This article was produced on behalf of FINT, a Nigerian peer-to-peer lending platform, as Stears explores marketplace lending in Nigeria.
Today, most disruptions promise to take humanity into the future, but some take us back to simpler times. Peer-to-peer lending is the oldest form of lending in the world. Before there were banks, people would lend money and property to each other. Stories and instructions on lending can be found in the oldest texts, and the concept of usury received attention in the earliest religions.
When societies were small and closed-off, people lent freely among themselves based on trust. At worst, the lender believed that he could take up his case with the local community. But as globalisation and technology came, people began to migrate, and personal lending became inefficient. The solution? Banks.
But banks have problems; in some cases, they are too big to fail, and in others, they are unable to satisfy customer needs. Today, technology and globalisation have now created a world where personal lending makes sense – by making the world small again.
At the centre of this story is FINT, a Nigerian online peer-to-peer lender founded in early 2017. The idea is simple. Emeka signs up to the FINT platform and requests for a loan. Chinyere signs up, funds her account, and chooses which loan(s) she wants to finance from a pool of anonymous borrowers. In its simplest form, Emeka wants ₦120,000 for one year, and Chinyere lends it to him and gets a monthly payment of a portion of the principal (₦120,000/12 = ₦10,000) plus her monthly interest of 3% (₦3,600), meaning she gets ₦13,600 each month. That translates to ₦163,200 at the end of the year at 36% interest.
FINT has been pioneering this simple form of lending in Nigeria. Its aim to “empower Nigerians by making loans more accessible and affordable; and lending more rewarding” speaks to the core idea of peer-to-peer lending. That is, provide the opportunity for Emeka to borrow money in a way that the regular financial system fails to permit – particularly in Nigeria where it is so hard for the average person to get a bank loan.
Fund a neighbour’s dream
Make no mistake about it, peer-to-peer lending is as attractive an investment as Chinyere would find in Nigeria – or anywhere else. FINT boasts returns as high as 39%, and a ₦100,000 investment lent out for 12 months to a B+ rated borrower (average rating) gets you ₦133,000 at a 33% interest rate. The same loan given to the highest rated borrower gives you ₦129,000.
Risk is managed as all loans are insured in the event of death, disability, or job loss. And to further reduce your risk, you can spread your funds across several loans; rather than invest in one ₦1 million loan, you can invest in five ₦200,000 loans. To customise even further, lenders can choose the purposes they want their funds to be put towards; medical bills or helping small businesses? FINT has it sorted.
Borrowers are also screened using algorithms, a process that may make peer-to-peer lenders like FINT better at figuring out which borrowers are going to pay back. The processes are not perfect yet, though, and the industry is still figuring out ways of screening borrowers, more so given Nigeria’s poor credit culture.
Interestingly, one notable study found that someone who mentions “God” in the question about why they need the loan or will pay back are 2.2 times more likely to default.
The pain of getting loans in Nigeria
Borrowers like Emeka have even more to gain. Nigeria’s dysfunctional credit market means that it’s nearly impossible for the average Nigerian to get a decently priced loan; if the bank doesn’t outrightly reject you, you get charged an exorbitant rate. Part of this is because most Nigerian banks would rather park their deposits in risk-free tax-free government securities, but most of it is because of asymmetric information. If Emeka and Ahmad walk into the bank together, the bank has little way of knowing which of them is a credible borrower so is likely to treat them the same – badly.
Peer-to-peer lenders solve this problem by screening everyone individually. Before Emeka applies for a loan on the FINT platform, he takes a credit assessment test and is assigned a FINT score, a rating that signals his creditworthiness to lenders.
Ultimately, the greatest appeal for him is that he can actually get a loan of up to ₦2 million – without collateral, quick and easy.
An infant in Nigeria, a giant abroad
Peer-to-peer lending is fairly new in Nigeria but has been thriving abroad for decades. In 2013, Google invested $125 million in The Lending Club, the biggest peer-to-peer lender in America, and the company’s market value peaked at $10 billion in 2014. And Zopa, one of the UK’s largest lenders, has managed to match over $1 billion worth of individual loans with a default rate below 1%. To put that in context, approximately 15% of loans in the Nigerian banking sector are non-performing.
Experience abroad also shows how peer-to-peer lenders can grow further in Nigeria. Most international peer-to-peer firms started off facilitating unsecured consumer loans to compete against high credit card charges, before branching out to creating markets for small business loans, mortgages, etc. And Beehive, a lender that started in the UAE, is a sharia-compliant peer-to-peer platform, so uses profit-sharing rather than interest. Given Nigeria’s large Muslim population, and the success of the sukuk bond in 2017, this looks like a particularly profitable venture.
Peer-to-peer lenders have come in for some criticism abroad; most notably from those who believe the platforms turn a blind eye to reckless lending as their revenues are based on transaction volumes. They argue that this is the sort of moral hazard problem that caused the last financial crisis. However, Nigerian platforms are already a step ahead here; FINT only makes money from successful loans, and most of its income comes from charges borrowers that pay back.
The future of P2P lending is yet to be seen, but Confucius directed humanity to study the past if we want to define the future. Heeding that advice, peer-to-peer lenders are leading us back to a world of hassle-free borrowing and lending, and helping lenders enjoy returns that only banks could boast of previously.