Many banks used to live on public funds. When the Central Bank of Nigeria (CBN) hiked the cash reserve ratio (CRR), the music changed. But, to the Managing Director, CRC Credit Bureau, Tunde Popoola, the CBN action is welcome. In this interview with Senior Correspondent COLLINS NWEZE, Popoola speaks on the advantages of the policy and how credit bureaux can boost banks’ lending capacity, among others.
THERE have been complaints over paucity of credits. Is it the fear of default that is keeping banks from lending to the real sector?
Actually, Nigeria has made significant improvement in lending to the real sector over time. If we look at where we are coming from, as at 2006, the total lending to the private sector was just about N2.6 trillion. By 2009, that figure, in four years, had moved to N10 trillion. By 2012, it had moved to N15 trillion. So, it has been some growth in banks lending to the sector. If you also look at from the point of credit penetration, that is the growth of credit, vis-a-vis the Gross Domestic Product (GDP), it was 20 per cent as at 2007. By last year, it had moved to 37 per cent. So, that will let you know that sectorally, in aggregate, credit to the private sector has increased. And it has increased significantly. But if you look at credit to the private sector globally, the performance of Nigeria, you will discover that we are still far below. And I think that is what the issue is. Nigeria can do far better than we are doing now.
But why are we doing what we are doing now?
The fact is that even the real sector we are talking about needs a level of infrastructure to be successful. And banks would not want to give money to institutions and discover that it will go down the drain. So, where there is high level of infrastructural development that will also assist those companies, beyond money to succeed, banks will give more loans. You can’t say that it was because of lack of funds that a lot of manufacturing companies have relocated to Ghana. That is not correct. It is because of other factors. The issue of power, other infrastructure, transportation, the high cost of doing business in Nigeria, all these add up to what they are talking about.
The second issue is that there is a high level of both financial and capital market developments. You see that our capital and financial markets are not big enough. So, they just concentrate on few transactions, where they think they are safe. There is also high level of inefficiency in the legal system. The legal system is so bad, that getting judgment is not easy. So, where you have low level of institutional development, it will affect the performance of the financial system. It affects their ability to give credits. If you are giving credits, and you know that where there are litigations, all odds are against you as a financial institution, you will try as much as possible to run away from certain transactions. Besides, a lot of the real sector we are talking about are not well structured, especially when it comes to the Small and Medium Scale Enterprises (SMEs), based on their age, their size, structure, they are not conducive for getting access to credit.
What are some of the challenges affecting SMEs’ access to credit?
Where you have SMEs that do not have board of directors, transparent financial and accounting systems in place, audited account and governance are almost zero. Financial institutions find it difficult to deal with them. So, a lot of what of happening is inherent in the way we run our system. Also, in the way the companies themselves run their operations. In the way, the government has been unable to provide basic infrastructure to support the organisations we are talking about. I believe banks can do more. But a lot much more should come from the companies themselves and the environment where they operate. Banks will not operate in isolation. They operate within the concept of what is happening in the environment.
What is the role of treasury bills and other government instruments in this?
Recently, there has been a high level of interest rate on treasury bills. And treasury bills is government borrowing. So, if the rate of treasury bills is double digit, say 12 per cent, and I am supposed to lend at 18 per cent to the private sector, lending to government is supposed to be risk-free. So, I would rather do that 12 per cent without incurring any losses. The fiscal system also impact on lending. Treasury Bills are not supposed to be an alternative window of investment for banks. The real sector should be the primary target, but where the rates they get from risk-free investments, are almost the same from those they get from risky investments, then they go and invest in such risk-free investments which are treasury bills, government bonds and all that.
That also contributes significantly to it because everybody is watching the market. The banks are out there to make money, and whatever will give them the money legitimately, is what they will do. If I have two sources of revenue, and one is risk, and one is risk-free, I will go for the one that is risk-free, and that also affects the lending to the real sector of the economy.
Why are the rates in government securities like treasury bills and bonds over 12 per cent?
In domestic borrowing by the government, demand goes up, and the rate will rise. If a company has not borrowed before, it is difficult for banks to lend to SMEs.
How can we relate it to Central Bank of Nigeria’s hiking of cash reserve ratio from 12 per cent to 50 per cent for public sector funds?
First, the Central Bank wants to push banks to go and look for private sector deposits. It is easier for banks to mobilise government funds. Once banks have government accounts, they hardly go to the rural areas looking for small deposits because local government or state government account can give the bank a cheque of N1 trillion. They will not, therefore, be doing their basic job of enhancing financial inclusion. Then, when the Cash Reserve Ratio is moved up, then banks will have less money. Also, the public sector funds will become less attractive because they can only use half of the money to do business. So, that forces them to be looking for deposits in the rural areas. It is only when banks have private-sector deposit liabilities that are long-term in nature that they can lend to the private sector for a long term.
Does it mean that banks have been lazy in their drive for deposits?
Banks have not been creative as they should be in deposits mobilisation. Their role of enhancing financial inclusion has not been successful, they should be. There are some local governments that do not have a bank at all. So, why can’t we have banks all over the country? Why are banks highly concentrated in the cities? So, they should learn to develop innovative products, to drive deposits. That is when they will have enough money to lend. The proportion of public sector deposit in some banks is over 40 per cent. That is not healthy. It is not healthy for them; it is not healthy for the economy. Those public sector deposits will not allow them to develop innovative products or do aggressive liability generation that will enhance financial inclusion.
How can banks help the Central Bank achieve its financial inclusion plan?
Basically, when you talk of access to credit, people must have accounts in the banks to have access to such credit. We still have over 50 per cent of bankable Nigerians who do not have anything to do with the banks. Those are the people they should go after. So, this type of policy has the ability to get the banks thinking of how they can reach the unbanked. Those in the banking system, how can we do more to get them to increase their transaction volume? The banks have to create attractive liability products, not lending products. The demand deposit rate in some banks is almost zero per cent. So, this type of system can get them to begin to jack up rates up. And if they do that, the customers can respond by leaving some balances in the banks. So, that is how it should work and is also the type of projection that the Central Bank has in rolling out the policy. In those days, government deposits were not even in commercial banks. They were kept with the Central Bank. The banks then complained and the funds were returned to commercial banks. But now, some banks are relying heavily on it. That is causing the type of challenges that we are seeing now.
What other implications does this policy have on lending rate?
The fact remains that lending rates will go up. The available loanable funds will be limited. So, once the size of the loanable fund is limited, everybody scrambling for the same funds, demand will outstrip supply, and it will increase lending rates. That is on the short run. But on the long run, once demand outstrips supply, the banks will keep on looking for other means of getting funds so that they can make more money. So, it is capable of really getting the banks to do more in terms of putting their thinking caps, and saying how else can we generate liability that is as cheap as possible. So, it can enhance financial inclusion.
What is the position of credit bureaux operations in the country. Are they really being working?
Yes, the acceptance of credit bureaux has really gone up. We started in 2009, and we went live. By 2010, we had only 54 member- institutions on our platform. By 2011, it moved to 90 institutions. By 2012, it moved to 110, and by this year, it has moved to over 200, including the commercial and merchant banks, discount houses. Secondly, the sector coverage has also expanded. When we started, we had only commercial and mortgage banks and some microfinance banks. But today, beyond banking, we moved on to leasing companies, debt management companies, finance houses, pharmaceutical companies, retailers, hotels and tourism companies. Even cooperative societies have also joined. So, that has shown that acceptance is improving. In terms of number of institutions, it has gone up. In terms of diversity of institutions, it has also gone up. In terms of the number of reports that are being requested and generated, has also gone up significantly. In terms of data submission and quality of data, they have also gone up.
The microfinance sector is still backwards when it comes to keying into credit bureaux services. There are less than 10 per cent of them that access credit bureaux services. They lack the needed system and infrastructure to key into the services. For instance, they must also have personnel to enable them. We had in the past dealt with microfinance banks whose software does not have the required facility to take information such as date of birth, sex of the customer. Systems of some of the microfinance banks cannot accommodate such information. Even though they are interested in joining, they lack the capacity to do so. They have also complained about cost of accessing the data and submission.
What of commercial banks. Are there challenges you are facing with them?
The challenge is that some of the banks are not using credit bureau services for all their transactions. So, the volume of usage that you are expecting to see is not yet there for credit bureaux in Nigeria. By now, we would have expected that we will be doing thousands of transactions every day. We are doing thousands, but it is not the volume of transactions that we are expecting. For us we are doing less than 10 per cent of what we should be doing daily. And so, that is something that we have to work on. And it is only by continuing to tell people the value that credit bureau can add, to the risk management system that this will be possible. The time it takes to process credit has been brought down by availability of credit bureau. That is something a reasonable financial institution should key into.
Banks will also have the opportunity to know the exposure of their customers to know whether it can lend more to such customer. That’s why we have at CRC moved beyond banks that should be of added advantage to stakeholders. Some banks are doing well. In every transaction, they consider credit bureaux report for loan renewal, and for restructuring. Some are doing it selectively, and that is the point. It is not supposed to be selective; it is supposed to be for every customer. Also, beyond loans, like employee engagement, contractor engagement, guarantee, bonds, and other products that can lead to exposure, the credit bureau has developed, products that assist all these institutions, to be able to deliver. We are ready, but we can do more than what we are seeing. However, the speed of growth is very small, compared to our expectations are and compared to what is happening in other parts of the world.
We have three credit bureaux in Nigeria. Are they enough to cover our market?
They are more than enough, because credit bureau is about bringing information on borrowers together. So, the more of them you have, the more challenging will it be for the user of the credit services. If you have only one, everyone submits information to that one operator. If you have two, people will have options, and that means a subscriber can pull information from two sources. That means additional cost. For three, it is even mush more complex. There data from different sources and to be comfortable as a user, you may have to be taking data from the three operators. Such also have cost implications. In advanced countries, they know that the more credit bureaux a country has, the more challenges they pose to users.
Consumer lending has not really done well here. What are the limitations that the sector faces?
Consumer lending is very interesting and it is one of the reasons that a credit bureau is required in an economy. In fact, a credit bureau is not critically required in lending to a large corporate. It is mainly about cash flow. But for consumers, it is all about integrity and credit history and all that. So, that is why you will discover that in recent times, there has been upsurge in consumer loans products. You have institutions coming into the market, basically doing consumer loans. You have a lot a financial institutions developing consumer loans products especially credit cards. That was not the case about three to yours years ago. We have banks that are now setting up specialised desks for SMEs credit. A lot of financial institutions wants to lend to this segment of the market. Some are only lending to salary earners to start with. That is a segment of the consumer market. And once one takes loan for the first time, then they have credit history that they can rely on. That is also the reason as a credit bureau, we are expanding beyond banks. Now, cooperative societies are submitting data to us. A high level of lending takes place in the informal sector in Nigeria. Unless, you have access to the informal sector data, you will not be able to do as much loan as you would want to.
What roles can cooperative societies play in making borrowers’ data available to lenders?
Millions of Nigerians are in cooperative societies, and they are taking loans from those societies, and also paying back. So, they have very rich credit history and the data must be incorporated into credit bureau and make them accessible for former lenders like banks and microfinance banks. No bank wants to give out money to people they don’t know. The second challenge really, is the unique identification issue for consumer loans. There is no one unique identification in Nigeria. We need to address it as fast as we can. There are lot a lot of restrictions, on the type of consumer you can engage as a lender. More can be done where there is a means of identifying those consumers. New products can be developed to meet their needs if only you can identify who they are.
How can credit bureaux help people in taking other financial decisions such as making purchases from unknown people?
You know that’s part of the issue we have. Lack of unique identification is still a serious challenge in Nigeria. As a credit bureau, the only thing we can do is what we are doing. Keep on bringing data from various sources, and once those data are increasing, the number of people on the database is also increasing. And so, that becomes what you can work with as a mortgage bank or mortgage financial institution or even as a real estate developer.
How are you handling competition in the industry?
Competition is healthy and it is required in an economy. Monopoly is not good. Where you have monopoly in any sector, it brings in inefficiency, and prices of products are always high. At CRC, our major asset is our ability to respond to customer requests and meet them. Also, we are web based and our pricing is not bad and is tailored to ability to pay by each of the sectors that we are dealing with.
We have self-enquiry product, batch processing, bulk portfolio for the banks among other products that keep us ahead of completion.
How are you finding regulation of the subsector by CBN? Are there areas you would want to see changes?
We have engaged the regulator in some of these issues and we are positive as an industry. Part of it is the ability to get data without the consent of the borrower. The rule is that you must obtain the consent of a borrower before doing a search on him. But a fraudulent borrower may not give such consent. Also, awareness is still very low. There is need for the regulator to support us.
