Informal Lending: The Go-to ‘sector’for Petty Traders
Adebisi (not her real name) is a fish seller in Iyana ipaja market in Lagos State. She does not own a shop. In fact, she does not need a shop. All she needs is a small space by the roadside to display the fish she sells. She pays N500 per day to get the space. If she doesn’t pay, the market association will rent out the space to another person eager to make some sales to take care of her family. The total value of her sales is approximately N20, 000. From dawn to dusk, she calls on passers-by to patronise her. Her prices may be little bit higher than those who have shops in the market. Her target buyers, however, are those in hurry and ready to make a quick buy. If you live in Lagos, you’d understand that a lot of people are in a hurry. So, there are a lot of quick buys and sells. This is the story of many market men and women all over Lagos. They are by the roadside every day, selling wares whose total value is not up to N10, 000. You probably know them as petty traders.
So, how does Adebisi gets capital to run her business? Let me tell you the story of Adewale (not his real name). Adewale is a young man in his mid-thirties. He used to work in a commercial bank. He lost his job four year ago. After searching for another job for about three months, he decides to start a small business. He once heard a friend talked about money lending business. He makes a few enquiries and did some research. He obtains a money lending licence from the state government. A friend introduces him to the market leader in Iyana Ipaja and they struck a deal. The leader will introduce him to the petty traders in the market, who can borrow as little as N20, 000. And of course, the leader gets a fee for referral.
The market leader introduces Adebisi and five others to Adewale. Adebisi needs money to buy two cartons of frozen fish and pay for space to sell. She borrows N20, 000 and pays N4, 000 upfront as interest. So for the next two weeks, she will pay Adewale N1, 500 until N20, 000 is repaid.
She does not need to sign any form. She does not need to provide any security or guarantor. She understands the implication of not paying back. She will not be able to sell in that market anymore. Competition for space in any market, even if it is by the roadside, is very stiff. She can lose her means of livelihood by just defaulting in the daily repayment. Adewale’s risk is very minimal. Who wants to lose everything for N20, 000? His reward is huge. Twenty per cent returns in 15 days. That is 480 per cent per annum! Imagine what sort of business you would do to get such humongous return. Money lenders get that, lending to petty traders.
The commercial banks are averse to lending to the informal sector, basically because of the inherent risks involved. The microfinance banks also stay away from this sector. They would rather lend to salary earners, shop owners, and well-established traders in the market. Petty traders do not have the luxury of time to fill forms. They do not have collateral or guarantors. What they have is their willingness to hustle, make some money, feed their families and survive. They do not have the time to go to banks and queue for loan. The majority of them do not even own a bank account.
Nigeria’s informal sector is the largest in Africa, accounting for 65 per cent of the Gross Domestic Product. The sector comprises unregistered enterprises hardly taxed nor monitored by the government. More often than not, most of the transactions in this industry do not involve any other financial instruments apart from cash. The volume of trade in this sector is estimated to be between $12bn and $14bn annually. This has been left to money lenders to finance. And the money lenders are cashing in on it stupendously. The petty traders do not mind or perhaps do not understand the astronomical rates the lenders are charging them. What they know is that someone is giving them the opportunity to survive.
Both the lenders and the borrowers understand the game. They follow the rules religiously. The money lenders sometime lose money. Unforeseen situations, like sickness or death, make it difficult for the lender to recover loans. These are extreme cases as it may only occur one in twenty. Financing the informal sector remains a challenge to the organised finance companies. The money lenders have, however, perfected strategies and processes to navigate the murky waters of informal lending.