Tackling Africa’s $330 Billion Credit Gap

Justin Norman: Why is lending so hard in Africa? 

Chijioke Dozie: We need to infuse credit scores into everything we do.

Mark Straub: This phenomenon of thin file is a very common thing.

Justin Norman: That's Chijioke Dozie, the cofounder and CEO of the Nigerian neobank and lending platform, Carbon, and Mark Straub, the cofounder and CEO of the identity verification platform Smile ID. 

Justin Norman: There's ability to pay, and then there's willingness to pay.

Chijioke Dozie: I think willingness to pay is probably the hardest thing to assess for.

Mark Straub: The more that I've seen the successful companies emerge, it's companies that have understood their customers really well and built algorithm profiles around the behavior of their customers inside their own app.

Chijioke Dozie: I know it's like sort of blasphemy for a digital business to say this, but for all the 60 million data points that we all say we collect, the best indicator if someone's going to pay back a loan is…

Justin Norman: We hear often about the huge multibillion-dollar credit gap in Africa. But why is credit so hard to do across the continent? We explore this question and more in this episode of The Flip. This episode of The Flip was recorded live at the Fintech in Africa Summit in New York, where some of the biggest growth stage Fintechs from across the continent were brought together with global investors and strategic partners. Be sure to check out FT Partners' latest Fintech in Africa research report, which we've linked to in the show notes.

Before we start, we have one small favor to ask. If you enjoy the show and want to support the content that we create, please hit that subscribe button. It only takes a second, but it will mean a lot to us if you do.

Justin Norman: So what I wanna talk to you guys about is credit, and in particular, why lending is so hard. Mhmm. How do we provision more credit? And you guys are thinking about this a lot, so I'm eager to hear what you think. But let's start from a Carbon perspective.

Why is lending so hard in Africa and in Nigeria and across the continent?

Chijioke Dozie: The obvious ones are for a lot of the African countries, there isn't the credit infrastructure. There isn't, like, credit bureaus, sanctioning credit bureaus outside I'd say outside South Africa, Kenya. You haven't got credit bureaus that all have, let's say, a score that people can actually lend against. And then identity is an issue as well. And then collections, we've all of the all these three. That's where you get the challenges in giving out credit.

Justin Norman: Yeah. Can you maybe just talk about from a Carbon perspective, in spite of the sort of myriad of difficulties with lending, you're still doing lending. Yeah. Right? How do you lend in that context that you just described?

Chijioke Dozie: From, a scoring perspective, we create our own scores, right? And that's been through creating algorithms, testing them against actual actual results, and refining them. And, of course, we we ingest a lot of data from our customers directly the from her transactions on the Carbon app. We also make use of open banking platforms where we can also ingest bank statement data and any other data that we feel is relevant. You know, in Nigeria, we have 3 functioning credit bureaus.

Now you don't have a score, but what we have is a database that lets us know if she has taken those out in the past and also whether she performed or not. So we also have that data. In terms of collections, you know, the best form of collections is where you don't have to do it, to be honest. And so we do a lot of soft collections. But when you have to employ, let's say, debt collection agencies, all they can really do is call, send messages.

And when I say call, I don't mean harass. I mean like literally just say, hey, you're 90 days late on your Carbon loan. Send SMS messages as well. And then if it's a bigger loan, then you would have a field agent go out and serve notice to the customer. That's all we can all we can do. And that's what we do.

Justin Norman: Yeah. So, Mark, we heard credit infrastructure as part of the problem. I know that that's your arena trying to focus on KYC and working across a bunch of different countries around this sort of identity challenge. You know, it's always an interesting question to me.

Why isn't there more credit infrastructure? Why aren't there credit bureaus? Maybe you can talk a little bit about your experience dealing with the various government agencies around this identity issue and the way in which you try to attempt to address it so that, you know, credit and lending can be more plentiful in these markets that you operate.

Mark Straub: Yeah. It's funny when you asked me about this it's the idea for this podcast and you said we're gonna talk about lending. I was gonna chuckling because we we're not, you know, we're not a lending company and some of our clients obviously do lending, but not everybody. Well, I started my career at Emerging Markets doing microfinance in India. So I'm very familiar with the sort of the building blocks of lending.

And obviously, in many emerging markets and many emerging economies, credit scoring has been a challenge. I'd say it's uncommon that there's like no credit bureau in a country. There's always somebody who started something. So I'm not sometimes there's 2 or 3. But this phenomenon of thin file, you know, is a very common thing.

So you'll have a country where there is a credit reference bureau, but they have records on maybe 3 million people in a country of 30 million people. Or they've got, you know, maybe they've even got 20 million records, but half those records don't really have a complete file. Maybe they only include a handful of negative events. They don't have any positive data. So these things all make it really challenging.

Obviously, lenders that look for other signals, what are the other signals you can do to reduce risk or fraud? KYC is one of them, whether that's just verifying an ID number or a name or a phone number or a document or a face. And, of course, the more things that you verify, the more costs you add, the more level of assurance you have. The reason I even started the company, I sort of go back to, like, why was I interested in this problem. I sort of go back to, like, the India days.

It was, like, how do you help lower-income people get money? Well, lending is the only really way to do that without charity. And to do lending, you need these different pieces of information in place. And I ran into this issue of realizing the more people I talk to, especially who are in the lending business, how much time and energy and effort they spent trying to solve the KYC issue, rolling their own solutions or using Facebook as a proxy. There just weren't that many great solutions when we started the company 7 years ago.

The credit infrastructure problem is multifaceted. Credit scoring and credit data is certainly part of it. The KYC is like an underlying foundational piece. But our our hope with our business is that we can lay down that one foundational piece, and then there's other things that can be built on top of that. And I think in particular, a lot of the companies we work with who are in lending are building their own credit scoring models and methodologies, which have proprietary value for them, which is great. We hope that we can provide them sort of a basic level of KYC upon which they can build.

Justin Norman: Yeah. And the reason why I thought it was important to have a conversation with you on this topic about credit and lending is, at least from my understanding, that a big problem is there is a lack of data to see, like, in terms of creditworthiness. Right? So just not having visibility into who has not repaid a loan on other apps and yeah. This opportunity to build infrastructure when you have a horizontal perspective.

And if the governments aren't necessarily going to do it, I think we've talked in the past about, like, private sector filling. And that credit infrastructure piece from an identity perspective seems to me at least to be a very important part of the equation.

Mark Straub: I mean, the problem is you can build all the algorithms you want, but if they're built on top of a SIM card like identity and the person swaps the SIM or gets a new phone, like, it's like a, you know, a house of cards. It all just falls apart. So having a foundational identity upon which you can then build these credit profiles or behavioral profiles or whatever is sort of is essential building block.

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Justin Norman: My understanding also is that we talk a lot or hear a lot about there's ability to pay and then there's willingness to pay. Yeah. You talked about one of your best customers is the one that you don't have to do collections. They're just willing to pay. So do you think about that in terms of credit profiling, those who are willing to pay and what are they borrowing for?

I think that there's also with consumer lending, it's a particular challenge relative to business or SME lending where they are borrowing for productivity. How do you think about that?

Chijioke Dozie: I mean, I think willingness to pay is probably the hardest thing to assess for because anyone can look at ability to pay based on the data they have, if they haven't. A willingness to pay is looking at the profile of the person. And then I know it's like sort of, I I would say blasphemy for a digital business to to say this, but for all the 60 million data points that we all say we collect, the best indicator if someone's going to pay back a loan is if they paid back a loan in the past. Yeah. I mean, that's really it.

I pay back loans. I'm probably going to pay back another loan. And really, the only way you can sort of really test that out is by giving somebody a loan. And then when they pay back, okay, you've got that data point. But I've heard competitors in the past talk about even the font in the computer or the app has an indicator that they're gonna pay back a loan. It's BS. It's a really simple business. That's really what it is.

Mark Straub: I remember there were so many companies. I was an investor before this. There were so many companies that came out in the US and Europe. Of course, emerging markets. And they were all like, well, we're gonna use your social media profile to figure out your credit score. And, like, the more that I've seen the successful companies emerge, the ones who kind of stood the test of time, even as interest rates go up or down, currencies change, it's companies that have understood their customers really well and built algorithm profiles around the behavior of their customers inside their own app. You know? Like, with the things they do inside that product, not the things they do elsewhere.

Justin Norman: One of the things that's been talked about a lot also is private sector solutions Smile being part of the foundation. Is that something that you think about? Like, I know that there's considerations around data sharing, for example. But

Mark Straub: Yeah. It's a great question. I get a lot of like, why do I have to sign up twice or why do I have to, like, do KYC all these times? And the perfect world would be one where you control your own identity credentials, and you can sort of selectively permission them with different companies that you want access to services, and you can revoke those permissions. And even the laws that were created with GDPR were all kind of created with this utopia in mind.

The reality of the problem is that if my customers want me to build something where I can share the identity information around, that means that I have to store all that identity information. Right? And so that means then that I have to have a relationship with that customer about I'm storing that information, how long I'm storing it. The way we operate is we primarily do that through our customers. So they, you know, are whether it's, you know, the Carbon or another bank out there that has a relationship with an individual consumer, that relationship defines the scope of the data sharing.

And so, I mean, increasingly, we're getting these requests from within our customer base. So, like, hey, a bunch of your customers have already onboarded these users for a payment solution. Can we benefit off of that? And so we've explored the idea of being able to have our customers share data with each other and being a facilitator of that. And that gets a little easier because then we're doing something where all the parties involved know what's going on.

Justin Norman: Yeah. And from your perspective, is it sharing data? Is it regulation? Is there anything else that if you could sort of wave your magic wand and say this would make lending much easier in Nigeria, what would it be?

Chijioke Dozie: It's really the credit score. Like, we need to infuse credit scores into everything we do. I I keep on talking about this. I mean, if I told you, hey, Justin, there's 2 candidates for a job you're advertising and they are equal completely. But I show you 2 credit scores and one is terrible and one is decent.

Everything else being the same, you're more likely to probably go to go for the person with the better credit score. And we live in Nigeria where rent is paid a year upfront. It's very hard to get a postpaid line. It's hard to get a car lease, etcetera. But if all of a sudden everywhere you go, like, someone's asked you, hey, you wanna rent an apartment?

Your credit score? Then when an individual's borrowing money, she knows that if I mess up on this loan, it affects my life. It affects my ability to get a close date line or get a good deal. It affects my ability to rent. I think that's where we need to go. Well because otherwise, it's really hard to incentivize people to do well.

Mark Straub: Yeah. There's no consequence. You know, it's your actions and you can sort of do whatever you want. That makes society worse for everybody.

Justin Norman: And then the question is the how. Right? So how does everyone get credit scored and who needs to change their ways? Is it regulation-driven? Is that the question? Is it regulation-driven in order to have that scenario that you want?

Chijioke Dozie: I mean, no. It's twofold. I mean, there are a lot of illegal consumer lending businesses where and you can tell because these are the ones that they are very easy to give out money because their practices of collections are aggressive. I mean, they will send what's up messages to everyone in your contacts saying you were dead or you've stolen money.

Mark Straub: Yeah. That's barbaric. They're not aggressive.

Chijioke Dozie: So that's why it's easy for them to learn because they're going to get you, right? That's what they think. But I think that even the individuals, so when Carbon, we gave out free credit, so we made people's credit reports available to them on our app for free. And the 1st day we launched this, we got a lot of complaints inbound. And not about us, but people didn't know why the records were updated.

So, we were borrowing money from all these other, lending businesses and these businesses did not report their good behavior. And sort of upset because we've always told customers the better you do, you should get cheaper rates, longer tenor, and maybe even a larger amount of money depending on your affordability. Now, if they're borrowing money from certain businesses that are not reporting their good behavior, they can't get good rates. Well, everyone reports bad behavior. Yeah.

But we always report positive and negative. But everyone reports negative. And I think more people need to report positive so that customers realize that if they actually repay on time, they're more likely to get good rate.

Mark Straub: There could be some basic kind of foundational policy that that government can put in place. I mean, the US went through this whole journey as years years ago, but where they sort of put in the rules where a consumer can request a free credit score at least once a year. They made it really simple. The data had to be shared in a certain way. And so part of the idea is you want to incentivize people to think about and be aware of their credit score, and then you want it to be easy for them to go to a certain place to get it, not to get it sort of needlessly and carelessly, which adds cost to the system, but to have at least some foundational idea of what a credit score is and where they can find it and why it's important.

And so government could do a little bit of education on that and standards setting on that front, and then private industry can fill in the rest

Justin Norman: So, Mark, I asked Chijioke the question about if you could wave a magic wand and have something fixed, and he said credit scoring. So what do you think? And maybe with respect to…

Mark Straub: Well, yeah. It's a little different, but it's related. It's like the reliability of these national ID systems. I mean, I get this request and this complaint every single day from our customers. I think I've had it three times today, you know, before lunch.

Obviously, we have products that cover all of Africa and now increasingly global products. Many of the most common and most popular products that we offer are being able to verify data against a national ID system. These national ID systems have become like critical bridges. They're on their on-ramps to, you know, products like Carbon or on-ramps to other services, ride-sharing, consumer lending, bank accounts, etcetera. But if they go down randomly 10% of the day, 3 days a week, right, then you can't build services on top of them.

So we do what we can. We share data with government. We give them feedback about what the impact of these different ID authorities going down. I think so often when this infrastructure gets built, whether it's lending infrastructure or credit infrastructure, ID infrastructure, when there is foundational government work that happens, often there's some pot of money that gets allocated, sometimes from the UN, sometimes the World Bank, whatever. And often, like, they build good systems, but then they don't necessarily set aside money for maintenance.

And so you get 2, 3, 4, 5 years out, and this what was a great piece of infrastructure starts to atrophy. And there's nobody there minding it to make sure it stays up. I think that's a real shame because, like, there is good work that's been done. There there's been great work done in Nigeria in particular, whether it's, you know, inside NIBSS, pieces of infrastructure that have been built, but that stuff has to get maintained.

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Justin Norman: We hear about this big credit gap in these markets. Is it realistic to say that a meaningful dent can be made without some of these? So I think a lot of people said, well, I'm gonna do vertical lending, for example. I'm gonna be vertical SaaS and know my customer really well and we're just gonna be better at understanding the customer and understanding incentives and collections because this is what the market looks like today. Right? So is it realistic to think that people can just be better at lending and that's going to make a dent in this credit gap? Or really is it sort of like spinning your wheels because this foundational stuff ought to be solved to really meaningfully increase?

Chijioke Dozie: I don't think you can scale, so you'd be good, but to really hit scale Yeah. The foundational stuff needs to be sorted out. It it needs to be done.

Mark Straub: I've had conversations even years ago with other businesses doing lending in other parts of Africa, and they would get to a certain level of scale, and they would need to go raise the next, whatever, $30 million. And to do that, they needed to securitize the underlying loan portfolio. But to do that effectively, there needed to be the rest of this infrastructure. And so when they hit these kind of critical moments of getting to the next level and the diligence is done and the infrastructure is found to be wanting, then they get stopped. And so that next big round of capital does not get unlocked. And I suppose the other thing is it's one thing to really understand a customer in one market, but we talk about expansion as a multi-market thing, and then it introduces a whole other level of complexities of kinda starting from scratch. I'd have to imagine.

Justin Norman: Anything else you guys wanna talk about or should we leave it there?

Mark Straub: What has surprised you about coming to this conference? I mean, I think that's I was gonna ask you that because it's very rare we get all these people in one room together, I think.

Chijioke Dozie: I think there's been any surprise. I I think it's been a very interesting curational companies. It's rare to get, I think, the caliber of companies all in one place In the same time with their investors. I think that I haven't seen that for a long time in that.

Justin Norman: What's your answer to that? Yeah.

Mark Straub: I was pinching myself. I was at dinner last night and there was maybe 12 entrepreneurs sitting at the table. And one of the investors stood up and said, did you know that there's a $1 billion of African revenue at this table? We were a tiny contributor to that, but still, like, I was impressed. And I kinda looked a bit to my left and my right. It was one of these moments when I was, like, kind of in awe at the people I was sitting with at the table, and that was that was really, gratifying.

Justin Norman: Yeah. And for me, it's like, right, there's a lot of doom and gloom in the ecosystem right now. Right? Companies are going out of business. But I was saying earlier, it's it's kind of like the power law playing out a little bit.

And so this is the 20% who are doing really well, who are still raising. There's been a couple of announcements of big rounds happening, like, this week with the companies who are here. And so I think it's a good recognition, like, you know, people are still doing well in spite of the macro, in spite of some other companies going out of business. And the fact that they're all here in one room is quite fun.

Mark Straub: Yeah. They're definitely like the strong are surviving, and then they will thrive as the markets return. Exactly.