapore - said one of its main functions will be to share knowledge on innovation across the sector. Similarly, in addition to regulating P2P loans, Nigeria could partner with other countries in Africa and beyond with a view to encouraging inter-country relations and knowledge sharing.
Much like the United Kingdom, Singapore is without a singular Fintech legislation. However, there are several laws that govern stakeholders operation in the market; nonetheless, the primary regulator for Fintech companies is the Monetary Authority of Singapore (MAS). Following the success of the FCA’s regulated sandbox, the MAS launched its regulated sandbox in 2016. Since then Singapore’s Fintech market has been on an upward trajectory as depicted by a report prepared by Accenture in 2018. The report illustrated that the Fintech market in Singapore is continually growing with investments totalling Three Hundred and Sixty-Five Million Dollars (US$365 Million) in 2018, which is an increase from One Hundred and Eighty Million Naira (US$180 million) in the previous year. That report further states that the number of digital banking transactions in Singapore rose from 61% in 2017 to 71% in 2018, thus placing it among the top five Fintech markets by funds raised in the Asia-Pacific last year.
Much like other Fintech markets around the world, the main type of loans offered via Fintech companies in Singapore is P2P lending. However, the government of Singapore has been able to increase their industry’s profitability through lending initiatives for start-ups and SMEs. The MAS set up a US$225 million Financial Sector Technology and Innovation scheme for Fintech companies, which offers funding for up to 50–70% of a company’s qualifying costs which has been capped at S$200,000, to promote experimentation.
To capitalize on the booming market, towards the end of 2018, MAS released a consultation paper on the creation of pre-defined sandboxes, known as Sandbox Express, to complement the existing Fintech Regulatory Sandbox that was launched in 2016. The aim is to enable firms which intend to conduct regulated activities embark on experiments more quickly, without needing to go through the existing bespoke sandbox application and approval process.
The Sandbox Express would grant fast-track approval within 21 days and it shall be suitable for activities where the risks are generally low or well understood and could be reasonably contained within the specific pre-defined sandbox. As a start, it will include sandboxes specifically pre-defined for insurance broking, recognised market operators and remittance businesses.
Much like their global competitors, the government of Singapore has no intention of slowing down on innovative measures to grow its market and understand the benefits of international partnership. As of February 2019, the MAS had signed 29 cooperation agreements with international counterparts to foster closer cooperation, including with China, Hong Kong, Japan, Korea, India, Australia, Switzerland, the US and the UK, as well as several members of the Association of South-East Asian Nations.
Nigeria could also imitate their government’s willingness to partner with non-banking institutions to facilitate digital banking systems through Public Private Partnerships. Singapore recently opened its interbank Instant Fund Transfer System to non-banks, allowing consumers to top up e-wallets from any bank account. Singapore’s market operators also collaborated with non-financial technology players such as the ride-hailing start-up “Grab”, to launch its digital payment platform “GrabPay”, which later expanded into credit services. Merging innovative technology with finance is an intelligent way to take advantage of the rise of artificial intelligence and big data, in a more secure environment, thus resulting in increased awareness for the lending systems, increased development across various industries and emphasis on data protection and privacy.
Nigeria is in an elite market position as one of the first African countries to initiate a regulated sandbox. Swift regulation of the Fintech market and a more defined data protection policy would set the country on the path of global competitiveness. Also, the government should encourage Public Private Partnerships to accelerate the growth of the sector, this can be undertaken through the SEC’s regulated sandbox.