Credit is not just a financial tool; it’s the lifeblood of a thriving economy. No nation can truly prosper or expand without the support of a robust credit system. Financial services often find their footing and thrive when credit is available, making it indispensable for economic survival and growth.
Whether enabling businesses to expand, helping individuals achieve their dreams, or stabilizing markets, credit plays an essential role in driving progress. In many cases, the resilience and success of financial services are deeply intertwined with the accessibility and reliability of credit.
Spotlight read: Open Banking regulation in Nigeria is now approved by the CBN
Africa’s got a credit problem
The credit ecosystem in developing African countries has been a turbulent rollercoaster ride, often dipping more than rising. But why has credit been so problematic? It comes down to the fundamentals of the 5 Cs of credit.
While each of these Cs is vital, capacity stands out as a smart lender’s go-to metric. To assess this, lenders need access to borrowers’ credit reports. Without this crucial information, evaluating a borrower’s ability to repay becomes daunting, leaving lenders in the dark and the credit ecosystem constantly struggling to find stability.
Unfortunately, the issue with credit reports is a classic chicken and egg case. Credit reports aren’t readily available because people lack access to credit, and people can’t get credit because they don’t have a credit report. It’s a frustrating cycle that keeps borrowers and lenders in a perpetual standstill.
Many African lenders today have devised sophisticated methods to assess borrowers’ creditworthiness, mainly focusing on their capacity to repay loans. One such effective approach is analyzing account statements.
However, this is where the real challenge emerges. Account statements are notoriously tricky to obtain, especially for financial institutions that aren’t traditional banks. This is precisely where Open Banking steps in as a breakthrough.
So today, we’ll highlight three ways Open Banking can make all the difference in the credit ecosystem.
Spotlight read: Open Banking explained in 60 seconds
Identity verification
Yes, there are a plethora of valid means of identification in Nigeria today, including the National Identity Number (NIN), the Bank Verification Number (BVN), and a host of others. But an individual’s real identity lies in their bank. After all, bankers care so much about identity that they spent $60m creating the BVN in 2014.
After all, no one likes to play funny about their money. Lenders can use Open Banking APIs to verify a customer’s information.
Here’s how it works: When Customer A applies for a loan with Lender B, Lender B, with Customer A’s consent, connects to Customer A’s bank. The bank then provides the necessary data, allowing Lender B to verify Customer A’s identity and make an informed credit decision. Essentially, the customer’s bank account data becomes the most reliable source of truth.
Statement data
Statement data serves as a substitute for a traditional credit report. Imagine seeing a comprehensive snapshot of a customer’s financial habits: how long they’ve been earning, where their money goes, any ongoing debt repayments, the regularity of their salary deposits, and even patterns of reckless spending that might indicate risky behavior.
These insights paint a detailed picture of a person’s financial health and reliability. In Nigeria’s financial ecosystem, the ability to analyze such data already exists. Companies like Periculum, Okra, Indicina, and Lendsqr provide services to analyze credit data, helping lenders make informed decisions.
However, there’s a catch — accessing this valuable statement data is often challenging for financial institutions that aren’t traditional banks.
Enter Open Banking — lenders can gain secure, consent-based access to their customers’ accurate financial data. This means they can easily pull statement data directly from a customer’s bank account when needed, providing a much clearer view of the customer’s financial behavior and capacity to repay a loan.
This not only improves credit decisioning but also ensures that lenders can offer more tailored loan products to their customers.
Bank account information
Open Banking empowers borrowers by allowing them to securely share their account information with lenders during the loan application process. This transparency ensures that lenders can accurately assess a borrower’s repayment capacity.
Whether confirming repayment abilities or adjusting loan terms when needed, this personalized approach enables lenders to offer tailored solutions that meet each customer’s financial needs. Ultimately, this fosters higher satisfaction among borrowers and drives increased business growth for lenders.
Read more: The role of Fintechs in Nigeria’s Open Banking ecosystem
A new dawn for credit in Nigeria with Open Banking
Imagine a future where getting a loan in Nigeria is straightforward, fair, and efficient. Open Banking makes this possible by transforming how financial data is accessed and used.
Take Yomi, a small business owner who has struggled to get a loan due to a lack of accessible credit data. With Open Banking, Yomi can securely share his bank statements and transaction history with lenders. This transparency allows lenders to see his true financial picture, improving his chances of getting the loan he needs to expand his business.
Open Banking not only helps individuals like Yomi but also strengthens the entire credit ecosystem. By enabling secure access to financial data, lenders can make more informed decisions, offer tailored loan products, and reduce risks.
In short, Open Banking is opening doors to a more inclusive and stronger credit ecosystem in Nigeria, fueling economic growth and improving financial well-being for everyone.
To stay updated about key developments in open banking in Nigeria, learn about membership opportunities, or inquire about participation, please contact the dedicated OBN team via email at [email protected].
