Post Image
  Many digital lending platforms have been dragged into several conspiracies as being vindictive, predatory, and shark-like in dealing with their borrowers. In a story bandied about by the Vanguard newspaper, several Nigerian lending platforms have employed the use of threats, witch-hunts, and complete public embarrassment of borrowers who have defaulted on their debt. Further, many Nigerians have stated that the interest rate of these lenders is throat-cutting and inconsiderate. For example, a man who had borrowed the sum of N25,000 was asked to repay the sum of N35,000 within seven days. He was among the many others who narrated their painful experience with these lending platforms. This scenario is the same across the globe. Many have described the acts of these platforms as “predatory lending”. 
Read more about Fintech
According to Okungbaye Ajibola, predatory lending is any form of lending that involves unethical lending practices seeking to enforce unfair and abusive loan terms on borrowers. In addition, predatory lenders employ dishonest and aggressive sale tactics to attract unsuspecting borrowers into taking loans they cannot afford. Succinctly put, they are the metaphorical wolf in sheep’s clothing. In 2020, the rate of borrowing increased in Nigeria and the world due to the outbreak of the COVID-19 pandemic. Millions lost their jobs and fell into a financial crisis. Jobs were lost, factories shut down, businesses closed their doors, and the entire world stayed indoors. The COVID-19 impact monitoring survey released by the Nigerian Bureau of Statistics revealed that about 42% of Nigerians who were working before the outbreak of Covid-19 lost their jobs due to the impact of the pandemic. This financial uncertainty made individuals gravitate towards digital lenders, who at that time appeared to be the only source of financial help. Most of these digital lenders offer loans as low as 5,000 nairas and as high as 150,000 nairas, depending on the borrower’s track record, with repayment periods usually capped at 30 days and interest rates ranging from 20% to 28% a month. However, some lenders design their periods to be less than 30 days. The borrower is promised a gradual reduction in interest rates and an increase in credit limits in return for continuous patronage and timely repayment. Although the rates are rarely reduced, borrowers who have built their financial stability around these loan offerings keep going back, and the vicious cycle continues. On the other hand, the loan repayment behavior of lenders can also discourage the growth and development of this niche. In this article, I draft an article that can help FinTech lending platforms to help
  • Evaluating Credit Scoring Systems
To avoid clients with poor borrowing behavior, lending platforms must evaluate a credit scoring system in which lenders can have access to a client’s financial history so that they can make well-informed decisions in client selection. Credit scoring systems give a lending platform information about a client such as educational level, income level, occupation, marital status, previous bank statements, and so on. With this information, lenders can tell the borrower’s creditworthiness. Assessing private and sensitive data can be cumbersome, however, lenders can use credit bureaus and credit scoring software based on verifiable client data which can increase bank productivity and efficiency as seen elsewhere. For example in Guatemala, joining a credit bureau helped lenders make larger loans to pre-existing clients, end their relationship with underperforming borrowers, and make loans to new borrowers who were better clients overall, with better repayment rates (24 percent reduction in the share of loans charged late fees) and 12 percent larger future loan size. In Colombia, credit scoring software-enabled banks to better dispense loans across borrowers, extending larger loans to less risky borrowers and smaller loans to riskier borrowers.
Sign up to the Connect Nigeria daily newsletter
  • Employing Dynamic Incentives
Lending platforms can employ innovative incentives and inducements that can facilitate timely debt payment. For example, lenders can offer the promise of larger loans or the threat of future credit denial depending on how the borrowers pay quickly or default on their loans. Existing studies report that borrowers whose repayment was tied to preferential future interest rates were 13–21 percent less likely to default on their loan than the average borrower in emerging economies. The larger the discount on future loans, the less likely borrowers were to default. Furthermore, collecting biometric data from borrowers as a screening and enforcement tool increased repayment by 40 percent among the riskiest borrowers in Malawi. Informing or reminding borrowers that their repayment behavior is recorded in a national credit bureau led to improved repayment behavior in Guatemala and Indonesia. This strategy can be adopted by Nigerian lending platforms to reduce the rate of predatory lending.
  • Applying  The Use Of Social Pressure
Social networks can be leveraged for repayment. Members of the same social networks can encourage repayment from peers. Using the instrument of multiple guarantors. family and friends can reduce the cost of loaning to the riskiest borrowers. Imagine asking a borrower to bring a minimum of 3 and a maximum of 6 guarantors whose biometrics would be captured in the lender databases; this will drastically reduce poor borrowing behavior. For example, in Peru, individuals obtaining loans that were co-signed by friends repaid loans at the same rate as higher-quality borrowers whose loans were co-signed by non-friends. This indicates that friends may have strategies to encourage repayment beyond those available to non-friends or banks. Likewise, while borrowers in South Africa were no better than the bank at identifying reliable borrowers among their peers, they were able to encourage their peers to repay when incentivized to do so; default rates fell from 20 to 10 percent. Another way digital lenders can apply social networking pressure is to leverage some of the power of personal relationships by strengthening relationships between loan officers and customers. In India, borrowers with personal relationship managers at a bank had on average 11 to 13 percent fewer late payments than borrowers with little to no personal contact from the bank, indicating the power of personal relationships.
  • Create A More Sustainable Payment Schedule 
Digital lenders should understand that lending is not without risks nor is it 100% risk-averse, rather they must apply the strategy of the sustainable and transparent debt payment. For instance, the installment strategy looks sustainable in this case. Dividing payments into phases over a longer period can ease the burdens of debt on borrowers. For instance, when a client borrows the sum of N100,000 rather than seek instant repayment of N105,000 (interest added) in 30 days, it is more sustainable to split the payment into 90 days, that is paying N55,000 (interest added). Sources Kneiding and Rosenberg, 2008. “Variations in Microcredit Interest Rates.” CGAP. Report de Janvry, Alain, Craig McIntosh, and Elisabeth Sadoulet. 2010. “The supply- and demand-side impacts of credit market information.” Journal of Development Economics 93 (2):173–188. Research Paper | J-PAL Evaluation Summary. Paravisini, Daniel, and Antoinette Scholar. “The Incentive Effect of Scores: Randomized Evidence from Credit Committees.” NBER Working Paper #19303, July 2015. Research Paper | J-PAL Evaluation Summary. Featured image source: LeadSquared
Got a suggestion? Contact us: editor@connectnigeria.com

You might also like:
This article was first published on 16th March 2022

nnaemeka-emmanuel

Nnaemeka is an academic scholar with a degree in History and International Studies from the University of Nigeria, Nsukka. He is also a creative writer, content creator, storyteller, and social analyst.


Comments (93)

93 thoughts on “How Digital Lending Platforms In Nigeria Can Overcome Poor Loan Repayment Behavior By Low-Income Borrowers”

Leave a Reply

Your email address will not be published. Required fields are marked *