Debt has earned a bad reputation in recent times. Private debt spiralled out of control in the 2000s and fuelled the 2008 financial crisis. Public debt continues to cause jitters. What is often overlooked is the vital role that debt plays in global and domestic economies.
In Nigeria, private debt comes with various challenges. Few people have access to reasonable credit terms. Our culture exalts the view that taking on debt is an irresponsible act. To quote a famous Nigerian adage – “He that goes a-borrowing goes a sorrowing.”
Another well-known saying counters that ideology – “You have to spend money to make money”. Debt facilitates spending by increasing access to purchasing power. Without credit one has to use savings, which diminishes access to emergency funds, delays purchasing of goods and services, and ultimately slows economic growth.
It is well known that small enterprises play an important role in developing a robust economy. At a time when unemployment is as high as 14.2%, credit support for small business owners might be what is needed to create jobs and strengthen the market place. It is notoriously difficult to borrow at reasonable rates in Nigeria, without valuable collateral or a recognizable family name.
For example, the rate of credit to the private sector ranges from 17% p.a. to as high as 30% p.a, while the sources of credit are limited. While we often chastise youths for being job seekers rather than job creators, the lack of financial support undermines their success.
It is impossible to ignore the role of “necessary debt” in the economy.
Supplemental funds make it possible for individuals to purchase homes, go to school, own a car or buy appliances. Many Nigerians ask: “if you cannot afford it why are you buying it?”
The question ignores the role credit plays in expanding our ability to purchase. Credit can help us acquire goods and services through planned cash flow. This type of consumption keeps the economic engine running. It does not exclude people with low disposable incomes and high earning potential from the opportunity to make efficient consumption choices.
One interesting feature of mature financial systems is the development of individual credit history. Usually starting from early adult years, individuals build credit ratings by accumulating and servicing debts. Credit cards are a popular avenue for this, and enable the creation of a good credit score, a pre-requisite for credit availability.
Nigeria’s financial institutions need to extend credit to participants from low-income groups. Those who prove their credit-worthiness will qualify for more credit. While income will always be a factor in judging credit worthiness, those who have a good credit score will qualify more easily than someone with no credit history.
To achieve this goal, credit must slowly be extended to the wider population. Only then will it be economically feasible for debt to be a tool for wealth creation.
In 2015, a list of bank debtors was published, supposedly at President Buhari’s request. It contained mostly upper echelon Nigerians and demonstrated the lopsided access to credit that is prevalent in the country.
It remains a frustration to many that credit is available to those who arguably need it the least while many young entrepreneurs suffer under the weight of little or no access.
Nigeria can look to the experience of other countries to learn how best to develop and manage its private credit market. In today’s Nigeria, there is a clear case for more debt to influence and strengthen the economy.
– A Financial Derivatives Company Publication
Frontpage September 27, 2019