Are lenders evil for charging high interest rates?
You should see Nigerians talk about politics and governance: the passion, anger, exasperation, pain, conviction, contempt.
Then, you should see Nigerians talk about the high interest rates lenders charge: the passion, anger, exasperation, pain, conviction, contempt.
After politics, high interest rates come in at a close second in the list of top reasons Nigerians get riled up.
The average lender today would typically charge 4% — 10% per month (48% — 120% per year) on a loan. Whoa. What probably immediately comes to mind is how crazy and horrible these rates are and that there is no way lenders aren’t taking advantage of Nigerians in their hour of need.
Our position remains that credit should be sustainable and taking out a loan should bear no semblance to slavery for borrowers. However, while we aren’t here to hold forth for bad lending practices..
Let’s understand what drives high interest rates in the first place ..
Let’s look at a typical lender’s money journey.
Let’s say Janet, the founder of **XYZCash, took a deposit of N10 million from investors, at 15% per year, which commits her to returning N11.5 million at the end of the year. Some of the investors are family, friends, and people introduced to her by her uncle.
XYZCash follows to disburse the N10 million in loans to their customers and channels the interest repaid on the loans towards making returns to investors and covering their cost of operation. The interest charged on loans also caters for expected profit; lending businesses, not being run as charity organizations, are out to make profit from solving a problem.
Unfortunately, XYZCash has to face the disappointing reality that Nigerians don’t pay back their loans and end up using a proportion of the revenue generated from interest on loans to cover the cost of the few borrowers that won’t pay back.
Let’s go further and imagine XYZCash gave N100,000 to 100 borrowers and about 10 didn’t pay back; this implies the actual value of loans they would generate interest on is N9 million — N1 million naira is lost to bad loans. Additionally, if they need 15% for operational costs and the added 15% as return to investors, this leaves them with an additional 14% (approx.) on the original amount they have to generate just to break-even.
What do lenders use money for?
To anyone looking in from the outside, it’s perhaps very easy to imagine that what lenders do is to simply recycle the money given out as loans and use the interest paid on these loans to give more loans.
A lending business, like any other business, does in fact incur operating costs; while a digital lending business may be hosted in the cloud, people make it work and people have to get paid salaries. A whole lot is spent on credit bureau and statement data which helps lenders make informed lending decisions to mitigate the risk of lending to bad borrowers; and towards regulatory fees which keep them in business. Investors must also not be forgotten; funding should not be treated as a “no-strings-attached” gift, any lender who does this is sure to have EFCC after them.
So what now?
After all is said and done, the main driver of interest rates in Nigeria is the risk associated with Nigerians not paying back their loans, mostly because they do not believe real consequences exist for defaulting on a loan and absconding altogether. The good news is that with good technology, a robust data network and modern algorithms, lenders are able to lend with assurance now and turn to more ethical ways to recover loans . It’s no secret that the tech to do this can burn a hole in even the deepest pockets …
But that’s where Lendsqr comes in ..
The Lendsqr LaaS provides an end-to-end solution that gets your lending business going at less than 2% of what you’d otherwise spend to build your own platform and you can sign up for free and start lending in minutes (bravo! the gift that just keeps giving).
- * — While this is a fictitious lender; lending companies have real humans behind them. They have hopes, aspirations, and family like the people they are lending to as well.