…Despite Defaulting In Payments
For many Nigerians, getting a bank loan used to be a difficult process that could take weeks or even months. There were forms to fill, guarantors to provide, documents to submit and, in many cases, collateral to present before money could be released.
For small business owners, salary earners, traders and people facing urgent financial needs, the traditional banking system often appeared out of reach. Commercial banks were largely interested in customers who could demonstrate their ability to repay and, in many cases, provide acceptable security for the facility.
Microfinance banks later became an important alternative, particularly for low-income earners, petty traders and small businesses that needed relatively small amounts of money. But even then, the cost of borrowing could be high, with interest and other charges making some loans expensive for borrowers.
Then came a new generation of financial technology companies.
With nothing more than a smartphone, a bank account and personal information, Nigerians could suddenly apply for loans from their homes, offices, shops or even while sitting in a bus. Applications such as OKash, Carbon, FairMoney, Branch, PalmCredit, QuickCheck, Renmoney, Lidya, Migo and several others helped change the way Nigerians viewed borrowing.
The attraction was simple: less paperwork, no long queues and, in many cases, no traditional collateral.
Carbon, for instance, traces its roots to One Credit, which was founded in Lagos in 2012 to provide loans to salary earners through a paper-based process. In 2015, the company expanded its reach under the OneFi brand before launching the Paylater mobile application in May 2016. The service became one of Nigeria’s early fully digital lending platforms, allowing customers to apply for and receive loans through their phones. It later evolved into Carbon as the company expanded beyond lending into payments, savings and other financial services.
QuickCheck followed the same broad digital-lending revolution. Its technology journey began in 2017, when its team developed a mobile application to test whether Nigerians would embrace borrowing through a smartphone. The idea was to use technology and data to determine a customer’s creditworthiness instead of relying entirely on the traditional collateral system.
Branch also entered Nigeria with a technology-driven approach to lending. The company uses machine learning and smartphone-based data to assess creditworthiness, allowing it to serve customers who may not have received the kind of attention they wanted from conventional financial institutions.
The idea behind the digital lending revolution was therefore not simply to give people money. It was to change how credit decisions were made.
Instead of relying mainly on physical collateral, lengthy documentation and traditional banking relationships, these companies began using data, transaction histories, repayment behaviour, bank information and other alternative indicators to determine how much a customer could borrow.
That same principle gradually pushed many of these financial technology companies towards small businesses and entrepreneurs.
The reason was not difficult to understand. Nigeria has millions of small businesses, traders, artisans and self-employed people who need working capital but may not possess the type of assets that conventional banks traditionally require as collateral.
Lidya, founded by Tunde Kehinde in 2016, was built around this problem. The company focused on helping small businesses and individuals gain access to financial services through technology.
Kehinde explained the company’s approach by saying, “We use mobile-first technology, fantastic customer experience and proprietary credit scoring algorithms to help businesses and individuals open an account online in 15 minutes, manage funds, and access credit needed to grow their businesses and plan their futures.”
The statement reflected the thinking behind the new generation of lenders. Technology could reduce the time involved in processing applications while alternative data could help lenders determine who was likely to repay.
Renmoney also moved deeper into the small-business space. In 2019, it launched its Micro Business Loans product after a trial in which it reviewed 30,000 applications and granted 6,000 facilities.
Its then CEO, Oluwatobi Boshoro, explained that the product was created specifically for small business owners.
“This product was specifically created to target small business owners in order to enable them conveniently access credit quickly,” she said, adding that it came with flexible repayment options and reduced documentation.
She also explained why the company was entering that market.
“We saw the need to make financial inclusion count for an unserved segment of the market,” Boshoro said.
The attraction for lenders is equally clear. A small business owner who receives money to restock a shop, buy equipment, pay suppliers or increase inventory may become a repeat customer. If the business performs well and the borrower repays on time, the lender can increase the customer’s credit limit.
This explains one of the biggest reasons fintech lenders continue offering loans even when some customers default.
The business model is built around risk, data and repeat borrowing.
Not every customer defaults. In fact, Branch’s CEO, Matt Flannery, said in an interview that the company’s experience in Nigeria had been better than expected in terms of repayment. He said the company had initially been uncertain about the default environment but found that the average customer was more reliable than anticipated.
“I don’t necessarily believe that, but coming to Nigeria I didn’t know if the default rate would be good or bad. However, I’ve been pleasantly surprised that the default rate has been lower and better than I ever imagined,” he said.
FairMoney has also explained how technology is used to manage lending risks. Its CEO, Laurin Hainy, said the company’s algorithm considers both financial and alternative data when determining whether someone is suitable for a loan.
“Does he use piggybank to save money, does he read the national press? We are looking for indicators to tell us what the customer’s financial standing looks like and to what extent we want to lend to the customer and how much,” Hainy said.
Migo founder and CEO Ekechi Nwokah similarly explained the broader philosophy behind digital credit.
“The global social inequality challenge is driven by a lack of access to credit,” he said. “What we are trying to do is to make prosperity available to all by reinventing the way people access and use credit.”
The companies therefore see credit as a financial product that can be scaled through technology. Their calculation is that thousands or millions of small loans can collectively become a sustainable business when lending decisions are properly managed.
But there has been a dark side to the digital lending boom.
Some Nigerians who defaulted on loans have complained that lenders contacted people in their phonebooks, including friends, relatives and colleagues. In some cases, borrowers complained about aggressive collection methods and embarrassing messages being sent to third parties.
The practice became a major public issue because some borrowers discovered that people who had never borrowed money from the lenders were being contacted simply because their telephone numbers appeared among the borrower’s contacts.
This became serious enough to attract regulatory intervention.
The Federal Competition and Consumer Protection Commission, FCCPC, working with other agencies, investigated alleged violations of privacy and other rights in the digital lending industry. The Commission specifically moved against practices involving the use of borrowers’ contact lists to reach friends, relatives, colleagues and other third parties.
Google also moved against digital lending applications that sought access to sensitive information such as contacts, photos, videos, precise location data and call logs, a development that changed the way many lending applications could collect information from customers.
The regulatory pressure, however, did not destroy the digital lending business.
Instead, it began changing the way legitimate operators were expected to operate.
Among the names Nigerians have encountered in the digital lending space over the years are OKash, Carbon, FairMoney, Branch, PalmCredit, QuickCheck, Renmoney, Lidya, Migo and numerous other platforms and applications.
But it is important to understand that they are not all technically “fintech banks.” Some are digital lenders, some operate through licensed financial institutions, some have lending licences or partnerships, while others are technology platforms connecting customers to financial service providers.
PalmPay, for example, has publicly clarified that it is not itself a loan company and that lending services available through its platform are provided by third-party financial institutions.
This distinction is important because the explosion of financial technology in Nigeria has created a much larger financial ecosystem than the traditional definition of a bank.
A fintech company can provide payments, transfers, savings, digital wallets, credit scoring, insurance, investment services or technology infrastructure without necessarily being a conventional bank.
OKash, meanwhile, became one of the better-known digital lending names in Nigeria by allowing customers to apply for loans through a mobile application. The model was attractive to customers because the application process could be completed remotely, without the traditional bank branch experience.
The same attraction applies to other digital lenders. For a trader who needs money to buy goods before the next market cycle, a small business owner who needs emergency working capital or a salary earner facing an unexpected bill, the ability to obtain credit through a phone can be extremely attractive.
But the convenience can also encourage people to borrow more easily than they would from a traditional bank.
A customer who previously had to visit a bank, fill forms and provide documents before borrowing may now be able to apply for money within minutes.
And this is where the question of default becomes important.
Why would a lender continue giving loans when some of its customers have failed to repay previous facilities?
The answer is that lenders do not necessarily treat every borrower who defaults in exactly the same way.
A customer’s repayment history becomes part of the information used to assess future credit. Someone who repeatedly fails to repay may have their access reduced or withdrawn, while someone who settles an outstanding debt and demonstrates improved financial behaviour may eventually regain access.
For lenders, the important issue is managing the overall loan portfolio.
A digital lender may have thousands or millions of customers. Some will repay before the deadline, some will repay late, some may restructure their debts and others may default completely. The lender’s business model is therefore based on calculating and managing that risk across the entire customer base.
This is also why many platforms start with relatively small amounts for new customers.
A new borrower may receive a modest facility. If the person repays successfully, the lender’s system may increase the customer’s borrowing limit. In this way, repayment history becomes a form of collateral.
The borrower who proves trustworthy through consistent repayment can gain access to larger facilities, while a poor repayment record can make future borrowing more difficult.
This has become one of the biggest differences between traditional lending and technology-driven lending.
The old system largely asked, “What assets do you have?”
The digital system increasingly asks, “What does your financial behaviour tell us about your ability and willingness to repay?”
That does not mean digital lenders have eliminated interest, charges or risks. Customers are still required to understand the terms of their loans, including interest, fees, repayment dates and consequences of default.
It also does not mean every digital lending company operates in exactly the same way.
The regulatory environment has increasingly demanded that lenders operate transparently, respect customers’ privacy and follow approved rules on debt recovery and consumer protection.
For borrowers, the lesson is equally important. The fact that a loan can be obtained with a few clicks does not make it free money.
For lenders, the challenge is to continue making credit available without allowing aggressive debt recovery, excessive charges or privacy violations to undermine the very financial inclusion they claim to promote.
The evolution from traditional banks to microfinance institutions and now to digital lenders has been driven by one persistent problem: millions of Nigerians need credit, while many have historically lacked the collateral, paperwork or banking history required by conventional institutions.
Fintech companies stepped into that gap with smartphones, algorithms and instant transactions.
They have made borrowing easier, while also creating a new responsibility for customers to understand their obligations. A loan received within minutes is still a debt. Interest, fees and repayment dates remain real, whether the money comes from a commercial bank, microfinance institution or an application on a mobile phone.
For the lenders, the challenge remains equally significant: how to continue expanding access to credit, especially for SMEs and financially underserved Nigerians, while controlling defaults, protecting customers’ privacy and recovering legitimate debts without crossing the line into harassment.
That delicate balance is now shaping the future of Nigeria’s fast-growing digital lending industry.
By Benprince Ezeh
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