Many SMEs Divert Business Loans to Building Houses

Blended: Stories of Nigerians Accessing Finance


We speak to a Senior Relationship Officer in a Bank about how the change in Central Bank of Nigeria Loan-to-Deposit ratio is boosting Consumer Lending and whether this is a model for increasing loans to SMEs.


The CBN has increased loan-to-deposit ratio for banks from 60 % to 65 %. Has your target to give out loans increased?  

In the last six months, banks have become more aggressive to get more loan transactions. So every staff member is under pressure to process more loans. Targets for loans come from the headquarters. They tell the branch manager that your branch has to give loans of, say, N600 million to your customers this year. Then the branch manager shares this target amongst everyone. I have a bigger share now.

Have the conditions customers need to meet to qualify for loans been softened since the CBN increased the loan-to-deposit ratio?

For individual consumer loans, the conditions have changed. They are now more flexible. Many banks now offer loans to customers with good turnover even without the customers asking. They send text messages telling them you qualify to get this amount in loan. You are offered a loan based on how much you keep in your account over 3-6 months. This is a gauge of your income and ability to pay. In my bank even people with savings accounts can get this type of loan if their credit record is good.

Even without collateral?

No, you don’t need any collateral for consumer loan. You don’t even need to say what you want to do with the money. And the bank doesn’t even need to know where you work. Before you got consumer loan to purchase an asset like a television and this was given only to people working with well-known big companies. The policy has certainly boosted consumer lending.

Could the CBN policy also increase the risk of more people not paying back loans?

Personally, I have a concern. I foresee a situation where the banks would have a lot of bad loans in the nearest future. This is what I mean: for some of these guys we are lending to due to the turnover on their accounts, we do not know if the money in their accounts is actually theirs. For example, a person might get a contract for three to five months, and not get any contracts again for the next three years. Say this person does a turnover of N20 million and gets a soft loan of N3 million to pay within a year. What if he does not get another contract or steady cashflow that would help him to pay? We are going to have that situation eventually. I am very certain.

Do you feel people are applying for loans they naturally would not have applied for just because they have been informed that the loans are available?

The average Nigerian will jump at the opportunity to take a loan even when he does not have a need for it. The mere fact that he is qualified seems to him like a golden opportunity to get his hands on funds and later decide what he wants to do with it later. That is the mindset. We have a very poor understanding of bank facilities. Some people see it as their own share of the national cake. So, they feel entitled to take the money and then, of course, the payment becomes a problem.

Don’t you think people will think twice about damaging their credit record?

I don’t think our system is ready for an expansion of access to credit. Even the process of credit-checking and all of that is not enough. I am aware a policy was being discussed that would allow Bank A to debit your account with Bank B should you be owing Bank A. I don’t know what became of the policy, but I believe that would be a game-changer. People take loans and go deposit it in a different account. Surely, we have a system of tracking people’s loan-taking history across banks. But that is not the point. There are people who are credit-worthy today that may not be credit-worthy by next month. So, you take a loan today and would not end up servicing it. Some do not even have any concrete plans for paying back the loans.

Out of every ten Nigerians who take loans, how many do you think have plans to pay or have the capacity to do so?

I have to mention that some people do want to pay back but they do not have the means of doing so. We know that the economy has not been growing. There are no new jobs. The impact of coronavirus on the economy will make things even more difficult. Some people will take the loans and start paying back as agreed within the first and second months. But by the third month, they will start defaulting. We also have people who will pay no matter the difficulty. I think that category contains about 50% of Nigerians.

SMEs are the engines of job creation. Will easing conditions for SME loans better boost the economy?  

I manage over 400 SME accounts and I can tell you that if conditions are eased for SME loans as they have been eased for consumer loans their level of default will even be higher. For an SME, when you take a loan, the right thing to do is to invest it in a business that will fetch profit so you can pay back, obviously. The average Nigerian running an SME will take the business loan and pour it into personal projects like building a house. The house project will not generate the cashflow to allow them to pay back the loan. I have a lot of cases like that. I have a meeting in the next few hours with a customer who has had a bad loan for the past three years. He diverted the money from business to house construction. This is very common.

So how can SMEs learn to use bank credit better?

 Our SMEs have to learn to work out why exactly the need a bank loan and if it is good for specific business they want to do. A business owner should study his or her business very well before approaching the bank. You should have made projections to know if the loan is necessary. Sometimes you take a loan and end up making a loss in the business just because of the interest on the loan you have to pay back. For example, I want to do a supply of N5 million and I want to make a profit of N200,000. The cost of the loan is N100,000. That means I am left with N100,000. I am going to pay staff from the remaining N100,000. It might be best to not take that loan at all. Sometimes, I advise customers against taking loans after analysing the cost of the loans, the cycle of the transaction, the interest implication and the projected profits they stand to make from it. Most times, the customer comes back to thank me for advising against it after realising what terrible decisions they were about to make.

Have banks become competition to Fintechs due to the CBN pressure?

For those guys, I will say they changed the banking system. Initially, banks were only looking for people who had complete documentation and all of that strict corporate stuff. But the Fintech guys came and saw an opportunity to give loans to people who are not as documented as the banks want, but who will pay back. They played into that market. Today, the banks are coming back to compete with them in that space.

So, will the banks eventually kill Fintechs like Cowrywise, Carbon, PiggyBank, Kuba?

The good news is that the market space is so vast there is enough room for everyone to make profits. That is because of the unstructured system. For instance, we have more money outside the banking system than in it. We still have millions of unbanked Nigerians. Even for corporate professionals, you still have people with safes at home and other alternative means of keeping money. I am privy to a lot of information through my job in the bank and my research as an economist. I can tell you that we have trillions of naira outside the banking system. It makes it difficult to know just how big our economy is. There is still a lot of money that could be mobilised to create credit. So, I think the Fintechs opened the eyes of the banks. They are making billions. So, banks decided to bend their rules for consumer-lending. Normally, banks would never dream of giving their facility to a savings account holder. It could never happen. And they would not make their judgment merely on turnover. You know turnovers can be manipulated. But banks are trying to reach more people.

How has trying to create more loans affected your day-to-day routine?

There is a lot of pressure because the CBN wants to put more money in the economy. There are fines for those who do not meet the new loan-to-deposit ratios. So, banks put the pressure on us. What we do is to increase our monthly target and give out more facilities. Banks have also relaxed standards for assessing risk. You can lend to more people when you don’t require collateral or a long history of relationship with the bank. Banks have developed new products that have removed these barriers to lending. Superiors breathe down our necks if they think we are not selling this product as much as we should. So we have to speak to many more people in other to create loans. So there is just more pressure. The more people you engage, the more facilities you can give out.

So are you doing more personal or more corporate loans?

It depends on the bank’s strategy, really. Some banks are retail banks. For such banks, you can expect most of the loans to be personal or consumer loans. You also have to consider the volume of loans. For a bank focussed on corporates, two customers might account for a facility of N10 billion. A retail bank might need up to a million customers to get that figure. It is not quite straightforward. Most times, banks tend to seek out large corporate loans because that is where the money comes from. CBN wants a certain percentage of the deposits to be loans, it doesn’t matter if your bank meets it by lending to individuals, SMEs or big corporations. But it is easier to meet the target if you lend N2 billion to Dangote than by chasing people to lend N500,000 to.

What is the best credit you have ever processed?

The best credit I have ever processed is a cash-backed credit. A cash-backed credit means that, for instance, I have N10 million and I approach the bank to ask for a loan of N9 million. I give the bank my N10 million and they loan me N9 million. Indirectly, I am using my money. The point is that because it is my money, I take the whole credit process seriously because I know they are holding my money. Because I have something at stake, I tend to take the whole thing seriously so I can go take back my collateral.

But how does this work? Why give your N10 million to a bank just to get N9 million? What’s the point?

There are a lot of reasons one might do that. You might have reserved that money for a project and you don’t want to use it yet. You could have an investment the money is supposed to service later. So, you can put that money in a fixed deposit and asked the bank to give you a loan out of that money [in this case, N9 million out of your N10 million]. You want to separate the project the money is reserved for from the one you need the loan for. You don’t want to mix them up so your finances do not get confusing while trying to manage both projects. So, you take a loan out of the fixed deposit and work judiciously to make sure you pay back as at when due so that at the end of the loan, you can get your money back and use it for the first project it was originally reserved for. Instead of expending your original N10 million on another project, you can put it in a treasury investment and get 18% per annum there, which you can use to offset part of the interest from the bank. You can take that money from the bank for free, in terms of paying interest, while you can get income from other sources overtime. Instead of taking that bulk sum and expending it on a project, you can put that fund in an investment, get it back from the bank and also get an interest. So, the investment becomes your collateral.

Have you processed a lot of this cash-for-collateral loans?

Yes. I had a salary earner who took money from the bank to buy her property. She had a treasury investment that was earning income for her. She knew she would get the principal from her salary overtime and she was also earning investment. So, the investment itself is paying back part of interest on the facility. Whatever income she was getting from the treasury, she used it to offset the interest on the loans. She is also offsetting it bit by bit from her own salary. So, she got 3 to 4% profit for yourself because she got money from the bank rather than using money she had invested.

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