Why low-income Nigerians prefer payday lenders over banks

In August of 2017, Henry Apampa-Aka learned about a lending platform named Paylater, which does not require any paperwork. Despite his initial skepticism, the then 27-year-old chef and entrepreneur applied for a loan of 10,000 Naira ($27) – the smallest loan he could apply for. Within 10 minutes, the loan was disbursed and credited to his bank account. Ever since, he has paid back six other loans to Paylater and is currently in the process of repaying his seventh loan of 100,000 Naira ($270). 

Apampa-Aka utilised the loan money to open a restaurant named Sir Henry's Barbecue in Lagos, which includes private and commercial catering services. It was the ease of access and the trust the digital platform provided that encouraged him to use the lending agency on several occasions. 

Paylater is one of a few payday lending platforms that have sprung up in Nigeria recently, especially since 2015. Barely out and at risk of getting into another recession, Nigeria's economy is flailing because large businesses moving abroad. Surviving a financial downturn will be a difficult task since Nigerians are not good at saving money. According to the World Bank, less than one in three small or medium-scale enterprises are able to access loans or credit facilities in Nigeria. But critics claim this figure is the result of an ambitious effort of the World Bank and other stakeholders to help lift poor Nigerians out of poverty.

Banks in Nigeria have a bad reputation for providing credit. The process is exhausting, and high interest rates coupled with the need for a collateral makes bank loans unattractive. With Nigeria's stringent property laws, it's difficult to own property, and people who seek loans from regular banks cannot put any property up as collateral. 

“My uncle lost his home and everything to the bank after he took out a loan. Banks are interested in people defaulting, despite the prevailing economic condition at the time.” Apampa-Aka explains. 

The introduction of Bank Verification Number or BVN by the Central Bank of Nigeria has made companies like Paylater, Kwikcash and even Lidya enter the credit provider space in Nigeria. The BVN is the first true record for Nigerians employing biometric security features while being linked to all bank accounts. Before 2015, bank records were not necessarily shared and banks ran a risk of loan defaulters moving to other banks to get loans. The BVN is a social security number of sorts accounting for every individual across all banks and credit unions adding a layer of trust. 

 According to Chijioke Dozie, the co-founder of Paylater, “It’s important to give loans that people need and not necessarily want. We have an in-house team of data scientists that help us with credit scoring.” In 2018 alone, Paylater has provided over 300,000 loans to Nigerians and has around 90,000 active monthly users. The BVN system has brought a new level of accountability to people taking loans from the platform as credit unions are gaining ground in the country. “But even with credit unions, Nigerians on our platform are always willing to pay back loans, even if they might take time before paying back.” Dozie explains. 

Users of micro lending. however, complain that the interest rates by the platforms are usually high. Apampa-Aka took the loans at  22 percent interest rate. In other platforms like Kwikcash, the loans are at 15 percent, but with a strict 14-day period for repayment. But, Dozie explains that as trust is built on the platform, interest rates are lowered and loan amounts available increases – same with Kwikcash. Adia Sowho, Managing Director of Mines Nigeria – the company that owns Kwikcash explains, “The terms reflect the current realities of making collateral-free credit available in Nigeria in the absence of lending infrastructure.  Loan terms – amount, tenure, interest – are customized to the users and their behaviour.  Good borrowing behaviour will also favorably affect the terms.” 

While Paylater is available via apps on the Google and Apple stores, Kwikcash is available via USSD – a feature that is widely used especially by people that are in the unbanked segment of the Nigerian economy. While still a relatively new company, Kwikcash has processed over a million loans, according to Sowho.

For Emeka Eze, Kwikcash is a provider of supplementary income – a stop gap while waiting for the next paycheck. “Because Nigeria is tough, my salary account is usually dangerously low by the 20th and I have to borrow until the next salary is paid,” he explains. Kwikcash has become attractive for its ease of access, but the interest charge is still a problem, something that just has to be budgeted for. One time, Eze’s close friend defaulted on the loan despite as many as four loan extensions. Everybody he had contacted on with his phone got a text message saying he was owing a certain amount of money. “I was embarrassed because people that know him know we are friends and think I might be that type of person.” Eze explains, but the stakes could be higher. Embassies now request for credit reports from credit unions and that could hurt future plans. 

But for Oluwatosin Ajani, an economist living in Lagos, these platforms are just a temporary solution for a bigger Nigerian problem of underbanking. “These companies are providing a service that banks should be providing and right now, they are able to charge high interest rates because there is no competition," Ajani says. "As Nigeria is already underbanked, these services are only available to a certain class of people and it does not help grow the businesses that can provide jobs to lift Nigerians out of poverty." 

Banks are not inclined to provide loans to small and medium-scale enterprises in Nigeria because they do not provide the big profits that multinationals and large companies promise to provide. 

For Apampa-Aka, microlenders are a route to prosperity especially through the line of credit he has carefully cultivated. He will soon be able to borrow one million naira ($2,754). While the lenders are not perfect, they are helping his business grow.