Four-point agenda for Nigerian digital finance in 2018
The digital economy will help the country unlock innovation, job creation, and linkages to the global supply chain.
After the Nigerian economic downturn of the preceding two years, the recovery, which began in Q2 2017, is expected to gain traction in 2018. One of the important lessons of the economic meltdown is that the economy must be resilient to external shock in the new growth cycle.
To realise a more robust growth, improvement in credit penetration to the real sectors and the SMEs is imperative. This means the intermediation role of the banking sector will be crucial in 2018 and going forward. To optimise the role of banking, or more precisely financing, we have to unlock digital finance.
The wider Nigerian digital economy must also become a key frontier in the quest for economic diversification. The digital economy will help the country unlock innovation, job creation, and linkages to the global supply chain. To make this a reality, as opposed to the usual pipe dream, I'm raising a four-point agenda for Nigerian digital finance in 2018.
1. Prime the credit bureaux for SME lending
The Credit Reporting Act, 2017 and the Secured Transactions in Movable Assets Act, 2017 – otherwise known as the Collateral Registry Act – were signed into law in March. The Credit Reporting Act provides the legal backing for the credit bureaux (CBx) who supply the lenders with borrowers' credit information. On its part, the Collateral Registry Act supports the registration of the assets provided with loan applications and the verification of the status of such assets in processing new loans.
These two legislations are mutually-reinforcing. They are expected to support more secured lending and at the same time make borrowers more successful with their loan applications. But even before the legislative enactments, there has been the notion that the credit industry has been significantly boosted by the operations of the CBx, namely CRC Credit Bureau, Credit Registry Bureau, and XDS Credit Bureau.
According to the Central Bank of Nigeria (CBN), the number of borrowers registered by the CBx reached 29 million in 2015. The CEO of CRC Credit Bureau, Tunde Popoola, said the CBx had helped to raise the value of loans granted in Nigeria from N7 trillion in 2014 to N12 trillion in 2016. He also said the CBx helped to reduce non-performing loans (NPLs) from 24 percent in 2012 to 4.52 percent in 2014.
However, the NPLs data may be the clearest indication that the celebration of the successes of the CBx might have been too early. According to the IMF, the NPLs of the banks grew to 15 percent by Q2 2017.
Over the last two years, credit market expansion has been constrained by CBN's tight monetary policy and the huge deficit financing programme of the federal government. And a 2016 report by the Bankers' Committee shows that 100 companies accounted for 75 percent of loans granted by the Nigerian banks. Therefore, it would appear that the economic cycle and some longstanding issues against lending to the SMEs have continued to exert more influence on the credit market than the role play of the CBx.
To reverse this trend, the CBN needs to start enforcing its 2008 directive to the banks, that they must use credit reports supplied by the credit bureaux in processing loan applications. The directive was deemed to be crucial for improving credit access for the SMEs ten years ago. The same is still true today.
The use of credit reports of the CBx will also help improve their cashflows, ensuring they can continue to innovate and invest in new products. To underscore the possible prevalence of financial stress in the CBx, one of them had to raise additional capital of N500 million through a rights issue in 2017.
The credit bureaux need to be primed to help improve lending to the real sectors and the SMEs, especially as the CBN inevitably starts to loosen monetary policy in the course of the year.
2. Provide regulatory framework for crowdfunding
In contemporary and functional terms, crowdfunding means raising money from a large number of people, using the digital platforms. The “large” number of people are reached with the aid of technology. But traditionally, crowdfunding for businesses and charitable causes have been provided by family members, friends, communities and passers-by, as in street begging.
A modern crowdfunding industry has partially taken off in the country. The Securities and Exchange Commission (SEC) says equity-crowdfunding is outlawed until it puts in place a regulatory framework for it. In the meantime, the donation segment has kept alive a market that can play an important role in financing innovation and small businesses in the absence of venture capital funds.
In modernising the Nigerian crowdfunding market, political donation has been the elephant in the room. But political donation is big business, not only in Nigeria but also in the United States, the self-proclaimed champion of democracy. In Nigeria, politicians “invest” in politics. If the “investment” is made in self-sponsorship, the elected politicians would then try to generate “returns” by embezzling public funds. Such funds are also “reinvested” into their campaigns for re-election, thus perpetuating a vicious cycle of public sector corruption.
The dysfunctions of the underground political donation industry in Nigeria notwithstanding, crowdfunding for political causes can help well-meaning political office aspirants to scale the high financial hurdle they struggle with. This barrier has kept many Nigerians of modest means, but who possess technocratic competence to improve the quality of public governance, from seeking election into public offices. Broadening the base of political financing will expand the political stakeholding, which is a necessity in improving the quality of governance.
2018 would make it two years since the now-suspended Director General of SEC, Mounir Gwarzo, said he acknowledged the growing interests among Nigerians to use crowdfunding to raise fund. SEC needs to deliver the needed regulatory framework this year. Advocacies for the enabling regulation should remain strident until that happens.
3. Provide regulatory clarity on cryptocurrency
Until mid-December, analysts had looked to 2018 for answers to the questions on whether Bitcoin could sustain its upward price movement over the medium term. From $997 on January 1, 2017 the valuation of Bitcoin rose very sharply to $19,343 on December 16th, according to data by Coindesk. That was 1,838 percent rate of return for investors in the digital currency.
However, Bitcoin experienced a price collapse in the third week of December. Since paring its dramatic loss of value, the cryptocurrency has struggled to sustain an upward trend, ending the year at $13,860.14.
Digital currencies, Bitcoin being the runaway leader, will remain in the reckoning of investors in 2018. Bitcoin's market capitalisation dropped from its peak valuation of $327 billion in mid-December to $224 billion at the end of the year. But the total market capitalisation of the cryptocurrencies reached $593 billion on New Year's Eve.
Digital currency has a symbolic importance for Nigeria, and indeed the African continent. Africa is expected to leverage the digital economy to close its innovation gap with the advanced economies. The continent is also expected to harness the digital economy to develop economic sophistication that would enable it participate more in global trade.
However, Nigeria is playing the cautious game with cryptocurrency. Last year, the CBN banned the banks from investing in, or trading, cryptocurrencies, until further notice. There is, therefore, a regulatory lacuna in the country for digital currency, instead of innovation and leadership.
To be clear, cryptocurrency is a metaphor for Nigeria in fostering a digital economy. Emerging markets that are thriving on technology and digitalization, including China, South Korea and India, are not simply tentative about digital currency. They have embraced its opportunities while addressing its risks. If Nigeria continues to be fixated on the risk, we may also be a laggard in developing use-cases for Blockchain – the landmark technology that enables transactions made with Bitcoin or other cryptocurrencies to be publicly recorded in a chronological order. Many astute observers have seen the Blockchain as a major technological innovation that will power the financial markets in the future that has already begun.
In 2018, the CBN should at least remove the ban on cryptocurrency. Banning is simply a crude regulatory tool. Harvard economics professor, Kenneth Rogoff, recently said: “The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates – and there is no reason to expect virtual currency to avoid a similar fate.” His message should not be lost in the negativity of his intonation. Cryptocurren-cies are here to stay. Nigeria needs to develop the astuteness to effectively regulate innovation industries.
4. Combat electronic fraud
The trend in Nigerian e-banking is that the number of fraud cases are rising while the amount of money involved in the frauds are declining. According to a recent CBN report, the number of cases of fraud rose from 1,461 incidents in 2014 to 19,532 in 2016, which represents 1,236 percent increase. However, the amount involved in the frauds dropped by 43 percent, from N7.75 billion in 2014 to N4.36 billion in 2016. During the same period, bank transactions value rose from N43.85 trillion to N64.18 trillion.
This suggests Nigeria is winning the fight against electronic banking fraud, while at the same time growing bank transactions at a very impressive pace. These successes may have prompted CBN Deputy Governor, Operations Directorate, Bayo Adelabu, to say the CBN targets “zero” electronic fraud in the banking sector. But such an overly optimistic target might be a hint that the CBN oversimplifies the fraud problem, and very likely, underreports it.
Electronic banking fraud has been hardly eliminated in any of the advanced economies where adoption of e-banking has moved through the growth stage to maturity. Moreover, the threat of cyberattack is growing around the world. Financial institutions and their infrastructures are often the prime targets of cyberattacks.
It is also doubtful that the CBN report is comprehensive. In actual fact, it cannot be, not least because incidents are often under-reported by the banks and the financial technology companies. A rosy picture is also good for the CBN. And we may ask whether fraudulent excess charges by the banks are also factored in the figures. Last October, the CBN said it compelled the banks to refund N50 billion excess charges to their customers over the last three years. Excess charges have become quite rampant with the multiple bank charges, some of which are for e-banking services.
Nevertheless, the indication of progress that has been made, as reported by the CBN, is important and should be sustained. Using the report as a basis of further discussion, the CBN and various stakeholders should try to curb the growing number of fraud incidents in 2018. If the number of cases is growing but the total value involved is on a decline, it would mean the average value of a fraud case has declined. But if the cases continue to mount, the likelihood of big amounts being involved in some cases remains. If the risk crystalizes, it would change the current pattern.
Besides, a growing number of cases of fraud will slowdown potential adoption rate of banking in general, and electronic banking in particular. Both have implications for the formalisation of informal sector businesses and driving the Nigerian digital economy.
Jide Akintunde is Managing Editor, Financial Nigeria; he is also Director, Nigeria Development and Finance Forum.
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