A Tale of Two Markets: How Lower-end Borrowers Are Punished for Bank Regulatory Failures in Nigeria

In 2009, the Nigerian banking system witnessed a financial crisis caused by elite borrowers in the financial market. Regulatory response to the Nigerian crisis closely mirrored the international response with increased capital and liquidity thresholds for commercial banks. While the rise of consumer protection on the agenda of prudential supervisors internationally was logical in that consumer debt was the main cause of the global recession, the Nigerian banking reforms of 2009 disproportionately affected access by poorer consumers, who ironically had little to do with the underlying causes of the crisis. As lending criteria become more stringent, poorer consumers of credit products are pushed into informal markets because of liquidity-induced credit rationing. Overall, consumer protection is compromised because stronger consumer protection rules for the formal sector benefits borrowers from formal institutions who constitute the minority of borrowers in all markets. While the passage of regulation establishing credit bureaux and the National Collateral Registry will, in theory, ease access to credit especially by lower-end borrowers, the vast size of the informal market continues to compound the information asymmetry problem, fiscal policies to tackle structural economic issues such as unemployment and illiteracy remain to be initiated, and bank regulators continue to pander to elite customers with policy responses that endorse too big to fail but deems lower-end consumers too irrelevant to save. The essay concluded that addressing the wide disparity in access to credit between the rich and poor through property rights reforms to capture the capital of the informal class, promoting regulation to check loan concentration, and stimulating competition by allowing Telecommunication Companies (TELCOs) and fintech companies to carry on lending activities because of their superior knowledge of lower-end markets will facilitate greater access. The risk of systemic failure deriving from consumer credit in Nigeria is insignificant compared to the consumer vulnerabilities resulting from the exposure of consumers to unregulated products in the informal market.