A large population of over 170 million people, a cash and carry economy and tough hurdles to access financial services, all combine to provide a sea of opportunities for investors in the retail financial services sector of the Nigerian economy. Commercial banking presents stiff regulations for entry and more people are seeking alternatives to commercial banking halls and platforms.
Recent statistics from the Central Bank of Nigeria (CBN) indicate that at least 37% of Nigeria’s population are unbanked. This means that at least 62.9 million people do not have access to financial services, even when they are very poor and require micro credit and other services to create wealth and survive.
Secondly, the Nigerian economy runs on a cash and carry basis, as a result of poor technology, distrust, and illiteracy. This means that most of the money circulating in the system do not pass through the financial system, which reduces funds available to banks to trap for financial intermediation. So banks end up lending only to big businesses and high net worth individuals who they already have relationships with, while the majority of the population are left to seek alternatives.
The small and micro business and individuals who constitute a majority in the economy are unable to access finance to meet their needs. The paradox of the situation is that the retail and micro borrowers are usually ready to pay more interest than the big companies and high net worth individuals that banks focus their attention on.
For instance, while the corporates are rate sensitive and may not be willing to pay interest rate of more than 18% per annum, small and micro businesses are happy to pay up and above 40% per annum as long as availability of fund is assured. The small time business man and woman is also more willing to pay back the loan unlike corporate who can afford a legal team to handle any litigation that may arise.
Consequently, setting up an outfit to lend to micro, small and individuals will meet the needs of a majority of the population and earn huge interest income as long as the right risk mitigation strategy is applied. Banking the under banked is a no-brainer as long as you device the right strategy to get back your funds.
Though this segment of the economy are not known to have collateral to cover loan requests, they usually operate in cooperatives and associations, and investors can plan around this system to ensure full compliance and cultivate other business opportunities in the value chain.
In sub urban and rural areas, many small businesses are already earning income from other value chain businesses like operating POS terminals and taking a margin from every transaction. Since banks and their ATMs are far away, customers who need urgent cash approach some POS operators who swipe the cards for a certain amount and give them cash for a fee.
For instances, you can swipe to debit N10,000 and pay a charge of N500 for the cash service. Others collect cash to do fund transfer and charge for the service. These small financial services are conducted in small kiosks or shops, in addition to other forms of businesses in the neighborhood.
There is also the area of personal loan which is flourishing, especially for workers and business owners. Lots of workers in both the government and private sector do not have access to loans and are usually game for easy-to-access loans. They pay between 3-10% interest per month on the facilities.
The interest rate is much more than what commercial banks charge, but many individuals rely on these forms of credit because commercial banks either throw in too many hurdles or do profile many of these SMEs as unqualified to access credit.
Investors’ intervention in this area is quite critical as it enables lots of workers to meet personal needs ranging from payment of children’s school fees, to rent, and others, which they can repay from their monthly salaries.
Some investors require employee confirmation or guarantors or other forms of collateral, depending on the nature of the request. Investors can also extend credit to this segment by directly purchasing assets or goods in an asset finance/ware-housing arrangement.
This sector is really booming, with an influx of lenders from South Africa and other countries taking the lead, but there remains a sea of opportunity for more investors to participate and create wealth for themselves and many others.