Nigeria presents an interesting proposition for point-of-sale financings commonly referred to as Buy Now Pay Later financing (BNPL). However, there are important distinctions in the local Buy Now Pay Later industry in Nigeria relative to the global BNPL industry. In this update, we outline some of the defining features of the local BNPL industry, which would become useful in thinking about market entry in the local BNPL industry. A general overview of local credit conditions may also be useful. Nigeria's Central Bank (the "CBN") regularly publishes a credit conditions survey report. The latest report is available here
(a) Low Credit Card Penetration
Many sources report that credit card penetration is still very low in Nigeria. According to a source, only about 3% of Nigeria's 200 million plus population owns a credit card and in a ranking of 137 countries worldwide, Nigeria was 124th, in terms of credit card penetration. When viewed within the context of a growing middle class, we think this gap creates a significant opportunity for Buy Now Pay Later fintechs looking to play in Africa.
(b) Hard and Soft Inquiries
The incidence of bad consumer debts and consumer fraud remains a major problem for local lenders as lenders often struggle to recover bad loans. In our experience litigating debt recovery for lenders and fintechs, we find that the credit culture is still relatively low and many borrowers are yet to fully understand the important of having a clean credit history. Nigeria's primary development finance bank has noted that non-performing loans to entrepreneurs is almost at 100%. The CBN has also noted that Non-Performing Loans are above the regulatory minimum. For these reasons, we think, a combination of hard and soft inquiries in a way that does not unduly hamper the customer purchase journey would be a useful approach for Buy Now Pay Later fintechs in Nigeria. We think that Buy Now Pay Later fintechs who are able to deploy advanced technological capabilities around fraud detection, credit scoring and deep integrations into order management systems of merchants to access relevant SKU data, would lead in this category.
(c) Interest & Charges
Local Buy Now Pay Later offerings are likely more of a digital credit card play without the card. Buy Now Pay Later fintechs in Nigeria typically levy a form of interest or charge on borrowers. We think that Buy Now Pay Later players who are able to roll out pay-in-4, interest/charge-free Buy Now Pay Later products, whilst also leveraging new revenue drivers and monetising consumer engagement will likely drive more merchant adoption and lead in this category.
(d) Licensing & Regulatory Framework
Local Buy Now Pay Later fintechs typically rely on a banking license as legal basis and cover for their operations. Banking licenses require a minimum share capital requirement and regulatory approval to operate. Buy Now Pay Later promoters who meet the requirements during the application process will typically not have any issues with procuring the relevant licenses. There are also sub-national licenses that allow BNPL providers to operate within a limited scope. Both frameworks come with distinct pros and cons and impose minimum standards on lending businesses. We find that fintech Founders must take the to determine suitability, based on their business models, monetisation strategy and product offerings because a determination of the applicable legal framework to a BNPL offering is case-specific. For instance, existing payment service companies intending to play in the Buy Now Pay Later patch will ordinarily be required to obtain a lending license for this purpose. This is likely not to be the case where such payment service companies partner with a licensed financial institution to provide a Buy Now Pay Later offering. From a licensing standpoint, these scenarios are also different from a pure play vendor financing offering.
(e) Foreign Investment Regulation
Nigeria's foreign direct investment laws are relatively friendlier, in a number of respects, than what one would find in other West African countries. As an example, foreign investors can own 100% equity in local Buy Now Pay Later subsidiaries without mandatory local participation. Subsidiaries are also guaranteed unconditional repatriation of capital and profits, provided that investors comply with minimum registration requirements.
(f) More Customer Protection Regulation
Recently, Nigeria's consumer protection agency announced plans to issue regulations binding on digital lenders. This development is as a result of increasing complaints from borrowers about lenders who "harass" borrowers in a bid to recover loans.
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