Ezekiel Zik Kun
In a recent media parley, a financial expert and group Managing Director/CEO of CRC Credit Bureau Limited, Dr. Tunde Ahmed Popoola, expressed passion while addressing and later answering questions from journalists on the role of Credit in driving economic prosperity.
He gave a special focus on the importance of consumer credit for economic growth, the role of credit reporting generally in strengthening access to credit and the importance of credit scores in facilitating consumer credit.
ON WHY CREDIT MATTERS?
Dr. Popoola explained that, an economy is basically about transactions. Transactions are the backbone of an economy.
However, transactions as we might have seen, can be in cash or on credit and can be to buy goods, services or financial assets.
The total spending in an economy is a combination of cash and credit and this helps to determine the vibrancy of the economy.
An economy cannot run on only one of these. If it runs substantially on a cash basis, there will be a limit to the level of transactions that can take place and growth may be difficult to achieve. Credit matters.
Credit is often defined as the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
Since about 4,000 B.C. when the Sumerian people began to establish the first world cities, credit was extended for what might have been the first time and has come to stay since then.
A strong credit system promotes credit to consumers (individuals) and credit to businesses, especially the micro, small and medium enterprises (MSMEs).
With access to credit, effective demand is stimulated. And this propels an increase in demand for goods and services.
If an economy is supported by access to credit also for commercial enterprises, production is enhanced. Access to credit for businesses is productive credit and it certainly helps to promote economic growth.
ON THE IMPORTANCE OF CONSUMER CREDITS,
The group Managing Director and CEO of CRC Credit Bureau Limited said, Consumer credit is an important element of any economy.
A consumer’s ability to. borrow money easily allows a well-managed economy to function. more efficiently and stimulates economic growth.
Continuing, he said that, a consumer credit system allows consumers to borrow money or incur debt, and to defer or spread repayment of that money over time. Having credit enables consumers to buy goods or assets without having to pay for them in cash at the time of purchase.
Today, most successful economies are driven by credit.
According to a statement dated May 10, 2022, the Federal Reserve Bank of New York’s Center for Microeconomic Data, issued its Quarterly Report on Household Debt and Credit in the USA, stating that there was a solid increase in total household debt in the first quarter of 2022, increasing by $266 billion (1.7%) to $15.84 trillion. The report highlighted that “balances now stand $1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic”.
It was emphasized that the report was based on data from the New York Fed’s nationally representative Consumer Credit Panel.
Also, in the Central Bank of Nigeria’s monthly economic report for October 2021 indicated that the growth in consumer loans was driven by a 52 percent, year-on-year increase in personal loans, and rose to N1.57 trillion in October 2021.
The provision of consumer credit has a key economic function and is a largely beneficial activity, propelling spending and thereby increasing income levels of a country.
It enhances productivity and leads to higher Gross Domestic Product (GDP).
It has been proven repeatedly that an economy with strong credit culture improves standard of living, stimulates growth, and ensures prosperity of many of its inhabitants, by enabling borrowers to purchase goods and services and spread repayments over time. This makes it possible for consumers to purchase items they need without having to fully save to purchase these items.
For example, they can enjoy reasonable access to basic and good things in life such as food, shelter, education, commuting, among others, and some relative luxuries.
Many items from motor vehicles, to houses and even television, air conditioners, among others are too expensive for most people to pay for all at once, with their own earnings or savings.
ON ACCESS TO CONSUMER CREDIT IN NIGERIA
The Credit expert said, the availability and ease of access to credit is represented by the level of credit penetration. This is measured by the ratio of total credit to the private sector to the GDP. This is relatively low in Nigeria, and it underscores the challenge of access to credit in Nigeria.
The expert said in 2020, from the World Bank Data, domestic credit to the private sector as a percentage of GDP stood at 12.1%, up by 2.1% in 2018, which was a mere 10.2% in Nigeria. Comparing 2020 and 2018 in four other economies showed that by 2020, it was 32% in Kenya, 96% in Morocco, 70% in Brazil and 134% in Malaysia.
Consequently, access to consumer credit in Nigeria has grown astronomically over the years.
Credit bureau penetration has also grown over the years, but it is still relatively low when compared with other countries.
Credit bureau penetration indicates the number of adults’ population covered by credit bureau. It is a database of the number of consumers and businesses that have credit in an economy.
Nigeria’s credit bureau penetration in 2019 was 14 percent, compared with 30 per cent in Kenya, 25 per cent in Morocco, 79 percent in Brazil and 83 per cent in Malaysia. Of course, credit bureau penetration will certainly be low where credit to the private sector is low. It is just an expression of the fact that only few consumers and businesses have access to formal sources of credit in Nigeria.
The low access to credit in Nigeria is practically demonstrated in various ways, apart from through credit penetration and credit bureau coverage. First, only few Nigerian consumers and SMEs enjoy credit facilities from Nigerian banks. According to statistics, Nigeria could boast of over 41 million micro, small and medium enterprises (MSMEs).
In a report jointly released by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS) on January 12, 2022, the MSMEs represent over 96.7 percent of total businesses in Nigeria; they contribute about 46.31 percent to GDP and 6.21 per cent of gross exports during the year under review. However, less than five percent of Nigeria MSMEs have access to credit.
Furthermore, Nigeria has been characterized by significant disproportionate allocation of credit to different sectors.
The sectors that contribute the most are denied credit while credit goes to the sector with relatively little contribution to the GDP. For example, while agriculture contributed over 21 per cent to GDP in 2018, the share of bank credit to agriculture was the lowest at 3.8 percent. On the other hand, while oil and gas received 23 percent of bank credit, its
contribution to share of GDP was less than 10 percent.
In addition, the cost of borrowing is very steep in Nigeria, and this serves as a disincentive to borrowing to a lot of businesses, especially the SMEs.
In appreciation of the challenge of low credit penetration, a significant number of actions have been taken by the government and creditors, mostly financial institutions. Overtime, since independence, Nigeria has established many specialized banks to mitigate the gaps in access to credit.
Today, we have the Bank of Industry, established in 2002 to support access to credit for SMEs in manufacturing companies; Bank of Agriculture established in 1973 to enhance access to credit for agricultural purposes; the Nigeria Export Import Bank (NEXIM) was established in 1991 to encourage production for exports.
In recent times, the Development Bank of Nigeria was founded in 2011 to provide wholesale credit to micro lenders for on-lending mostly to micro enterprises while the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) was incorporated in 2013 by the CBN as a dynamic, holistic US$500 million public-private initiative to catalyze the flow of finance and investments into fixed agricultural value chains.
In addition, the government has established several initiatives and intervention funds to support access to finance for specific sectors.
Examples include the N200 Billion Small and Medium Scale Enterprises Guarantee Scheme (SMECGS) launched in 2010; N200 Billion SME Restructuring and Refinancing Fund under the management of the Bank of Industry; N100 Billion Cotton, Textile and Garment (CTG) Fund established in 2019, among others.
Dr. Popoola stated that in the past, the government had directed deposit money banks to set up special funding schemes to encourage access to finance, especially for SMEs and the agriculture sector. Most of the schemes met with limited success and impact. In 2019, the government directed deposit money banks to give out a minimum of 65 percent of their total deposit and other liabilities as loans under an LDR scheme orchestrated by CBN.
In line with the trend to promote access to finance through an efficient financial system, most governments now adopt tools of monetary and fiscal policies and financial reforms that enhance access to credit and promote overall development of the financial markets for all.