The rise of unregulated payday lenders: A ticking time bomb!

It was supposed to be a serene and calm worship service at my local community church one Sunday, but angry policemen marched in, whisked away our head of children‘s department, took her down the community street and, to our chagrin, handed her over to some street urchins who began to beat even death out of her.

 This happened some years ago. But why did it happen? How come our dearly beloved sister found herself drawn to the sweet enticing claws of a loan shark (Uncle Hulk), better known today, as payday lenders? Apparently, she was desperate and lonely. She was a 46-year-old trader with three kids who found herself in a need that fuels the demand keeping the likes of Uncle Hulk in business. It took God’s intervention and the swift donation by church members to save her that day.

 But who would come to the rescue of these desperate borrowers? Who is watching or regulating these non-bank intermediaries who loan money to helpless creditors with unbelievable interest rates and unprintable conditions.

Payday lending usually works like a collaboration between agents and their kingpin; the agents fish for people in need of cash and tells them of their boss – the kingpin – who can loan them at a rate, provided that they can pay back on the day their next salary is received. Unfortunately, these creditors most times default in the loan repayment, and the real menace begins. Some kingpins begin to increase the interest rates from the day of default, while others use all manner of force to take whatever earthly possession the creditor has in a bid to recover their loans.

 You see, all over the world, there are traditional and non-traditional financial markets. Some of these non-traditional methods are rooted in ancient practices like Esusu, Ajo etc that precede financial regulations.

 While rising literacy and improved technology have helped to regulate and harmonise financial systems, the truth is that there are parts of the world, especially in underdeveloped and developing countries that are yet to be reached by conventional markets.

 Sharp practices of financial institutions, service failure, poor turnaround time, communication challenges and poor relationship management have contributed to the continued existence of these non-conventional financial systems.

 Youngsters like Akin, who even prefer their services based on certain flaws long to be corrected by the commercial banks said: “I needed the money urgently to pay for my programme and I needed it in 48 hours. The bank won’t give me because it would exceed my Debt-Service Coverage Ratio (DSCR). So I borrowed and paid back. Yes the interest was high but the need was greater,” he said, when probed on his continued patronage of the payday lenders.

 Interestingly, the operations of these lenders have grown viral aside the unconventional methods; there are countless institutions who give out loans and credit facilities without the proof of employment. The institutions charge as high as 40 percent and some go as low as 5 percent but one must be a taxpayer, or must upload some supporting documents, personal banking details, guarantors etc to access such loans which are also usually in very small amounts.

 “They have a form of collateral too. They often ask for post-dated cheques and they prefer salary earners. In the event that you can’t pay, your cheque is presented. If it bounces then you risk losing your job and nobody likes that, but the reason people turn to those guys is the speed at which they respond,” says an economist who spoke with business a.m. on the matter.

When asked about his opinion on the activities of the payday lenders, he said: “I don’t particularly approve of them but their existence is necessary to reach the unbanked. In the end, banks are being forced to become innovative and tap into that market by offering similar products”

 Nigeria’s Central Bank (CBN) has also begun to give out licenses to some of these other financial institutions like Credit Direct. “The licensing helps keep these institutions under regulation, however a larger proportion of such lenders are unregulated and there is very little the CBN can do,” said an official with good knowledge of the matter.

“It’s a purely personal business and people patronize them based on choice. It’s like CBN trying to regulate me lending money to my friend and asking for interest. It really isn’t CBN’s business. The people it creates an issue for are banks because those guys are essentially competing with banks by doing the same thing banks do and as such thinning bank’s income lines and taking potential customers,” the official said.

Meanwhile, the solution to this need for money known to be man’s highest desire after salvation is beginning to get more explored by the Nigerian banks and other financial institutions, a deeper exploration of this need could, however, lead to capturing the teeming number of Nigeria’s worrisome unbanked populace.

Today, the likes of Access and Sterling banks are leading the pack in such service delivery with their service solutions like Payday loan and Specta respectively.

Access’ salary based instant loan product is for employees of organizations who meet their risk acceptance criteria. The bank charges upfront fees of two percent flat and insurance of 0.15 percent of the loan amount is taken upon loan disbursement while an interest of three percent flat is taken at the point of liquidation, with a tenure of 31 days maximum or payday whichever comes first.

For Sterling, the bank developed a platform that allows one access loans in five minutes with minimal requirement. The bank, last Friday announced that a whopping N2 billion had been loaned to salaried workers who are members of the lending platform’s pre-approved community.

“Essentially if you’re a salary earner in a company that has been on board to the Specta platform, you can access a loan of up to N1.5 million and pay for a period of up to 24 months as long as your monthly repayment does not exceed 33.3 percent of your monthly pay,” one of the bank’s staff told business a.m. Since the recipients salary accounts are domiciled with the bank a standing instruction for the repayment is placed on the account for payday.

 These solutions although laudable, still need fine-tuning, the bouquet of opportunities is yet to be filled and extended to all walks of businesses prevalent and peculiar to the Nigerian environment, especially the informal sector.