The difficulties in Africa's financial sector create room for many opportunities. Like a giant onion bulb, when one financial service issue is resolved, other layers reveal more issues to be solved.
When businesses found it difficult to receive payments online, people hurt under ridiculous bank charges, but fintech companies have come to the rescue.
Today, financial inclusion has improved considerably from previous years. For example, Nigeria’s banked adult population has increased from 36 million in 2016 to 47.7 million in 2020. As of March 13, 2022, the Nigeria Inter-Bank Settlement System (NIBSS) places the number of Nigerian bank account holders at 53 million.
However, the bulk of Nigeria's financial inclusion growth has come from savings and payments, leaving a considerable gap in the credit and insurance space.
Adedeji Olowe, Open Banking Nigeria Trustee, believes that unlocking credit access is a surer method of boosting financial inclusion in Africa. Tying into his ambition to democratise banking in Nigeria, he is currently building Lendsqr, a startup that would create large-scale lending infrastructure in Africa.
“I believe that without an evolving middle-class, we may not come out of our national morass. But without credit to help people stand up, the middle-class wouldn’t emerge."
With over two decades of experience in banking, credit, technology, and venture capital, Olowe delved into lending in his two-year (2006 - 2008) stint at First City Monument Bank (FCMB), one of Nigeria's largest banks, where he built a lending system.
Olowe, who is on the boards of Sparkle and Paystack, has been neck-deep in Nigeria’s financial space, having previously been the chairman of TeamApt.
Olowe is currently building a reputation as Africa's Open Banking leader, and our Senior Reporter, Oluwanifemi, went behind the scenes of his enviable LinkedIn profile. However, building any lending solution is tough, but what the fintech mogul has planned with Lendsqr is a different beast entirely.
The stubborn onion bulb
Nigeria's lending space could be likened to the difficult parts of the onion bulb that are not so straightforward to peel. Accessing credit in Nigeria is difficult, and for good reasons.
A 2021 Enhancing Financial Innovation and Access (EFInA) report reveals that in 2020, only 3% of Nigeria’s 106 million adults had access to credit from a regulated financial institution.
Such a low percentage points to a considerable gap, and per Lendqr's analysis, the credit market is worth ₦72 trillion ($173.5 billion) in Nigeria alone.
Traditional financial institutions should be jumping at the opportunity, right? Apparently not, and for a good reason.
Most financial institutions across Africa are only willing to lend to the most creditworthy of borrowers like governments, large corporations, and high-net-worth individuals. The scenario is different for small businesses and regular individuals.
“Small firms and individuals borrow at high rates because of the high risks involved as lenders do not have information on their credit behaviours,” said Juma Reli, Bank of Tanzania Deputy Governor, at the launch of the country’s official databank.
In recent years, several digital lending platforms have sprung up in Nigeria, but going by current events, most have been operating illegally and unethically. The few legal ones constantly deal with loan defaulters.
However, loan defaulters and rogue lenders are also increasing.
All things considered, Olowe believes it may be hard to blame institutional lenders. The average Nigerian's credit score has not improved considerably, and the low lending percentage says it all.
"Then came the light bulb moment — what if tech and data are combined, made available at bargain prices, to enable lenders to lend securely and responsibly? Wouldn’t that make lenders expand? Wouldn’t that curb chronic debtors and block them from abusing credits?
"Wouldn’t that make institutional investors make capital available to lenders? Wouldn’t lenders be able to reach Africans at the point of need through BNPL?" Olowe asks.
Providing a solution
To tackle the issues with lending, Lendsqr provides small to medium-sized lenders with a comprehensive technology and data stack to lend to customers at scale using the best of breed decision engine, integration to payments systems, and data for quality decisions.
An excellent way to explain the startup's value offering would be Canadian tech giant, Shopify. The platform allows retailers to create and manage their online stores. If you have anything to sell online, Shopify takes the pains of creating your website and lets you customise the platform to attract visitors.
Similarly, Lendsqr provides a platform for any company interested in entering the lending game.
"Our stack has 100% of everything a lender needs to lend. And they can register and issue their first loan in five minutes, running off one of the largest data repositories for credit in Nigeria. All for free."
For context, data on a business or an individual is critical for any lending decision. Your employment history, your income level, and your debt-to-income ratio all come into play. Behind the scenes, there are hundreds of data variables to choose from.
Olowe explains that this data comes from lenders already on Lendsqr and from other established lenders, who he prefers to keep secret for now. Lendsqr is also plugged into the CRC Credit Bureau and Credit Registry.
Recall that in 2020, a former OKash CEO went on to create a Blacklist, a platform for small digital lenders to access data on Nigerian borrowers.
The Blacklist creator, Darlington Onyeagoro, who's currently CEO of Aladdin, a digital bank, argued that such a platform would create little escape room for serial defaulters.
On the flip side, such a platform can be positively used by lenders to make decisions.
"We plan to use this data to unleash credit for the underbanked. And we're powering our lenders to reach their customers via our Web app, Android app, iOS app, and Web SDK," Olowe explains.
Lendsqr has painstakingly assembled a team of engineers and data experts with experience in Nigeria's credit and tech space. However, there are players with similar value offerings.
In 2020, Evolve Credit went live as a marketplace for borrowers to review and choose the best lenders to borrow from. Since its launch, it has evolved into a platform offering a cloud-based solution for would-be lenders. It claims to help them set up in 24 hours.
Indicina's product, Originate, helps lenders digitise identity verification, credit decision/analytics, and disbursements and collections.
Though initially offering similar features to the other two, Creditclan, has pivoted to aid the process for buy now, pay later (BNPL) companies, a growing sensation in the eCommerce space.
Interestingly, Lendsqr claims its customers can start lending in five mins with already configured products and domain names.
"Our cost of set up and user onboarding is as cheap as free (₦0). Our decision engine is very smart with over 300 data variables available for lenders to tweak as they wish, yet we provide them with simple start configurations, to begin with," Olowe submits.
Continuing, he says, "Our collections and recovery is relentless; it hunts down bad borrowers until the very end. We have one of the largest blacklists to protect lenders from predatory borrowers and chronic debtors.
"For our APIs, unlike the credit bureau and others, we only charge if and only if it finds data."
Solutions can be tearful
Lendsqr's aggressive approach certainly comes at a cost. Few people can boast of not tearing up when peeling an onion or trying to build a startup
If Lendsqr has zero costs for setup and user onboarding, how does it make money? The answer seemingly lies in playing an Amazon-esque long game.
"The core of our revenue model is charging a fee when we help lenders collect their loans. And there is an alignment — we don’t charge them before — our bread isn’t buttered before theirs," Olowe insists.
Considering this, any keen observer can guess Lendsqr will earnestly chase growth and try to corner the lending market. So far, it is growing an enviable user base.
The CEO claims that Lendsqr already has over 100 lenders offering credit to almost half a million users.
"Lendsqr will break even after two years. We follow the model of Amazon — amazing technology and data play at basement level pricing," Olowe maintains, and for emphasis, adds Jeff Bezos' famous words, “Your margin is my opportunity.”
When building products for the African market, its peculiarities have to be addressed. For instance, the challenges involved with building a lending infrastructure.
"The cost of underwriting is high in Africa, which puts lenders in a bind. The technology is too expensive to build. Or the cost of data (Credit bureau and statement) is so expensive it is ruinous to small ticket loans."
Olowe and his team at Lendsqr have had to draw on their wealth of experience and network to navigate the space.
"We’ve had to engage with different data providers, credit bureaus, and others. We successfully argued cases for cheaper and scalable lending with the likes of CRC and Mono, who are partners in this journey."
These were just some of the wins, though, as Lendsqr had to walk away from some data providers with unnecessarily high usage costs.
The rewards at the end
When eating a well-prepared meal, few people remember the tear-filled eyes of the onion-slicing cook. The same applies to the founder of a unicorn. For a financial sector replete with lending-averse financial institutions, Olowe is adamant that Lendsqr is tailored to match the market's reality.
"We are a scale company. We understand that the categories of lenders we are serving are super sensitive about pricing, and we offer propositions that are unmatched in value anywhere in Africa."
Per Olowe, Lendsqr is using its scale to pass on cost savings to the lenders, which invariably leads to cheaper loans for Africans and Nigerians.
So far, Lendsqr's approach has won the hearts of investors as it has closed an undisclosed pre-seed round. On the strength of this, Lendsqr has some major upgrades in sight.
"In four months, our lenders would have access to native mobile SDKs that allow them to lend even to the mass market, using their phone data for free instead of paying over $0.5 (₦250) as offered by many lendtech providers."
The startup also plans to hit customers at their point of need by targeting BNPL players across different sectors.
Beyond technology, it also plans to connect lenders with capital providers to help them scale their lending.
Olowe encapsulates Lendsqr's immediate vision with the following words:
"Within 18 months, 1 in 4 consumer credit in Nigeria would either be originated by lenders on Lendsqr or Lendsqr would have provided data comfort to other lenders."
To understand the full impact of Lendsqr's development, one only needs to look at the recent funding trends for BNPL startups, credit-led neobanks, and innovative companies like Indicina and Evolve Credit playing in the space. All things being equal, Africa's lending scene looks set to explode.