Opinion

How to survive the Recession: Think Peer to Peer Lending

by Damilola Afam Ade-Odiachi

February 23, 2017 | 1:02 am
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By August 2016, many Nigerians had learned a new word: recession. Two consecutive quarters of negative economic growth confirmed by the National Bureau of Statistics. It was a word that had not shown itself since 1994. Time had long eroded its meaning. For some, a recession means very little. It’s something heard in the news and mentioned in articles not unlike this one, their bank accounts and their incomes secure enough that they do not have to worry. But for the economically vulnerable, it is as good as an excruciatingly slow death. They watch their loved ones lose their jobs and live in fear that they will lose theirs sooner rather than later. Life in Nigeria was difficult enough when the dollar was cheap and the economy was undisputedly Africa’s largest. Now that the economy is in recession it is almost intolerable.

 

On the streets of Lagos the harsh realities of rising unemployment and inflation are apparent. “Masses are crying loud” said one pedestrian at the Adetokunbo Ademola round about in Lagos’ Victoria Island. Before she could finish, another passer-by chimed in. “People are crying.” Another woman lifted her hands despondently and said, “If they (the government) want people to perish and die and go, let them do it because I have never seen this kind of government before.” One man said that he had to keep two of his four children at home because he could no longer afford their school fees. Others reported much of the same. Rising prices leading to cutbacks on expenses that were once considered necessities. Any real hope that the government is capable of dealing with the situation is dying.

 

When times are hard and real income is falling, people look for alternative sources of income to meet their needs. They take loans from banks and other financial organisations. However, with interest rates in the double digits this is not an option many can afford. The First City Monument Bank interest rate for general commerce ranges from 17.5 – 30%, and across the industry customers applying for personal loans or SME loans could face rates as high as 80%. As if that wasn’t bad enough, according to Lafferty Cards and Consumer finance, the probability of a loan being accepted is about 7%, but this is not unusual in a recession. In a recent interview with Premium times, the Chief Executive, Rest of Africa Standard Bank Group, Sola David-Borha said, “With economic recession, customers and companies find it very difficult to pay loans. Consumers have not been paid salaries and are unable to service loans.” As banks do not have the regulatory or legal framework to ensure repayment, or a well developed method of assessing risk, they have very little choice but to charge high interest rates. Furthermore as the Monetary Policy Committee has kept interest rates high, the bank rates have little room to manoeuvre but up.

 

As rational as this method of operating may seem, it is not without its drawbacks. In a 2011 survey of the Nigerian middle class by Renaissance Capital 60 per cent of the respondents claimed it was impossible to borrow small amounts from formal institutions, 84 per cent had never applied for a loan, and a mere 20 per cent saw banks as the possible providers of loans. This is shocking when you consider that 20 million small and medium enterprises account for around 80 per cent of all businesses and  they employ a total of thirty-one million people. The situation has not gone unnoticed. Prof. Akpan Ekpo, the head of The West African Institute for Financial and Economic Management (WAIFEM) said that the hard conditions faced by SMEs was caused by the lack of access to funds for working capital needs as a result of the behaviour of banks. This peculiar situation raises a necessary question. If 84 per cent of the middle class have never applied for a loan from an official financial institution then where or from whom do they borrow in times of need?

 

Most people are likely to borrow from the three fs: family, friends and fools. They are the first resort. A fool and his money are soon parted and family and friends are willing to dilute cynicism with affection. As some ask, what it is a little money between friends? But there’s a problem here. While blood may be thicker than water, it isn’t more binding than a well constructed contract. There’s no legal or formal framework and because of this both parties are exposed. Friends can recall the debt before it’s due, and you could choose to not pay back. In addition to this, friends and family are unlikely to have the resources to truly support the dream you have. Whatever they give comes at great cost to their well being. This is not the case with most formal institutions.

 

With inflation crippling the value of money and rising job insecurity, many Nigerians have turned to fraudulent Ponzi schemes promising impossible returns. Up to 3 million Nigerians signed on to the country’s iteration of the Mavrodi Mondial Movement, a platform that has never once failed to bankrupt users in every country it’s operated in. Nigeria’s version is in dire straits, as the founder of MMM in Nigeria is reported to have fled to the Philippines, leaving millions anxious about their investments. However, this tragedy has not curbed the Nigerian appetite. New ponzi schemes pop up by the day with some like Twinkas offering 200 per cent returns. A drowning man will grab a straw to save himself from death, it is the same way Nigerians have grabbed on to schemes most know are fraudulent to save them from poverty.

 

The difficulties of the great recession are not restricted to the lower and middle classes alone. Those with significant amounts of disposable income have been affected. Consumer confidence fell to a record low of -28.20 in the third quarter of 2016, and investor confidence has been hit as well with the Nigerian Stock Exchange shedding a trillion naira of its market capitalisation last year. In times of uncertainty even the rich seek security. They pull out from any schemes they deem risky and lock their money up in safer financial instruments.

 

For solutions to these problems, it is necessary that we look to technology. From time immemorial, technology has provided us with the most efficient means of moving forward. In the Nigerian retail space, companies like Konga and Jumia are introducing e-commerce to the average Nigerian and enhancing the shopping experience which has been crippled by logistical and infrastructural difficulties. According to a report by Philips Consulting, in 2014, 38% of Nigerians preferred to shop online, by 2016, this figure had shot up to 49%. This development has made shopping more convenient for consumers and has contributed to the rapid growth of the wholesale and retail industries. In 2014 the sectors accounted for 16.6% of Nigeria’s GDP, second only to agriculture.

 

If similar innovations were applied to the financial sector, it is possible that some of the problems the sector is plagued with would be resolved. An instance where this has been successful can be seen in the introduction of BVN which now serves as a powerful tool in identifying an individual financially. This system is not perfect but it is definitely a step in the right direction. One possible solution to the scarcity of credit and the lack of confidence in Nigeria’s financial markets especially in a recession, could be the introduction of a peer to peer lending platform like Fint, Nigeria’s first peer to peer lending site. Fint is an online platform where people can access credit at competitive rates and investors can earn returns on their investments by supplying those loans. On the platform borrowers can get as much as N3.5 million.

 

The loans span a number of categories and are both given and received through an internet mediated registry. This model is new in this part of the world, but it’s been tried and tested in the United States with platforms like Lending Club and Prosper. Judging by their reviews, the benefits it could bring to borrowers and investors alike are astounding.

 

For a peer to peer lending platform to work, it must have a method of assessing risk; a credit model. Fint uses a pioneering proprietary risk algorithm to achieve this, allowing people to receive unique interest rates that are calculated after a number of conditions have been taken into consideration. This leads to lower interest rates not only because the loans are provided by a large number of investors, reducing the risk any given one of them faces in the scheme, but also because the rates are tailor made for you after taking your considering the particulars of your financial circumstances. Furthermore, because the loans are administered over the internet, overhead costs are reduced and efficiency is increased, cutting the red tape by up to 12 weeks.

 

The benefits of this system are not restricted to those who need credit alone. Peer to peer lending platforms like Fint are typically transparent so investors need no previous knowledge of financial products and can self manage their investments. Once they find a person, a project, or a business to back, they receive monthly payments from borrowers. This gives them an additional stream of income that requires very little additional work or effort. Furthermore, because interest rates are favourable, returns on their investments are higher than comparative financial instruments. Investing in Fint brings an opportunity to diversify a portfolio with a new asset class, giving greater confidence as risk is shared over a larger number of financial markets.

 

When peer to peer lending took off in the United States of America, some who were reluctant to look at the fine print of platforms like Prosper, were quick to paint it with the same brush as they would a ponzi scheme like MMM. However, the comparison is demonstrably false. According to the Securities Exchange Commission in America, a ponzi scheme is “investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” The difference is that with peer to peer lending, it is the borrowers provide the returns for investors, as they do with the most traditional financial instruments.

 

The causes of the Nigerian recession are many and varied. The scarcity of affordable credit, the global fall in oil prices, the lack of significant foreign reserves, the penetration of corruption, and the current government’s sluggishness in the face of  an economic disaster all had a part to play, but that is not where the story ends. To exceed the heights of our previous economic boom, we must not leave it to the Government’s spending plan or a reversal in global oil price trends. We must look to ourselves. We must empower our 170 million strong population, all of whom could be an entrepreneur given the right financial assistance. A peer to peer lending platform like Fint could very well be all the help that they need.

 

 Damilola Afam Ade-Odiachi, Ade-Odiachi is a graduate of the City University London and an Intern at CNBC Africa

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by Damilola Afam Ade-Odiachi

February 23, 2017 | 1:02 am
  |     |     |   Start Conversation

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