Financial services play a key role in economic growth: one cannot overemphasize how important it is that scarce resources are channeled to its most efficient use, or the role banking plays in economic prosperity. But what is the current state of Nigerian banks? Banks stay profitable mostly by fees and commissions, and income from investment securities rather than their core business, lending.
Persistent negative loan growth, and a corporate-concentrated loan book, for most banks, suggests that credit needed for economic expansion is not being extended to most people, the everyday person, seeking capital to foster business and entrepreneurship.
To some extent, it is hard to blame the banks; only just recovering from an industry plagued by poor asset quality and nonperforming loans, most bankers play safe by extending risk-free investments to the Federal Government at high double- digits interest rates while they shy away from creating risk-assets. The banks may not be blamed for this because the government has not created a conducive environment to protect them from risk.
The banks are generally averse to lending to individuals and SMES without an established reputation because of the cost of due diligence, credit assessment, and setting up legal checks for unsecured lending. The government has failed to change this paradigm in many ways. On the one hand, the FGN crowds out
private sector credit by persistently offering juices yields to local financial institutions. More importantly, our government has failed to set up the infrastructure needed to facilitate unsecured lending; especially a legal system to protect lenders and borrowers. This situation will improve if the CBN and the banks work closely with legal professionals, to take responsibility of fixing this challenge by developing a framework for retail, SME lending and loan recovery within the scope of their existing regulatory capabilities.
This framework should serve as the legal backbone for lending, such that there is appropriate recompense for anyone who does not pay his loans as at when due. Imagine that whenever a customer takes a loan and does not pay back as at when due, the lender is
required to contact the customer and specify a grace period, perhaps three months, within which the borrower is to fulfill their outstanding obligation else they would be reported to a national registry of defaulters. Of course, banks must show evidence of this notice to the registry periodically.
This is expected to prompt the borrower to pay back his outstanding loans before the grace period elapses. If within the grace period the customer pays back, all well and right between the lender and borrower.
However, if the debt extends beyond this period, more aggressive measures will kick in. The bank will push the data to the national registry which will then act on it with an automated warning with details of the consequences should the borrower fail to oblige. Punishment for defaulters will include preventing all of the debtor’s bank accounts from any further debits – this will also apply to guarantors of defaulters.
Apparently, this will involve more details and a lot of fine tuning – we will also need a quick and reliable credit rating/ scoring system – but it presents a possible view of how we can get the banks more
comfortable with retail lending.
Furthermore, a lot needs to be done by the CBN and banks to ensure that potential borrowers are well informed about the benefits of taking loans and the consequences should they default. We recommend a campaign through various media platforms/outlets – analog and digital.