Digital credit options gain favour with Nigerian MSMEs
Small businesses in Nigeria have long been hampered by limited credit options. But digital transactions are getting a toehold in this largely cash-based economy. As a result, alternative credit solutions that serve the needs of MSMEs are now on the menu there.
Cash transactions continue to dominate the Nigerian economy as its huge informal sector is excluded from financial services.?
Small businesses see cash as an easy, fast, safe form of payment. There are over 39 million micro, small and medium enterprises (MSMEs) in Nigeria of which 97.8% operate informally and are largely cash driven. On the downside, this preference for cash reduces the ability of credit providers to capture financial flows and leverage these for credit assessment.?
However, more Nigerian businesses are starting to adopt digital payments: in the first seven months of 2022, the volume of mobile financial transactions increased by 150% when compared to the same period in 2021.?
The shift can also be seen in point of sales (POS) transactions. Between the first two months of January 2021 and 2022, POS transactions in Nigeria surged by 86%, with POS terminals becoming increasingly popular among merchants. This increased adoption of POS devices, in particular, presents an opportunity for alternative credit providers to offer more cash-based lending products.?
This presents an opportunity for alternative credit providers to offer more cash-based lending products and to extend credit through solutions such as the merchant cash advance (MCA), an alternative credit product where the lender provides the business with a cash advance that it pays back through a percentage of its customers’ card payment receivables.?
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It stands to reason that any credit solution that seeks to simplify the credit process, with low-cost options that can help a small business with cash flow management, will be met with high demand, as has been the case with South Africa’s?Yoco’s cash advance solution. Since Yoco’s product was launched at the beginning of 2019, loans have been disbursed to more than 4,000 merchants. Other pioneers in the South African market are?Retail Capital,?Ikhokha,?Merchant Capital, and Lulalend.
In Nigeria, the merchant cash advance solution is still in its nascent stages. However, service providers are emerging and offering similar solutions. Players piloting the service in the market are Baxibox and Flutterwave.?
Flutterwave’s merchant cash advance product -?Flutterwave Capital, is currently open to businesses in Nigeria based on their payment volume and transaction history with Flutterwave. The plan is to expand the programme to cater to other businesses everywhere on Flutterwave.?
In 2015, Capricorn Digital Limited?(now acquired by MFS Africa)?also introduced a POS device known as ‘Baxi Box’ to help improve online business transactions on a real-time basis.?Sukfin?is another Fintech offering merchant cash advance solutions to MSMEs by leveraging their POS transactions data.??
Overall, the emergence of these alternative lenders is promising for Nigeria's MSME credit landscape. The uptake of these products, however, may be slow as the country's economy gradually transitions away from cash, especially in rural areas.?