Creating Consumer Credit Leverage, for the Economy

By Victor Ogiemwonyi
Marketconversations.sub-stack.com

Recently, I read a brilliant writeup by Mr. Uzoma Nwagba, the CEO of the newly established Nigeria CreditCorp. Reading him, I can tell, his mind, is in what he is doing. He even enthusiastically said, this was his dream job; I believe he will do well.

He has a brilliant mind.

Mr. Nwagba made a comparison between what earnings can achieve without credit access versus what is possible when leveraging the same earnings with credit. His analogy was apt. It precisely defines what can happen if we successfully create consumer credit leverage for our economy.

He compared two people with similar earnings: one in Akure, Ondo State, Nigeria, and one in Detroit, Michigan, USA. Despite the same earning power, the man in Detroit lives a much higher standard of living, because he has credit leverage, unavailable to Biodun in Akure.

The Contrast of Living Standards in Mr. Nwagba’s example, features Biodun, an Assistant Director in the Ondo State civil service earning N315,000 a month, alongside Brandon, who lives in Detroit, Michigan, USA, and earns $1,500 a month. Using purchasing power parity (PPP), they fall into the same income bracket.

Biodun must pay upfront for nearly everything needed for a good life:

• One year’s rent, with furnishings: about N2.4 million.
• A used Toyota Corolla: N2.5 million.
• An air conditioner, TV, telephone, generator, etc…significant costs, his current earnings cannot accommodate , so he must postpone getting some of these needs.

Brandon, on the other hand, lives a different life.

• He can rent a furnished flat for $400 per month.
• He can get a used Toyota Corolla for $240 per month over a two-year repayment plan.
• He can get a phone on a carrier credit plan for $50 per month etc.

Their living standards are miles apart, even though they earn similar incomes. The difference is the lack of consumer credit leverage, for Biodun.

The Economic Imperative.

The illustration above shows why we must do everything to develop our consumer credit ecosystem. Consumer spending is now a vital part of economic measurement. If we can leverage our consumer spending by leveraging credit to consumers by 50%, it will increase spending and boost our GDP above most countries in Africa. The big economies of the USA, Brazil, China, and South Africa, all have a consumer credit system that gives their citizens leverage for a better standard of living.

Mr. Nwagba clearly defined CreditCorp’s mandate and outlined, specific actions he is taking, to fulfil this mandate. I am totally in agreement, with all he is doing with CreditCorp, until he said ….” he was building a Government Bank from scratch….”

CreditCorp Is Not Another Government Bank.

CreditCorp’s mandate is to build and enable the ecosystem for consumer credit; it is not to build another Government Bank. Mr. Nwagba must resist pigeonholing the agency into becoming a direct lender. CreditCorp can never have enough money to lend and should not even begin to lend directly. They must avoid the suboptimal position that the Federal Mortgage Bank (FMB) and the Bank of Industry (BOI) have created for themselves.

The FMB has no business being a lender. Its role, is that of an enabler of housing development in Nigeria. Its function is to buy and refinance mortgages from property developers who build, sell, and create mortgages. FMB should then package these mortgages to create liquidity. There is a big difference between trying to lend money to individuals and trading securities created from mortgages. FMB is not even equipped to be a lender. We have enough banks and loan institutions, that can do that work more efficiently.

FMB should work with Investment Banks, to package the mortgages it buys and refinances, into Bonds, that can be sold to investors. This will provide the huge liquidity needed to quickly achieve our housing goals. This is the only way to ensure sufficient finance flows into the housing market. This inability to enable the housing market, is why FMB’s growth has been stunted.

No matter how many recapitalizations the government does for FMB, it will not be able to expand housing delivery to the Nigerian people. Simply put, FMB is a refinancing entity; it should refinance mortgages and create liquidity for the housing sector, not become a lender.

The Bank of Industry (BOI) is also acting suboptimally. BOI is still using the model of the old Nigeria Industrial Development Bank (NIDB) from the 1970s and 1980s. While NIDB was fairly successful then, because Nigeria’s industrial base was near zero, and there were few Banks, who can lend to the industrial sector. So, direct lending was needed, they even required that beneficiaries, have commercial bank support for working capital. This collaboration allowed NIDB to focus on industrial projects while commercial banks handled working capital.

Today, BOI has several banks and lending institutions that can do the lending. BOI should instead become a guaranteeing agency that provides guarantees to lenders to facilitate lending to industry. This approach will also provide more liquidity and financing for the industrial sector and will overall, be more efficient. The lending bank would rely on the BOI guarantee, since industrial lending is usually against solid assets (factories, machines), BOI would have very little payout on its guarantees and could always take over and sell the assets to other investors in case of default.

The distributed nature of this type of industrial lending, handled by several banks with expertise, will accelerate the goal of industrializing the country. The cost of borrowing for industry will be low, because the risk to the banks lending against guarantees, will be lower. BOI currently has at least a one-year waiting list for financing requests for various industrial projects. Lately, we have even seen BOI wasting resources on debt recovery agents and receiver managers.

If they give guarantees to banks, various project requests can go to different banks, speeding up the process and eliminating auxiliary problems like loan recovery. In fact, BOI could, on a case-by-case basis, demand a 15–20% equity stake in new factory startups, which could then be listed later on a stock Exchange or sold back to the company once successful.

CreditCorp must avoid falling into this pigeonhole lending trap. Becoming a government lender would be its limiting factor. Unlike FMB and BOI, the primary job here is not actually about creating liquidity; the money for consumer credit in Nigeria, already exists in the economy. It only needs to be triggered.

Focus On Building The Ecosystem.

CreditCorp should focus on building the ecosystem for consumer credit growth, in Nigeria. They are already doing the right things, such as helping build the Unified Credit Infrastructure with NIN-backed credit scores. I will add two more essential components:

1. Consumer Credit Insurance:

CreditCorp must work with Insurance Companies to develop insurance for consumer credit. They should encourage insurance companies to form a consortium to share the risk and extend credit insurance to merchants who extend credit to consumers. The premiums would be a small part of the credit extended.
For example, a consumer buying an item for N1 million and financing N700,000 (after a N300,000 upfront payment) might pay a 10% insurance premium, or N70,000. This guarantees the merchant’s credit. If there is a default, the insurance consortium can pay from the fund pool.

2. A Consumer Credit Tribunal (CCT)

CreditCorp should also work to create a Consumer Credit Tribunal (CCT), like the Investment and Securities Tribunal (IST) in the capital market. The CCT would sit on disputes with a time limit for hearing, perhaps not more than 45 days, avoiding our courts that take forever to resolve disputes. This will be a key way to build trust, in the ecosystem CreditCorp, is building, given the current trust deficit in our system.

Though I do not subscribe to the fable that Nigerians don’t pay their debt—Nigerians living abroad all subscribe to the consumer credit system in their various places and have some of the best credit scores in those countries.

Enlightenment And Addressing Merchant Mistrust

The next major part of CreditCorp’s work will be to educate merchants and everyone else that consumer credit works for everyone, not just the consumer.

I recently spoke to a hotel manager who wanted to buy 10 air conditioners for his hotel. He approached a merchant, offering to pay for five units upfront and spread the payment for the balance five units, over six months.

This is an ideal consumer credit situation, selling to an established business, that generates cash every day. Surprisingly, the merchant would not sell. He said he would rather keep what he could not collect money for immediately, because he was unsure how much it would cost him to replace his inventory.

This is warped thinking. The merchant is in love with his inventory and not in the business of selling his goods as fast as he can, which should be his primary goal. A higher turnover will mean more profits. This mistrust must be addressed in the two ways discussed above: an insurance mechanism against defaults and a quick, reliable dispute resolution system.

In Mr. Nwagba’s own words, “ we should galvanise all parties toward a National consumer credit plumbing, that actually works… with a re-orientation, to create responsible debtors.” He calls them

“responsible Onigbese.”—(responsible debtors)

We must work quickly to create this consumer credit leverage for our economy. The benefits are too great to ignore. The majority of our people today, live poor lives, because we lack credit, at scale.