CREDIT ECONOMY is one in which transactions often occur on credit terms, payment is deferred through loans, credit cards, or trade credit. In other words, payments for transactions involving credit are not necessarily made immediately.
Unlike in advanced economies, the credit system is just emerging in developing nations and is yet to be embraced by the majority. Some providers now allow phones and other electronic devices to be bought and payments made in instalments. This credit culture is now being promoted even for the unbanked. Quite recently, lending apps and digital banks like Palmcredit, FairMoney and Renmoney offer uncollaterised loans based on digital credit scores. Some microfinance banks now give small loans to traders and farmers with group guarantees, which is a step away from traditional cash systems. However, promoting wealth through the credit system still faces prevalent obstacles, highlighted: here.
Trust deficit between individuals C2C, between corporate bodies B2B, among business entities and between individuals and corporate entities B2C are integral to the low level of credit-based transactions. In particular, banks are averse to lending without material collateral. Even with the collaterals, banks, especially the deposit money banks, mortgage banks and microfinance banks are still reluctant to lend. Their arguments and defence are hinged on default, inconsistent repayment, business nature and cashflow, current turnover.
Regulatory constraints pose a serious constraint on banks and their lending activities. Prudential guidelines tend to hamstring the banks, just as flagging borrowers’ names on Credit bureau tends to hinder borrowers from accessing money. Material things count for eligibility for credit as in goods, assets, funds under lien, bonds, stocks and shares, but intangible assets are yet to gain traction as in cases of innovation, invention, registered trade marks, or other forms of copyright ownership. Ironically, without any collateral, politically exposed individuals such as government officials, politicians and tenured appointees get bank credits far beyond their monthly salaries from banks, even without formal requests.
Productive sectors fail and innovative ideas do not make it to the market for lack of access to credit. Nigerian banks have no place for them yet. And, without such privilege, not much will happen in wealth creation and in building the economy outside petrol and tax revenues, especially when such ideas do not resonate with banks.
Venture capitalism is yet to thrive and so it’s yet to build many businesses from ground zero without credit facilities. For food production, to get farm agricultural inputs or equipment on credit and pay back upon harvest still remains problematic. In the educational sector, intelligent but indigent students are deprived of access to loans for study, to pay back after graduation and getting jobs. They are all elusive. Agricultural Credit Guarantee Scheme of the Central Bank of Nigeria (CBN) failed for a number of reasons, part of which have been enumerated.
Generally, the problems that are weakening the prospects of credit based transactions need to be tackled. It bears repeating emphasis on trust deficit. Others include inflation, which is associated with an unstable value of local currency; high cost of doing business, like in the case of electricity, transportation, insecurity, extortion by uniformed officers in the military and paramilitary forces, official corruption, policy somersault.
Hire purchase of cars was once in vogue in Nigeria. And it worked well. What killed it? Contract manufacturing, with input credit can boost the industry, but sellers of inputs usually decline credit sales for later payment in favour of cash in hand as agricultural commodity prices fluctuate with seasons.
Credit economy will receive a boost by improving the following:
- Financial literacy and trust: People are to be educated on how credit works, responsible borrowing and interest rates. Trust should be built in digital systems and institutions.
- Digital identity and credit scoring: BVN and NIN enrollment should be widespread to allow for unique identification. Digital lenders should be able to use transaction history, airtime use or phone data as parameters to score credit.
- Mobile banking and fintech integration: Mobile wallets should be promoted to ease cashless transactions. Users are to be allowed to build credit records based on mobile activity.
- Enhanced policy and regulation: Central Bank and government should encourage formalisation of informal markets; protect borrowers with consumer credit laws; and support financial inclusion.
- Incentivising MSMEs and traders: Tax breaks or grants should be offered to traders and SMEs that are able to register and adopt formal banking systems. Marketplaces are to be encouraged to accept digital payments and issue receipts.
- Building credit infrastructure: Credit bureaus should expand coverage to include informal lenders, cooperatives and fintechs.
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