Why Nigerian Retailers Can Access only 30% of their Credit Needs and How Fintechs Can Help
By Joseph Aito (Link to LinkedIn Story)
Retailers in the African consumer goods industry are among the strongest drivers of economic development. sadly, they can only access less than 30% of their credit needs. In Nigeria, over 80% of these retailers are women. While documenting the needs of these women in business has been both educating and exhausting, what is most intriguing is how a capitalist world has neglected a market opportunity of over £6.4bn which meets the weekly need of over one million Nigerian retailers.
Early last decade, many producers of consumer goods changed their route to market, choosing to use key distributors instead of selling directly to wholesalers. While the distributorship model works, it never fully tackled the problem of credit risk. Instead, it only shifted the burden to the shoulders of the distributors.
With every sales cycle, these distributors offer credit to wholesalers and retailers. The credit days could last from one to four weeks, and in peculiar cases, 8 weeks. Repayment for the credit given doesn’t always happen. In fact, for many distributors, about 5% of the credit given becomes bad debt, while a whopping 15% go overdue.
Distributors haven’t just folded their hands. Over the years, they have devised means of reducing this risk. Some reverted to cash sales only, willing to lose over 50% of their sales in the process. Some built a reputation of ruthlessness riddled with court cases, the thuggish sacking of defaulting retailer’s store, and brutish name smearing. A few make use of detailed KYC and demand guarantors before extending credit.
None of these methods has worked satisfactorily.
“These retailers are evil people. They will take my goods on credit, sell and won’t pay me back immediately. Instead, they use my money to buy foreign creams and lotion and trade a few times over, before finally repaying me. I reduced their credit days from one month to one week and most of them stopped buying from me.”Distributor in Lagos
“Iya Kabiru has used my money to complete the roofing of her house.” another distributor complained. “Everyone in the market knows this but Iya Kabiru keeps lying, saying she was robbed by armed robbers and wouldn’t be able to repay my money quickly. In her police statement, she says she would pay ten thousand every month until the debt is cleared. She owes me three million!”
The producers aren’t oblivious to these. They know the risks and many of them have taken the extra caution to further protect themselves by ensuring tripartite agreements between themselves, the distributors and the bank. This effectively ensures the distributor’s collateral serves as extra security for the producers. This is one of the core roles traditional banks play in the consumer goods industry. They also provide bank drafts, loans and other forms of financing for these distributors.
For these provisions to happen, collaterals, guarantors and solid transaction history with the bank are required. These requirements mitigate risk but also excludes small retailers and forces the question; Is it the overwhelming risk or a lack of operational agility that is to be blamed when similar offers aren’t extended by these traditional banks to the small retailers?
The problems with retailers in Nigeria
The retailers aren’t all a bunch of money-diverting traders, neither do they misuse credit all the time. Majority of them stick to agreed payment terms seeing as 7 of 10 of them survive on the daily profit they make and wouldn’t want to ruin a credit relationship with a distributor.
In 2018, Lateefat Akinniyi, a retailer in Ibadan, who barely made enough to feed her two daughters, now wanted to send them to school. She needed more credit to buy more from distributors and sell to her growing customer base. The distributors were unwilling to risk more by providing more credit, the banks couldn’t give her a loan because she had no collateral or banking history with any of them, the rates the Fintechs and cooperatives demanded would leave her with no extra profit.
Hundreds of thousands of retailers face this same problem across Nigeria and one might ask why they do not have adequate bank records. The simple answer is because they hardly need the traditional bank in their daily, monthly, operations. As they sell, they make payment for goods in cash or via POS outlets to their suppliers.
Profit not used for daily feeding is saved and paid as thrift-savings contribution weekly. When it’s their turn to get paid via the thrift savings, the money goes straight into a project; school fees, rent, goods, building project etc. Even wholesalers and bigger retailers who are better banked still face similar challenges with collateral and how their bank records may only reflect a third of their business capacity.
The role of fintechs and data companies
In 2019, Seta Field, a local Nigerian market data processing company that builds artificially intelligent tools for measuring brand share-of-shelf, attempted to solve the problem. They engaged several retailers and distributors and analysed their customer payments history. They discovered a pattern, and after more studies, asserted that the retailers who would consistently repay credit given all bore similar characteristics.
Seta Field built this into an algorithm adding other salient rating criteria thus creating one of the first-ever credit-risk ratings not based on banking history. Based on its findings, Seta Field carried out a Pilot in Abeokuta, offering working capital to 100 retailers, through a consumer goods distributor. It experienced less than a dozen late payments over the four-month pilot period, and zero bad debts.
Today, Seta Field is even surer of its credit scoring algorithm, helping distributors across the country offer credit in smarter ways. In 2021, Seta Field has included available bank and credit bureau records as part of its algorithm and has recently begun finding novel ways to analyse phone and social media activity for a deeper understanding of customer repayment behaviour. But Seta isn’t the first company to attempt this.
In 2014, Tienda Pago, a fintech player in Latin America, started providing working capital solutions targeted at fast-moving consumer goods (FMCG) traders. They developed a mobile-based platform that specialises in distribution finance and aims to resolve credit and payments in FMCG retail sector.
Latin American traders, very much like African traders, often have limited cash to pay distributors for goods, forcing them to buy limited inventory. This reduces potential sales and limits the trader to smaller and more frequent orders. Tienda Pago’s core product proposition is a credit line that allows small merchants to purchase inventory on credit at the time of delivery.
Both Seta Field and Tienda Pago’s reinforce the fact that the credit needs of traders in developing countries can be met. There’s also the hope that their studies would inspire more financial institutions to focus on the opportunities in the consumer goods payment space. This hope is not empty.
In 2021, Carbon a Nigerian fintech that has given credit to Nigerian consumers for about a decade finally directed focus to the credit needs of the roadside consumer-goods retailers. Working in partnership with multinational FMCG companies and their distributors, the Nigerian fintech is offering a cash advance at 6.25% over 10 weeks, targeted towards these retailers.
Founded by Chijioke Dozie and Ngozi Dozie, Carbon’s offer is among the best available to retailers and like Tienda Pago’s, doesn’t require banking history or guarantors. The most genius element of Carbon’s model, much like Seta Field’s, is that it doesn’t attempt to change the existing route-to-market and distributor operations. Despite its enormous disruptive potential, it slides in very smoothly while changing little in existing distributor operations.
Despite these, it does seem Carbon is willing to expose itself to heavy risk as current requirements for retailers to get working capital doesn’t show there is much focus on minimizing repayment defaults. Neither is there any conversations around an optimal way of choosing which retailers to lend to.
Perhaps the risk is worth it when one considers the enormous amount of retailer inventory, sales and purchasing behaviour they would mop-up over the years.
Another company influencing Nigerian retail payment behaviour is Trade Depot which started business in 2016 with the aim to enable Factory-to-Retail distribution for Consumer Goods companies. The company has taken a wholesome approach to providing credit, choosing not to integrate its offers with already existing distribution structures.
They execute the physical distribution of products while offering the needed credit. While this approach is capital intensive, they can easily collect accurate real-time sales data fully owned by them and not have to rely on partner distributor operations.
Regulations against defaulters and the future of the retail space
While there is available insurance for cases of fire and theft for these traders who need capital, there is still the problem of condition and character. What happens when a retailer adamantly refuses to repay a loan? What is the highest recourse available to credit lenders?
In 2020, the federal government of Nigeria, through the Central Bank, instituted the Global Standing Instruction ensuring that in order to satisfy a loan repayment, money belonging to a retailer in one bank can be used to repay loans taken in other banks. While this is a game-changer, as of March 2021, this hasn’t taken effect in most banks and a few retailers are still able to game the system.
Despite these efforts and lofty plans from these companies, the need remains. About a million Nigerian retailers need more credit and distributors capacity to adequately manage or offer credit to them keeps reducing. Why has this need gone unfulfilled for this long? The long answer is spread across this article while the short answer is lack of adequate data.
The prediction is that this problem is on its way to the grave. Dozens of data collection companies are springing up, facilitating data collection in the consumer goods space. Distributors have gathered about a decade’s worth of sales and payment records, and lastly the digitization of even the smallest roadside retailer is at hand.
By 2023, 95% of Nigerian retailers will have internet-enabled mobile phones and free internet data for sales and inventory record keeping. With all of these happening, there wouldn’t be room for excuses anymore. The Nigerian consumer goods industry will not be left behind. This future will be created intentionally.
Aito Osemegbe Joseph is a Sales Manager with vast Experience in Retail sales Management, Route to Market Development, Key Account Management, Channel Management, and Distributor Capability Development in the FMCG Industry. He also consults on tech & financial inclusion in the FMCG retail space.
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