Breaking Barriers in Access to Finance for #MSMEs in Nigeria

By Olu Akanmu

Nigeria is estimated to have about 40m MSMEs, most of which are in the informal trade. With formal financial inclusion at just about 50% according to the last EFINA study, skewed largely to mid and upper income, urban demographics, it can be assumed that most MSMEs in Nigeria are not included in the formal financial system. Most of the #MSMEs would be nano enterprises employing two or three people, informal, unstructured and would largely trade or do business in their personal names. MSMEs in Nigeria are estimated to contribute 50% of Nigeria’s ?GDP and generate 88% of employment. Providing inclusive access to #finance for the 40m MSMEs in Nigeria is critical to ensuring we have a Nigeria that works for many more people, a Nigeria where prosperity is more widely shared. A more #inclusive financial system for MSMEs will also generate strong positive externalities for the larger economy in accelerated GDP growth, employment and expanded market demand for business that will create a further reinforcing loop of more employment, demand and investment and prosperity for Nigeria households and businesses.

There are five challenges that we need to tackle to break barrier in access to finance for MSMEs in Nigeria. These barriers are as follows:

1.????Inclusive and pervasive digital identity that works: Digital identity is the foundation stack in the financial system on which the payment, credit and other stacks in the financial system is built. It implies that efforts to create an inclusive #payment or financial system for MSMEs will be constrained by the reach, pervasiveness and inclusion of Nigeria’s formal #digital #identity system. MSMEs businesses are typically unregistered and informal. Most MSMEs do business in their personal names. Hence the basic digital identity for individuals is also what the MSMEs also need as their their personal and business lives are significantly intertwined. An effective payment rail in the digital financial system must know who is sending money and who is receiving the money being sent. This simple but effective digital identity system is also the first layer of building a secured payment system that prevents frauds and a payment system that users trust and will recommend to others. Building trust in the digital financial system is particularly important to MSMEs who would be using formal digital financial payments for the first time, for which concerns about fraud could be a significant barrier to adoption and usage. Formal digital identity is also the first data point in credit scoring in digital finance which along with payment and cashflow data of a formally identified customer, provides the information for the credit stack of the digital finance system. Essentially, who is borrowing and what does their payment and cashflow information say about them in determining the credit they could access.?

The government of Nigeria and the National Identity Management Commission (NIMC) must be commended for the very significant progress made over the last four years in pushing the reach of the Nigeria National Identity Number(NIN). The Central Bank of Nigeria as the financial system regulator must also be commended for the progressive regulation in KYCs that have now included NIN which now has a bigger reach that the Bank Verification Number (BVN). There are about 50 million Nigerians on the BVN. NIN has however grown very fast in the last four years or so with more than 90 million Nigerians formally registered on the NIN data base with biometric information tied to their phone numbers according the information given by the NIMC at the recent National Identity Day celebration. This is a real cheery news. The pace of growth of the NIN database in the last four years suggests that there would be 100million Nigerians registered on the NIN database by 2023. This will be a real, big historical milestone for the Nigeria digital identity system with wide ramifications for inclusive digital finance. 100 million Nigerians with formal digital identity by 2023 implies that we can theoretically have 100 million formal financial accounts (bank or wallet) by 2023 if we can provide all NIN holders with formal financial accounts. A rallying cry to the ecosystem is therefore – what must we all do as players in the financial and digital ecosystem to bring this to reality? The social implications in inclusive digital finance would be massive.?

One of the key task we must tackle is the quality of the NIN database for identity verification. Experience suggests that there are still significant challenges with the quality of the NIN database. At a recent Premium Times Twitter space on the NIN with representative of the NIMC, there were significant public complaints on the pains and success of identity verification even for individuals who registered and uploaded their NIN records. These challenge needs to be fixed for the benefits of the NIN database to be fully harvested for financial inclusion.?The tech ecosystem should also work with the NIMC to build address verification system that complements the biometric and phone number information of NIN. ?Using geospatial and geolocation technologies, how can we verify the claimed addresses on the NIN database where necessary to improve identity records and do so with speed and agility of the low transaction cost that digital technology enables.

2) Accessible and affordable merchant collection solutions that can scale and reach millions of MSMEs:?Current card and offline traditional Point of Sales (POS) terminals that are deployed in Nigeria for merchant collections, where the POS terminals cost about 60 dollars per terminals are expensive and cannot scale to serve millions of small merchants. Sixty dollar terminal cost implies that current merchant collections solutions are exclusive and only available to large merchants where the unit economics of terminal cost could be justified.?Yet providing digital solutions that enable millions of MSMEs to get paid conveniently offline could be a powerful method to get millions of informal MSMEs digitise their offline payment collections and establish a digital payment footprint for their business. Such offline digital payments would be the precursor of their online payment collections as they get comfortable with digital technologies and extend their business online. The offline digital payment collection also improves the formalisation and business efficiency of the small merchant enabling them to access software as a service tools like inventory and working capital management as they scale while providing the digital payment and cashflow data to access credit.

We need to push more on the industry and ecosystem cooperation to build alternative and affordable merchant collection solutions and rails like the QR (Quick response) code. This will need some initial heavy lifting and coordinated push on the issuance and acquiring side with ecosystem investment in payer and merchant awareness and user-friendly product design.?The business and social returns of the push and investment would be well worth it if we could bring at least 20 million of the 40millions MSMEs in Nigeria on the affordable and scalable digital payment collection rail. Other alternatives such ?as tap and pay where the android phone of the merchant could serve as a payment collection terminals should also be pushed.??

An additional benefit of the QR and other non-card account to account merchant collection and payment solutions is that the payer pays rather than the merchant who would be typically charged 0.5% of the collection, popularly known as the Merchant Service Charge (MSC) for card payments. For the MSMEs, the MSC may be significant relative to their trade margins and may be a disincentive to the use of digital payment collections.

3) Smartphone, affordable internet and USSD: Smartphone penetration in Nigeria is increasing, helped significantly by more affordable pre-owned phones, estimated currently at 37%. ?Data however needs to be more affordable to get more of our MSMEs to consistently use their phones for digital and micropayments. Because of expensive data, quite a significant number of lower middle and lower income demographics in Nigeria would switch off their WhatsApp connection and only turn it on periodically. This suggests that data cost are expensive relative to income of lower income demographics in Nigeria and would constrain the consistent use of digital payments even as smart phones get more affordable.

Also USSD pricing per session charge at N6.98 plus a minimum of N10 per payment implies that a minimum USSD payment cost of about N17 at the minimum. This would be very expensive for millions of nano-enterprises and MSMEs and those who might want to pay them for very small or micro-payments. It would constitute a disincentive for usage of the USSD platform that should be ordinarily offering inclusive payments given that the USSD phone is the most accessible and affordable for millions of MSMEs and their customers. We may be having a potential market failure problem in USSD pricing where the social returns of more affordable USSD pricing in financial inclusion is far bigger than the private commercial returns that could be appropriated by #USSD service providers. This calls for some of regulatory intervention to rethink USSD pricing in the larger public interest of financial inclusion of millions of MSMEs and small holders farmers in spaces like agriculture. If we could bring additional 40milion MSMEs and their customers to use USSD payment consistently and affordably, the social returns in financial inclusion and lifting millions out of poverty would be huge. The current commercial market for USSD usage might even multiply 3X in volume which could more than compensate for lower and more affordable prices. The financial services industry should also consider more affordable transfer fees below N10 for micro-payments to provide incentives for trillions of Peer to Peer (P2P) micro and nano-payments that could be done digitally which would also accelerate #financialinclusion with big positive externalities.?

4. Smarter AI and ML?for alternative credit scoring and smarter risk pricing: The evolution of fintech platforms providing lending through alternative credit scoring for people, typically MSMEs ?without traditional financial records who have been historically excluded from credit in the financial system is very commendable. Interest rates on these lending platforms which could be as high as 10% monthly and 200% or more on annualized basis suggest that the digital lending platforms might be significantly overpricing for risk in their alternative credit scoring model. While such pricing makes digital lending very profitable, they are expensive and potentially limits the reach and uptake of digital lending products for millions of the excluded who ordinarily, the new alternative digital lending platforms should serve. It comes with significant social cost in lost opportunities to provide wider access to credit and lift millions out of poverty. Prevailing alternative credit scoring models in the market seem to assume the worst of the borrower and tend to use the most risky borrower to price for risk and interest rate. It tends to penalise the good borrower who has to pay the risk price or high interest rate of the worst borrower. It dis-incentify the patronage of credit for the good borrower and potentially limits the growth of the alternative digital credit market in long run. Smarter #AI and machine learning models are needed that segments risk pricing more smartly based on borrower risk profiles essentially ensuring that the good borrower pays far-much lower interest rates.?While some lending platforms are moving in this direction,?the fact that median interest rates on the digital lending platforms are still generally high, suggests that the #AI and #ML models would still need to get much smarter to deliver affordable borrowing rates to many good borrowers. It will ensure that credit works for the good borrower, do not further impoverish them and that such pricing do not become a barrier to credit access and uptake for the MSME.

5) Credit bureau system should also cover the fintechs. All Fintech digital lenders should also subscribe to credit bureau: Credit bureau coverage today covers the banks mandatorily. Fintechs in digital lending do not seem to have a regulatory mandate to subscribe to and share credit history of their borrowers with the centralised #credit bureau. While alternative credit profiling as done by each digital lender is a competitive asset based on the smartness of their #AI, current system implies that there is no central ecosystem view of the credit profile of the new types of borrowers being served today by the fintechs. This becomes even more important as the share of lending done by the #fintechs in the credit market grows, as they serve more customers who have been historically excluded from traditional lending. ?Credit bureau data with a wider coverage would provide useful complementary data to the alternative scoring model of fintechs and digital lenders, thereby helping to improve the accuracy and predictability of their risk pricing. Improved predictability and accuracy of risk pricing would lead to lower interest rates as borrowers with good credit history could be more easily identified and offered lower interests in tandem with their good risk profile. This would have a reinforcing effect on the credit system as more borrowers have incentives to build a good centralised credit history and access lower interest rates. It will also reduce the tendency to shop around by non-credit worthy customers who create bad credits across the fintechs platforms as each fintech has only their own silo view of the credit worthiness of the borrower.

Credit bureaus will also need to reform their pricing and their systems to serve the small borrower like the MSME. Current pricing of about N700 per credit check will not be suited for the small ticket and micro loans of the MSME.?

Conclusion?

The opportunity has never been greater for real substantial progress in the #financial inclusion of MSMEs in Nigeria. The convergence of more pervasive digital identity, innovative technologies in merchant collections and credit implies that we have an historic opportunity to include at least the next 20 million MSMEs in Nigeria in the formal financial system with the associated positive externalities in social impact and inclusive economic growth. We will achieve together with this, a Nigeria that works for many more people. We must not fail this historic duty.?

Olu Akanmu is President and Co-CEO of OPay-Nigeria. He writes from his multi-industry experience in #telecoms, #banking and #fintech. The content of the essay was given in a speech at a recent EFInA ( Enhancing Financial Innovation and Access in Nigeria ) program on ?#MSMEs financing.