High interest rates, surging non-performing loans threaten loan app business in Nigeria 

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Article summary 

  • Nigerians borrowing from digital lenders are complaining about high interest rates, yet they are constrained to take the loans due to economic difficulties. 
  • On the other hand, the lenders are blaming the high cost of funds and the peculiar risks of the business as factors determining the rates. 
  • With repayments becoming difficult for the borrowers, the lenders are now battling non-performing loans and working on stricter measures to minimize losses.  

The digital lending space in Nigeria is currently in dire strait as both the lenders and the borrowers are lamenting increasing non-performing loans and the high cost of borrowing. 

While the lenders, popularly known as loan app companies are worried about the spate of indebtedness by the borrowers, the people taking the loans said the high interest rates are making it difficult for them to repay and turning them into debtors. 

Some of the loan apps currently offer loans with an Annual Percentage Rate (APR) ranging from 34% to 271% payable in 3 to 24 months.

While this is higher than the rates charged by banks, the digital lenders say the risks involved are higher and many of their customers may not be able to secure loans from banks.  

They also added that most of the funds being used to run the digital lending business also come from the banks as loans, with banks’ interests already charged.  

Borrowers lament high interest rates 

Sharing her experience with one of the loan apps, Lilian George said she tried to secure a loan from Fairmoney to boost her business but the interest rate discouraged her from proceeding as it would be difficult to repay the money if she collected the offer. 

“FairMoney offered me N2.5 million and I am to repay N268,230 every month for 24 months. This means I’m paying a total of N6,437,520 at the end of the deal. For the N2.5 million, I would be paying N3,937,520 as interest.  

“How would I pay back? Even my business cannot yield that much profit in 24 months. So, I had to turn down the offer in order not to put myself into trouble. This is how many people run into debt,” she said.  

Loan offer from the FairMoney app 

For Emeka John, who has also patronized loan apps recently, the high interest rates are a major concern. According to him, a lot of Nigerians continue to take the loans out of desperation despite the high interest rates.  

“What the loan apps are doing is taking advantage of Nigerians at these trying times because many of those people taking the loans have no other alternative. They just have to get the money to meet their needs at that time. And this is why it is becoming difficult for many to pay back their loans. Loans should be given at fair interest rates,” he said.  

Why loan app rates are high 

However, justifying the rates of the loan apps, the Chairman of the Money Lenders Association, the umbrella body of registered digital money lenders in Nigeria, Mr. Gbemi Adelekan, said the rates are a reflection of the costs of funds and technology. 

According to him, digital lenders do not receive deposits like banks, hence, they have to also borrow money from banks to run the business. 

Speaking with Nairametrics on the issue, Adelekan said, 

“Our licence does not allow us to collect deposits like banks. Banks lend money from their customers’ deposits. For us to lend to people, we use funds from investors and also borrow from banks. The source of our funding is already expensive as the banks also charge us their interests 

“In addition to that, we are using technology to provide the required service by the customers, that is instant loans. We use technology to onboard and to do location verification. These technologies are owned by third parties and the cost is high. 

The lenders’ Chairman added that the loan app companies are also facing high risk in the business because most of the people they are serving are people at the bottom of the pyramid, who often do not have steady sources of income.  

According to him, before a bank gives out a loan to an individual, they ensure that such an individual has a salary account with them, so they know his or her income source already. He added that digital lenders will first have to verify the source of their customers’ income, which adds additional cost to them.  

“However, that doesn’t mean that we have to be predatory in terms of the way we operate. We still need to conform to the normal lending principles. We just don’t charge indiscriminately,” he added.  

Non-performing loans on the rise 

Adelekan said the business is becoming more challenging for digital lenders as many borrowers are not repaying their loans, leading to a surge in non-performing loans. 

“The situation of non-performing loans on our platforms is getting worse. We have discovered that out of 10 statements that we verify, 3 or 4 are doctored. People are desperate.  

“You have someone who has over 58 apps and is delinquent in all. People just go on platforms to get loans, without the intention of paying back,” he said. 

According to him, while are trying to help the economy by providing easy access to credit, people are misusing the opportunity by not repaying. He said some of the Association’s members are now having between 50 to 60% non-performing loans.  

He added that the Association is now pushing for a stricter credit-worthiness check by its members before they disburse loans to reduce the current burden of non-performing loans.  


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