Nigerians seek refuge in personal loans as inflation nightmares linger

CYNTHIA EZEKWE IN LAGOS

As the cost of living continues to soar, an increasing number of Nigerians are seeking out credit facilities from financial institutions to finance their daily expenses, a move that has become a widespread coping mechanism in the face of rising economic pressures.

The Central Bank of Nigeria (CBN), in its recently released monthly economic report revealed a 14.3 percent jump in personal loans, from N2.648 trillion in December 2023 to N3.028 trillion in January 2024. The sharp rise in personal loan uptake, which accounted for 79.2 percent of consumer credit, suggests that more Nigerians are turning to loans to fund their day-to-day expenditures, as the rising cost of living continues to take its toll on household budgets.

An analysis of the apex bank’s report, showed that the total consumer credit increased month-on-month by 11.9 percent to N3.82 trillion in January 2024, driven, mainly, by the rise in personal loans on the back of heightened inflation.

Compared to January 2023 figures, the CBN report showed a N1.41 trillion increase in total consumer credit by January 2024, largely fueled by a 14.3 percent surge in personal loans from N2.648 trillion in December 2023 to N3.028 trillion in January 2024. 

Meanwhile, retail loans also grew by 3.6 percent, from N774.19 billion in December 2023 to N794.79 billion in January 2024.

The report stated: “Total consumer credit outstanding increased by 11.9 percent to N3.82 trillion in January 2024, driven mainly by the rise in personal loans amid heightened inflation. A breakdown of consumer credit revealed that personal loans increased by 14.3 percent to N3.028 trillion from N2.648 trillion in December 2023, while retail loans rose by 3.6 percent to N794.79 billion. Personal loans accounted for 79.2 percent of consumer credit, while retail loans accounted for 20.8 percent.

While the current government’s economic reform efforts have been characterised by ambitious measures aimed at spurring growth, they have also resulted in a debilitating financial turbulence, plunging the country into one of its worst economic crises in decades. Despite the CBN’s aggressive hike of the interest rate to 26.25 percent in an effort to temper inflation, the country continues to struggle with soaring prices, as evidenced by the National Bureau of Statistics (NBS) report that the inflation rate rose to a record-high 33.95 percent in May 2024.

As the economic crisis continues to rage, Nigerians find themselves embroiled in a whirlwind of financial distress, with dwindling living standards, deepening economic hardships, and skyrocketing inflation plaguing the nation.

Driven by desperation, many Nigerians have been compelled to turn to loans as a desperate means of survival, as food prices skyrocket and access to basic necessities becomes increasingly elusive.

Explaining how the upward   trend in inflation is translating to increased demand for consumer loans, Tunde Abidoye, head of equity research, FBNQuest Securities Limited, said: “The effect of rising inflation and currency depreciation on the economy is that it has reduced real income for households. Therefore, households will have to look for other sources of inflow, which in most cases, will be in the form of debt financing to meet up with their already existing obligations. Some households may need bridge financing. This may be one factor responsible for the rise in personal loans.”

Reflecting on the recent surge in consumer loan uptake, Atinuke Egwuatu, group head of consumer lending at UBA Plc, offered valuable insight into the current economic realities that are driving this trend.

Egwuatu posited that the weakened naira has triggered inflationary pressures, resulting in a sharp rise in the cost of living for many Nigerians. This, in turn, she  stressed, has diminished the purchasing power of many consumers, who now face an uphill battle to cover their everyday expenses using their salaries alone.

“Prior to the consistent devaluation of the naira against other currencies, people were able to save up funds in order to finance major projects. However, with the consistent naira devaluation, saving up funds for a project is not as effective anymore, as the projected cost could have doubled or tripled while saving up cash for it as the returns on the investment is not able to keep up pace with the devaluation rate. As a result, consumers tend to seek additional funding to finance these projects and spread their repayments over a period of time,’’ Egwuatu explained.

SBM Intelligence, an Africa-focused consulting firm specialising in intelligence gathering and strategic analysis, also uncovered a concerning statistic highlighting the far-reaching impact of inflation on the daily lives of Nigerians. The firm, in a recent report, found that  27 percent of Nigerians, spanning various income levels, have been forced to turn to loan apps as a means of paying for basic living expenses in the wake of record-breaking inflation.

Interestingly, Fintech companies have seized upon the opportunity presented by the skyrocketing demand for loans, leveraging this trend to boost their profitability and achieve a range of strategic objectives, including:

• Generating a significant income stream through interest earned on loans, as well as catering to a growing consumer base.
• Lowering operational costs and providing competitive pricing, thereby positioning themselves as the go-to option for many Nigerians in need of financial assistance.
• Collecting valuable data on their customers, which can then be used for advanced analytics and targeted marketing campaigns.

As digital-first financial entities, Fintechs have been harnessing the mounting loan demand in the Nigerian market as a springboard for rapid expansion. Armed with cutting-edge digital capabilities that allow them to cater to borrowers in a more flexible and streamlined manner, Fintechs have been able to outmanoeuvre their traditional banking counterparts, disrupting the financial landscape and positioning themselves for explosive growth.

Adeshina Adewumi, the chief executive officer/founder of Trade Lenda, a digital financial services provider, said his firm’s absolute numbers had grown by 100 per cent in recent times.

“The numbers have gone quite high. In terms of users, we have grown slightly over 100 percent within this subsidy removal period, June and July. The increase in loans is generally across the board even though we do not focus on individuals. We focus just on businesses that need loans to grow their business, and we have seen the number grow significantly high. We have grown by over 100 percent in the last two months. People are requesting N50,000, which is the least we have recorded and as high as N5 million,’’ Adewumi noted.

The impact of inflation on businesses is further underscored by the insight provided by Olajuwon Marc, founder of TellerOne, a fintech startup focused on cross-border payments and remittances to Africa. Marc noted that the number of approved loans has been on the rise, as businesses struggle with the stifling effects of inflation, turning to loans as a means of survival.

“Things are now very expensive and the initial capital businesses have is no longer enough to buy things from the market, and they now rely on loans to survive this. We give out these loans to SMEs. The number of approved loans has grown to up to 70 per cent. The demand has surged to over 100 per cent. People always need loans, and the harsh economic realities now are driving this,’’ Marc said.

Despite facing fierce competition from the emerging fintech market, traditional banks have not been left behind, implementing various measures to enhance the accessibility and affordability of their loan products and services in a bid to maintain their foothold in the loan market.

Pushing back against the disruptive threat posed by fintechs, traditional banks are actively promoting their loan offerings, deploying targeted messaging campaigns to encourage customers to take advantage of their simplified and hassle-free loan application processes.

Some of these measures  as identified by Njideka Esomeju, the group head, consumer banking, Access Bank PLC, include digitisation, product design and flexibility, increased marketing and visibility.

“As a bank we have leveraged on technology and first-mover advantage to scale consumer lending and be able to serve our huge and growing customer base. We continue to record incremental numbers and potential YoY with the simplification of loan application, minimal or no documentation and instant disbursement via digital platforms including USSD short string, loan app and web portal where human interface is eliminated, and interaction is algorithm driven and attracts individuals who seek swift financial solutions. The benefit of convenience and speed here has been transformational,’’ she noted.

According to Njideka, personal loans are becoming increasingly appealing due to their versatility, catering to a diverse range of financial needs. She added that this comprehensive coverage, together with the inclusive nature of personal loans that allows individuals from various income levels to access loans within their capacity, has contributed significantly to the growing popularity of this loan type, particularly amidst the backdrop of  economic hardship.

Speaking from a consumer perspective, Blessing Onyemaechi, a Lagos based civil servant noted that  the constant loan messages from banks are both enticing and intimidating.

“I received a message from my bank offering an instant loan up to 400 percent of my salary in less than  five minutes with no collateral. It’s tempting, but I’m wary of the interest rates and repayment terms,’’ Onyemaechi said.

Pelumi Idowu, a small business owner, also shared her firsthand experience with the aggressive loan marketing tactics employed by banks, as she has been bombarded with messages encouraging her to take out a loan, a proposition she feels reluctant to embrace due to her limited income.

Despite her bank’s efforts to make loans more accessible, Idowu is cautious about borrowing, highlighting the need for responsible lending practices that prioritise borrowers’ financial well-being.

“I’m not interested in taking on debt, especially since my income isn’t stable enough to guarantee loan repayment,” she said.

Faced with the swelling personal loan market, analysts have expressed deep-seated concerns about the sustainability of such debt, particularly in the midst of an economic landscape marred by uncertainty and instability.

As the loan market continues to surge, analysts underscore  the critical importance of caution and transparency in the lending process. Nigerians seeking financial relief through loans are advised to take the time to weigh the terms and conditions of these loans, while banks and fintech companies are encouraged to prioritise ethical practices and the long-term financial health of their customers over short-term profits.