•Consumer loans up 34% as inflation, naira depreciation eat up households’ income

Consumer loans booked by banks’ customers rose by 34 per cent, year-on-year, to N2.64 trillion in the first half of this year, H1’23, driven by increased demand from households compelled to depend more on borrowing to survive higher cost of living.

The pressure on households’ income is coming from persistent increases in prices of goods and services triggered by naira depreciation, food supply gap and other environment circumstances including insecurity.

The National Bureau of Statistics, NBS, last week reported the 10th consecutive month rise in inflation rate to 27.33 percent for October 2023 while food inflation was reported at 31.52 percent.

The growth in consumer loans was also enhanced by measures deployed by banks including digital innovations and capabilities, simplified processes and minimal documentation, improved product design and flexibility, as well as increased publicity and customer engagements.

Financial Vanguard findings from the latest data in the Central Bank of Nigeria, CBN, showed that the 34 per cent, YoY growth recorded in H1’23 represents the highest in four years, since 2019, when the apex bank introduced measures to increase loans to the economy including the Loan-To-Deposit Ratio, LDR, of 65 per cent.

According to the CBN Economic Report for the second quarter of the year, Q2’23, consumer loans rose to N2.64 trillion at the end of June, 2023, from N1.93 trillion at the end of June 2022. This represents N704 billion or 34 per cent year-on-year YoY growth during this period.

The growth represents a 31 percentage points higher than the 5.0 per cent, YoY growth recorded at the end of June 2022.

Furthermore, consumer loans recorded quarter-on-quarter growth, QoQ of 12.2 per cent from N2.35 trillion at the end of Q1’23.

“Consumer credit improved owing to increased demand for personal loans and strengthened enforcement of the Loan-to-Deposit Ratio (LDR) policy,” the CBN said.

On the LDR, the apex bank had stated in 2019: “All Deposit Money Banks (DMBs) are required to attain a minimum LDR of 65% by December 31, 2019 and this ratio shall be subject to quarterly review. To encourage SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose.”

The increase in demand for personal loans according to analysts and bankers who spoke to Financial Vanguard is due to the higher cost of living caused by persistent rise in prices of goods and services as well as continued depreciation of the naira.

The NBS data also showed that over 65 per cent rise in inflation in October, was caused by increases in the prices of basic household needs namely, Food & Non-Alcoholic Beverages, Housing, Water, Electricity, Gas & Other Fuel. In addition to food shortages caused by insecurity and transport cost, a major factor behind the increases in prices of goods and services is the continued depreciation of the nation’s currency.

The depreciation of the naira was aggravated by reform measures introduced by the CBN on June 14th, 2023.

In the official market, the exchange rate rose to N840.53 per dollar last week Wednesday from N471.67 per dollar on June 14th, representing 78 per cent depreciation. Similarly, the exchange rate in the parallel market rose to N1,155 per dollar from N768 per dollar on June 14th, 2023, representing 50 per cent depreciation.

The higher cost of living resulting from this development, according to banks, has triggered a sharp increase in demand for consumer loans.

Experts, analysts’ insight

Commenting on this situation, a senior banker who spoke to Financial Vanguard on condition of anonymity, said: “There has been a consistent increase in loan demand across all consumer segments, with an almost 50% increase in the average loan amount requested by customers in the affluent segments.”

Explaining how the upward trend in inflation is translating to increased demand for consumer loans, Head of Equity Research, FBNQuest Securities Limited, Tunde Abidoye, said: “The effect of rising inflation and currency depreciation on the economy is that it has reduced real income for households. Therefore, households will have to look for other sources of inflow, which in most cases, will be in the form of debt financing to meet up with their already existing obligations. Some households may need bridge financing. This may be one factor responsible for the rise in personal loans.

“Secondly, inflation is the increase in the price of goods and services. As a result, households will have to pay more for their needs. Consequently, if the disposable income of households remains constant, they will have to look for other sources of income, such as borrowings and loans.”

Also commenting, Oluwole Sole, Sub Saharan Africa Banking Analysts with Vetiva Capital Management Limited, said: “The growth in consumer loans is driven by heightened inflationary pressures that have left consumers with limited options to meet their current needs. Consequently, borrowing has become an attractive option.

“The data reveals that the significant surge in consumer loans can be attributed to personal loans, indicating that consumers are grappling with meeting their demands in the face of the elevated inflationary environment.”

Similarly, Atinuke Egwuatu, Group Head Consumer Lending, United Bank for Africa, UBA Plc, explained that the increase in demand for consumer loans is driven by current economic realities reflected in the increased cost of living triggered by naira depreciation.

She said: “Increased cost of living has led to a reduction in the purchasing capacity of customers. Due to the high rise in cost of living, many customers are unable to sort out day to day running costs of their homes depending on their salaries alone, hence the need to seek funding from their banks in lieu of expected future salary payments.

“Prior to the consistent devaluation of the naira against other currencies, people were able to save up funds in order to finance major projects. However, with the consistent Naira devaluation, saving up funds for a project is not as effective anymore, as the projected cost could have doubled or tripled while saving up cash for it as the returns on the investment is not able to keep up pace with the devaluation rate. As a result, consumers tend to seek additional funding to finance these projects and spread their repayments over a period of time.

“Some customers resort to obtaining personal loans from financial institutions to start a side business or alternative income source to augment their income flows so they are able to cope with the harsh economic realities the country is currently facing.”

What banks are doing

While the growth in consumer loans may have been triggered by economic realities, Financial Vanguard findings also showed that banks have deployed measures to make the loans more accessible and affordable for the customers.

Some of these measures according to the Group Head, Consumer Banking, Access Bank PLC, Njideka Esomeju, includes digitisation, product design and flexibility, increased marketing and visibility.

Speaking on Access Bank’s efforts in this regard, Esomeju said: “As a bank we have leveraged on technology and first-mover advantage to scale consumer lending and be able to serve our huge and growing customer base. We continue to record incremental numbers and potential YoY with the simplification of loan application, minimal or no documentation and instant disbursement via digital platforms including USSD short string, Loan App and Web portal where human interface is eliminated, and interaction is algorithm driven and attracts individuals who seek swift financial solutions. The benefit of convenience and speed here has been transformational.

“Personal loans are highly attractive in that they are applicable to a wide variety of areas including personal, financial and lifestyle needs. The growing demand for personal loans is also attributable to the fact that by product design and target market definition, it is inclusive – Low-Income-Persons, Middle-Income-Persons, and High-Income-Person alike can request for loans within their capacity.

“Concerted and targeted marketing activities to create awareness and drive visibility of personal loan products has been a very potent and powerful tool in influencing loan uptake. Robust marketing budgets directed at Above-The-Line communication and Below-The-Line messaging has been core to the business of consumer lending and growth in demand generation.”

Also highlighting UBA efforts in this regard, Atinuke Egwuatu, Group Head Consumer Lending, United Bank for Africa, UBA Plc, said: “Various engagement communication is done on a regular basis via SMS, Email, Social Media, Radio Jingles, other traditional marketing outlets, and consistent one-on-one engagement with customers by the business relationship teams. We have had to also improve the terms of our consumer loan products early in the year to increase ease of access for the loans. Since then, we have seen a high influx of feedback in form of enquiries after these communications leading to increased loan sales.”

A Union Bank senior official working in the Retail Segment, also explained, “Union Bank delivers simpler and smarter solutions to our customers’ financial service needs We have a loan for every need and ensure it is accessible and personalised for eligible customers.”

He added, “Our bouquet of consumer loans caters to the needs of existing and prospective customers as we consistently expand risk acceptance criteria to accommodate more customers.

“We grant asset financing loans for new and used vehicles (in partnership with reputable vendors). We enhance the quality of living by financing renewable energy solutions for customers to have a guaranteed uninterrupted power supply. We partner with home developers for affordable and luxury homes, and we have Personal Loans for other financial needs such as rent, school fees, vacation plans etc.

“We regularly engage our customers on the loan products they are eligible for and help them connect the dots to convenient and pocket-friendly financing opportunities. Our Workplace banking proposition is positioned at customer locations nationwide and has spurred increased ccustomer demand.” (Vanguard)

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