"What if?" is a question often asked at points of decision making, but since COVID-19 became a global problem, it has become the question on the lips of people in different sectors, for different reasons. If we narrow it down to the financial services sector in Nigeria, we find various players asking the same question for varying reasons.
Borrowers question their ability to repay personal loans and put some plan in place to do so before approaching lenders who assess their credit risk and determine how much to give out, if at all, depending on a number of factors upon which loan eligibility is based; one of such conditions is a monthly salary.
The assurance lenders get from knowing borrowers have the capacity to repay a loan often takes a heavy hit when their means of livelihood are threatened and repayment is uncertain.
This is where loan insurance comes into play.
Why loan insurance?
It presents an affordable way to protect oneself against unforeseen circumstances.
In the event of death, involuntary job loss, or disability/illness -- preventing work -- loan insurance can cover some or all loan payments. The loan insurance premium is added to the loan amount and is paid in bits with each repayment made.
CBN's disclosure requirements
With the Central Bank of Nigeria (CBN), Nigeria's apex bank, responsible for regulating financial institutions in the country, its consumer protection framework guidelines on disclosure and transparency lists the requirements to be complied with prior to the execution of any contract with consumers. One of such requirements is that financial institutions are to:
- Disclose to consumers all terms and conditions of a product or service on offer, as well as the features, inherent risks, benefits, fees, and other associated charges.
Listing further requirements, the CBN expects that "in any proposed contract, letter of offer or final contract" given by financial institutions to consumers, "insurance requirements (where applicable)" must be disclosed.
Is this standard practice?
Considering the role insurance plays in protecting both lender and borrower, it is expected that this is the norm, rather than the exception, in transactions.
It, therefore, came as no surprise when the frequently asked questions part of the United Bank for Africa's website revealed that loss of job, death, and permanent disability are insurance benefits covering personal loan applicants.
In addition to these benefits, FBNInsurance Plc., insurers of First Bank Nigeria, lists critical illness of the policyholder as covered by their policy.
However, Umar (not real name), a First Bank employee, says, "the insurance on loans is not perpetuating, " and in the case of job loss that's not the fault of the customer, "the insurer takes up the repayment for three months until the person can get another job," he adds.
He goes on to point out that in cases where the customer is unable to secure another job and the three months have elapsed, the bank writes off the loan.
Is there full disclosure by lenders?
Seeing as personal loan insurance is beneficial to both the lender and borrower, this card should always be placed on the table -- as well as others -- in the spirit of full disclosure.
However, Michael (not real name), who recently got a loan from Page Financials, says, "There was no mention of an option for insurance and it wasn't in the loan agreement I was sent via mail."
Discussions with a few regular customers of other online lending platforms revealed shock at the existence of such an insurance cover.
While it is worth noting that the insurance premium on personal loans is not much (about 2% of the loan amount), and it seldom guarantees that an insurer will pay off a loan, it is a borrower's right to be told all their options; the onus is, therefore, on lenders to put all their cards on the table.
After all is said and done, there are questions to be answered: Do lenders follow the CBN's consumer protection framework guidelines on disclosure and transparency? If they do, is the option of loan insurance buried in the fine print or are borrowers aware it exists? If they don't, do they have the right to go after customers who have lost their jobs after the pandemic?
Do you have answers? We'd like to have your thoughts.