Time to restore consumer credit

By Osaze Omoragbon

Few years ago, many Nigerians snapped consumer goods from shelves in shopping malls with ease. Electronics and other household appliances topped the list of consumables bought by the public. This shopping spree was fueled by consumer credit made available by banks prior to the outbreak of the global financial crisis. The intervention of the Central Bank of Nigeria (CBN) in 2009 following the near systemic collapse of the banking sector reined in banks’ lending which underpinned the growth of the Fast Moving Consumer Goods segment of the economy. Indeed, Nigerians are still buying consumer products. This time, however, they mostly pay cash as consumer credits hitherto made available by the banks have all but dried up. “Those assets and lifestyles loans are gone,” says a banker with Zenith Bank who pleaded anonymity. The question is: where are the mortgage loans in today’s economy? Several reasons, according to observers who spoke to TheEconomy, are responsible for the near collapse of consumer credits. High default loans that pervaded the banking sector which led to the intervention of the apex bank, observers say, is the chief reason for the precipitous decline (no official figure available) in mortgage loans. According to this school of thought, most of the banks failed in their due diligence and Know-Your-Customers (KYC) requirements as stipulated in the prudential guidelines. This resulted in high default rate, and consequently the crash of some banks. “Without a fundamental change in the structure of the economy, it is only logical that high default rate led to a decline in consumer credits just as CBN tightened lending requirements,” says Mr. Martin Uwa, a retired banker. In the wake of the banking crisis which led the CBN to sack some bank chiefs and spent billions of dollars in taxpayers’ money to bail out troubled banks, the apex bank enacted reforms aimed at ridding the rot in the banks especially the prevalent insider abuse. The CBN scrapped universal banking, instituted tenure for bank CEOs’ and executive directors, revised the prudential guidelines to meet the realities of today’s lending activities and enacted a four pillar reform aimed at ensuring financial system stability. Recently, the CBN moved to further instil financial stability and improve the financial position of banks. The apex bank issued directive/framework on implementation of Basel 2/3 in Nigeria which covers regulatory capital measurement and management. They specify approaches for risk weighted assets for credit risk, market risk and operational risk for the purpose of determining regulatory capital with mandatory compliance. The directive that all banks adopt the stringent regulatory standard dents any hope of a quick revival in mortgage loans. Why consumer credit? Though accounting for about three percent of Gross Domestic Product (GDP), the launch of an aggregative credit policy in Nigeria, once led to an accelerated credit extensions by banks despite the growing risk of lending (before the banking crisis of 2009). With the adoption of the lower income segment of the society by the banks, there have been significant structural changes in the consumer credit market. The lowering of the income thresholds in the credit card segment of the economy by banks has improved access to finance for lower income individuals, giving persons in the lower income-end access to a comparatively cheaper source of credits than, for example, micro loans. This gives a boost to households spending which impacts positively on the economy. Experts say the high growth rate in consumer credit extension by financial institutions has resulted from (and led to) a number of interrelated factors including the economic boom, relatively low-debt servicing costs, development of a growing mortgage spirit, new alliances as well as new entrants, predominantly in the credit card arena. Consumer credits boost retail sales which further feed into the production chain, resulting in increased economic activities. The importance of consumer credit to the economy cannot be overemphasised. First, credit transactions come into play when a person wishes to obtain a service or product for which he chooses not to pay in cash or by way of exchange in kind or he simply cannot pay for it immediately. Credits also afford an individual the use of a service or product which ordinarily by circumstances of his salary he would have been unable to pay for across the counter, but is now able to do so over a period of time. The credit system can boost the purchasing power of the average Nigerian and assist in alleviating poverty. An economy that imbibes consumer credit culture will increase productivity, create employment, improve infrastructure, and create wealth for its people. Also, it will stimulate economic growth as there is a direct relationship between consumer credit and a country’s GDP. This is true of the advanced consumer societies especially the United States which leveraged on consumer credit to drive retail business and boost its GDP to be the largest economy in the world. For Nigeria, the prospects are high given the huge population, a growing middle class, an internet savvy generation and the deployment of sophisticated ICT infrastructure by banks in collaboration with telecom companies. “Nigeria is a huge market which every reasonable firm would want to invest in. It will be a mistake to take the country for granted,” a report by Goldman Sachs which named Nigeria among the countries that would be the engine of global growth stated. Many believe a strong consumer credit culture along with the fast growing electronic business in Nigeria and banking system will strengthen financial intermediation as these enhance the capacity to mobilise and deploy savings to critical credit seeking sectors of the economy. A consumer credit system if properly established, operated, managed and sustained will contribute immensely towards enhancing the production dynamics and GDP growth. Consumer credits help to unlock a diverse range of opportunities which would impact positively on the people.