By Favour Adeboye
Since April last year, the Nigerian government has been making efforts to incorporate consumer credit into the country’s financial ecosystem, democratising access for the working population.
In a recent announcement, Credicorp, Nigeria’s consumer credit institution, revealed a new initiative set to be launched in July: an interest-free loan designed to encourage the uptake of consumer credit. Through the initiative, Nigerians could access up to ₦2 million in interest-free loans, with eligible workers having the opportunity to explore other options with single-digit interest. While this move could boost financial access, it raises concerns about a potential debt spiral if not carefully managed.
Consumer credit is a system that allows individuals to take loans and credit to finance expenditures for which they do not have the funds. It guarantees the purchase of goods and services for personal consumption, and responsible payment over time.
Although consumer credit is relatively new in Nigeria, it’s quite popular in other African economies, contributing significantly to their Gross Domestic Products (GDPs). In South Africa, consumer credit’s contribution to the GDP stands at 40 percent; in Morocco, 30 percent; and in Egypt, 12 percent.
In contrast, consumer credit contributes a staggering 3 percent to Nigeria’s GDP. Rather, personal loans and cash advances, notable for their high interest rates, make up 90 percent of the ₦8 trillion consumer loan portfolio of financial institutions across the nation.
However, with well-informed adoption and popularisation of consumer credit, Nigerians can now take loans with little to zero interest to fund their needs. They could also have access to social mobility, improving their socio-economic standards. The credit system would potentially boost the nation’s economy too. The increased demand for goods and services could stimulate local industries and job creation, according to Ajuri Ngelale, President Tinubu’s Special Adviser.
In achieving these objectives, Credicorp has initiated a series of programmes to ensure financial literacy and encourage the uptake of consumer credit, especially in rural areas. One of those is the 2 million interest-free consumer credit announced on June 17.
Passing Over of the Burden of Poverty for Debt
While the adoption of consumer credit may be a subtle replacement for personal loans and cash advances, it could also plunge the nation into a debt spiral if not checked.
One major feature of Credicorp’s ₦2 million interest-free consumer credit is to empower both formal and informal workers with loans for which they could pay back over time, a move inspired by the need to solve people’s financial problems.
According to estimates, the informal sector has the highest working population in Nigeria, making up 92.7 percent of the labour force. Inadvertently, the informal sector is also the highest borrower of money in the nation, mostly from informal sources to grow their business. Approximately 50 percent of these informal businesses are own-account independent workers, possessing small and medium enterprises in rural areas, while the remaining 50 percent are employees, working for an employer in the small or medium enterprises, the International Labour Organisation explains.
The International Labour Organisation defines own-account workers as those working on their own account or with one or more partners, hold the type of job defined as a ‘self-employment job’ and have not engaged on a continuous basis any ’employees’ to work for them during the reference period.
According to a 2022 National Salaries, Incomes and Wages Commission (NSIWC) Incomes Survey of the Informal Sector, informal workers who do not own businesses earn monly salaries ranging from ₦20,000 to ₦33,000, while those who own businesses earn approximately ₦53,000. In a highly inflated economy such as Nigeria, borrowing cannot be averted, making loans and cash advances a poverty-coping mechanism for informal workers.
But debts are not investments that bring wealth; rather, they are burdens borrowers must repay with or, in Credicorp’s initiative, without interest rates. And for a population that borrows to survive the Nigerian economy, offering loans to them should be relatively based on their income.
While the loan cap of ₦2 million may work for the 7.8 percent formal workers in the labour force, it may be a burden for informal workers who earn below the current minimum wage of ₦70,000. When they are unable to pay back loans within the stipulated time, they may be propelled to borrow more money to pay; thus, they are plunged deeper into an unmanageable debt cycle.
To avoid this, the Nigerian government should commit to financial equity, setting relative limits to individual loans. Setting relative standards for workers would make the consumer credit work on individual financial terms and not on general terms.
Financial Literacy at the Grassroots
Credicorp’s mandate of financial inclusion calls for grassroots financial education. Since about 93 percent of the labour force are informal workers, they would also be the highest recipients of the ₦2 million interest-free loan; thus, their literacy becomes critical to the success of the project.
In its 2024 report, the National Bureau of Statistics revealed that 99 percent of informal workers are uneducated. It also stated that the rate of informal employment, among rural dwellers was 97.6 percent. Consequently, their exclusion from formal loan structures becomes inevitable. Suddenly introducing them to the interest-free loan could lead to hidden terms and unclear contracts.
Although Credicorp launched financial literacy programmes across major rural regions, more targeted engagement in remote areas is important. As part of its credit distribution agenda, the consumer credit agency seeks to work with financial institutions across the nation, but it could also leverage this partnership for grassroots education.
To strengthen its financial literacy efforts, Credicorp should mandate banks and other financial entities to educate their rural customers before granting them access to credit, not only through the distribution of reading materials but education in local languages. Since the majority of the credit recipients would be illiterate, an awareness campaign should be explored.
The consumer credit institution should also liaise with media outlets in driving its message. Traditional mediums of communication, especially radio, are renowned for their popularity in rural areas. Capitalising on this medium would potentially push financial literacy to the rural areas.
Despite its potential for economic elevation, the consumer credit system could drive more citizens into unsustainable debts. To avoid this, the Nigerian government should embrace financial equity and literacy. This would not only make the credit process seamless but also promote financial inclusion.
Adeboye is a development journalist and a Free Trade fellow at Ominira Initiative.
This article was first published In Tribune