1. 1.0 INTRODUCTION
The accessibility
of credit to SMEs is a great challenge in emerging economies, such as Nigeria.
It is a widely known fact that SMEs are the engine room for economies across
the world, in Nigeria SMEs contribute 48% of Nigeria’s GDP, constitute 96% of
businesses and provide 84% of local employment[1].
It is
worthy to note that the bottleneck faced by SMEs through traditional financing;
high interest rates and collateral security led to the establishment of
alternative lending (digital lending) characterized by its flexibility, lower
interest rate, ease, and speed of credit disbursement.
The ease
of access to credit for SMEs is
an important index in how the World Bank measures a country’s Ease of Doing
Business. This criterion makes sense because if an economy does not facilitate
easy access to capital; a critical component in creation of businesses and their
survival, doing business in said economy would most likely be challenging.
The
existence of a digitized credit system is one of the key enablers of attaining
a sustainable development particularly in poverty alleviation in Nigeria. According to Global
Findex, its 2017 database shows that the global share of adults who have an
account with a financial institution or through a mobile money service
increased to 69% in 2017 from 62% in 2014, and 1.2 billion adults have obtained
an account since 2011. This share has also increased in developing economies,
from 54% to 63%, amid gender constrains in account opening. Digital technology
has become a key support and enabling pillar in the financial space worldwide. 'Technology
giants have also moved into the financial sphere, leveraging deep customer
knowledge to provide a broad range of financial services'.[2]
2.0. THE CONCEPT OF DIGITAL LENDING
Digital
lending comprises of 3 areas which makes it different from the traditional
lending system:
a.
The use of digital channels
b.
The use of digitized data
c.
The focus on customer experience and engagement.
In other words,
digital lending leverages on the use of digital channels such as; Smartphones,
Mobile Applications and USSD (Unstructured supplementary service data) to reach
new and existing customers at their convenience, so they can apply for credit,
receive loan disbursement and make payment remotely. This can only be achieved using
digitized data sourced from: call data records, bill payment histories, bank
statements and credit bureau information. These data are fed into algorithms
and analyzed to predict customer’s willingness and capacity to repay.
The
figure below gives an illustration of how digital lending works.
It is worthy to note that the digital lending ecosystem is complex and evolving daily around the world, this birthed the different digital lending models we have, some offer end-to end digital solutions, while other focus on a specific component of the lending process and leverage partnership to supplement their models. In other words, digital lending implies an end-to end process of developing and delivering data-driven financial products that are applied for, disbursed, and managed through digital channels.
3.0. THE DIGITAL LENDING MODELS
The distinct market structures, regulatory environments and customer needs have led to a wide variety of digital lending models aimed at easing business for customers in Nigeria. We have seven primary digital lending model:
1.
Online Lender: In this
model the lenders offer a full end to end digital lending products for
customers with no need for face-to-face contact. The entire process of customer
acquisition, customer engagement and loan distribution are wholly digitized
through a website or mobile application.
2.
P2P Lender: In
this model a digital platform is designed to facilitate digital credit between
many borrowers and lenders. It uses profiles and data to match borrowers with
lenders, they also support repayment and collection processes of the credit
facility.
3.
E-commerce and Social
Platforms: In this model the digital platform does not focus on
facilitating credit per se but leverage on their digital distribution, strong
brand, and customer data to offer credit products to their customer base.
4.
Marketplace Platforms:
In this model digital platforms are created to use proprietary algorithms to
match a borrower many lenders for an origination fee. Once the funds are
dispersed, the customer relationship is direct with the lender.
5.
Supply Chain Lender:
In this model digital platforms provides digitized short-term working capital
loans for microenterprises to purchase inventory form their distributors or for
pas-as-you-go financing of an asset purchase within a supply chain or
distribution network.
6.
Mobile Money Lender:
In this model, their exist partnership with lenders and mobile network
operators (MNOs) to offer mobile money loans to their customer base, leveraging
mobile phone data for scoring.
7.
Tech-Enabled Lender: In
this model, it involves traditional financial service providers that have
embraced technology to digitize their lending process by adding digital
acquisition channels or digital repayment options.
The major
factor affecting the evolution of the digital lending landscape is innovation
and market expectations with focus on providing customers with a faster, more
transparent, and convenient service which are rarely provided by the
traditional banks.
4.0. THE DIGITAL LENDING PARTIES (ECOSYTEM)
The
digital lending ecosystem is composed of numerous niche verticals and various
active players involved in the delivery of the product from a principal
institution to an end user or vice-versa.
This
ecosystem is of paramount importance to ensure that technological innovation is
created to make financial services more efficient and to improve customer
experience.
 |
5.0.
THE BENEFITS OF DIGITAL
LENDING
One of
the biggest attractions to the embracement of digital lending is the time to
decision making, the average time to cash for small business loans is almost 25
days, this is a waiting period for a small business that needs a cash injection
in a hurry. The advent of digital lending greatly reduced the time for credit
to 24hours through the automation of the verification processes and other
manual processes previously adopted.
Furthermore,
there are range of benefits that digital lending offers both financial
institutions and consumers:
a.
Digital lending gives financial institution additional
data points, such as browser cookies to conduct targeted marketing and direct
outreach, enhanced controls of information outflow compared to human
interactions as well as simpler way of testing to monitor performance and
remediate challenges.
b.
Digital lending is beneficial to the customers due to
its inclusiveness, affordability, speed, convenience, simple procedure, and
documentation.
c.
Traditional lenders may be reluctant to grant loans to
persons having no history of taking loans as they do not have proofs regarding
their loan repayment habits but digital lending makes it possible for a
first-time borrower to get a loan by relaying digitized data.
It is
worthy to note that there has been a great shift from the traditional mode of
lending to digital lending and this is attributable to the fact that the
digital lending offers many benefits that may not be found in the traditional
mode of lending.
6.0.CONCLUSION
It is a well
settled fact that availing credit is one of the major avenues to drive economic
empowerment. Availing credit through digital optimization would foster equal
access to credit facility to everyone especially those at the bottom of the
pyramid, SMEs will grow, and business will expand enough to create employment
opportunities which is supposed to drive our economy.
One major
challenge posed by traditional lending is the issue of credit concentration,
more than 40% of loans granted in Nigeria are within three sectors; oil and
gas, construction and maybe government, this is the reason when we have issues
around oil prices, non-performing loans in the industry go up. With the advent
of digitized lending, credit is available to different sectors in the country,
and it will help our economy.
Generally,
the advent of FINTECH aims at solving the issue of financial inclusion in
Nigeria, EFInA data shows that only 64% of Nigerian adults were financially
included by the end of 2020, meaning that 36% of Nigerian adults, or 38 million
adults, remain completely financially excluded, with only 45% of women using
formal financial services compared with 56% of men. The digital lending
platform been part of FINTECH solution contributes positively to resolving the
issue of financial inclusion as a woman in Sabon Gari and Balogun Market have
equal access to such opportunity in accessing credit.
Egbetola Sola is a budding business lawyer, based in Lagos, he is passionate about helping business owners maximize their opportunities using legal tools. He works as a chief operating officer for a fintech startup
He is also a tech enthusiast with a commitment towards legal and tech innovations. He is a certified product manager and software developer.
E-mail: solaegbetola@gmail.com, 08138765200
[1] SMEDAN and National Bureau of Statistics Collaborative Survey:
Selected Findings (2013) < SMEDAN
2013_Selected Tables.pdf > (accessed 19th July 2021).
[2] The Ease of
Getting Credit Reforms in Nigeria https://www.proshareng.com/news/Credit%20Services%20&%20Registry/The-Ease-of-Getting-Credit-Reforms-in-Nigeria/48434 (accessed 19th July 2021)
