How interest rate reduction may affect credit-based fintechs
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria left the interest rate at 14 percent for the seventh time in September this year. That decision has drawn several commentaries, with majority of voices urging the apex bank to consider reducing the rate, because according to them this will help credit availability for businesses.
“I expect government to cut the rate as a palliative measure to boost activities in the manufacturing sector,” said Bongo Adi, a senior lecturer at the Lagos Business School (LBS). “Even though sectors have bounced out of recession, the manufacturing sector seems to be still suffering, because of the high borrowing rates in the banks. With a rate cut, things would become easier for them,
There are many individuals and small business that require credit but are unable to borrow from the commercial banks either for lack of collateral or they did not qualify for some criteria. In the past, people in this category will either give up on their pursuit or the businesses will simply die.
The advent of credit services firms that leverage digital technology has ensured that many Nigerians and business can get the credit they need at the time they need. Fintech companies like Paylater, Aella Credit, Social Lender, Kiakia, and so many others have made lending so convenient that customers can borrow money with just a click of a button on their phone. Some of them continue to play an active role in lending to people with less access to banking activities, such as the unbanked or underbanked or in situations where borrowers do not have good credit history.
The icing on the cake is that, borrowers do not need to present collateral. Aella Credit which recently raised funds from 500 Startups and Y Combinator offers crypto credit services where individuals in their network can lend fiat currency and save in crypto currency.
While the commercial banks may charge interests slightly higher than the CBN’s official rates, the credit services in fintech go for much higher interest rate. But they are generally more flexible than banks.
For instance if you were to borrow N10,000 from Paylater to pay back in 15 days, you will be charged 1 per cent daily which means you will pay back N11,500 or N13,000 in 30 days.
Should the CBN decide to go lower on the official interest rate, will this affect the interest rate users get to pay from fintechs that offer credit services?
“At the moment, the interest rate is relatively high and that feeds into the rate that credit-focused fintech companies offer borrowers,” said Razaq Ahmed, co-founder and CEO of CowryWise, an online personal finance and wealth management services company. “Overall, the interest rate offered by these fintech companies is driven largely by two factors; first, the cost of fund especially for those who still access liquidity from local commercial banks. Second, is the cost of risk.
“The second factor is more important. Hence, reduction in interest rate environment will have some positive pass-through effect on lending rate but will be marginal. The big elephant is the cost of default.”
Sholla Akinlade, co-founder and CEO of Paystack a payment services company that enables merchants to collect payments from their customers told BusinessDay that the effect on credit-based fintechs will be minimal.
“This is because the core value the lending fintechs offer is being able to give super-fast loans with minimal documentation, and no collateral. Instead, innovative credit companies such as Paylater and Aella Credit use different proxies to make loan decisions.
“People will always need instant loans, and the fintech loan companies are arguably in a better position to offer them than legacy financial organisations. Even if the banks reduce interest rates at CBN’s insistence, I do not believe those moves will significantly affect the credit companies,” Akinlade said.
Akin Jones, co-founder and CEO of Aella Credit told BusinessDay in an email that while interest rates are driven by cost of capital, a reduction could adversely affect ability to raise funding for financial institutions.
“Government securities (Treasury bills) in Nigeria are competing for capital with banks and entrepreneurs. The solution is for the CBN to continuously provide cheaper funding alternatives and invest in credit evaluation technology for small businesses and individuals,” Jones said.
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