HOW CREDIT INSURANCE SUPPORTS CREDIT BUSINESS IN NIGERIA

Thursday, 4th July 2024.

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DANIEL BRAIE, FICA, MD/CEO – LINKAGE ASSURANCE PLC

HOW CREDIT INSURANCE SUPPORTS CREDIT BUSINESS IN NIGERIA

DANIEL BRAIE, FICA, MD/CEO – LINKAGE ASSURANCE PLC, a member of the National Institute of Credit Administration, speaks onHOW CREDIT INSURANCE SUPPORTS CREDIT BUSINESS IN NIGERIA”, in the National Institute of Credit Administration’s Credit Economy News.

 

Is the strength of the insurance industry to support credit business transactions in Nigeria collapsing?

“The strength of the insurance industry to support credit business transactions in Nigeria is not collapsing but facing significant challenges. These challenges include lack of capacity, poor data management, economic instability, regulatory issues, poor collaboration along the financial value chain system and market penetration problems. Despite these hurdles, the insurance industry continues to provide critical support through credit and quasi-insurance products despite the poor risk management environment to help mitigate risks associated with lending and borrowing.”

The insurance industry is adapting to the evolving economic environment and regulatory landscape to better support credit business transactions and is poised to take advantage of the new consumer credit framework recently introduced by the Federal government. What seems to be collapsing is the strength of credit available in the face of current economic reality.

 

Currently, what are the credit mitigation products introduced by the industry players to induce credit availability, credit accessibility, and credit affordability in Nigeria?

The industry has some limited products available within the market which to some extent enhances credit availability, accessibility, and affordability within the Nigerian lending and banking sector. These products include:

  • The most common products are bonds and guarantees, such as Advance payments, Performance bonds and bid bonds etc.

  • The Insurance Act 2003 empowers Life Insurance Companies to underwrite credit insurance. As a result, credit life and mortgage products provide cover for outstanding loans and mortgage protection.

  • Credit Guarantee Insurance in the form of credit insurance runs as a general insurance business. Few insurance companies may provide cover on a case by-case basis if the insuring client would provide collateral.

  • Trade credit insurance, usually available via collaboration with specialized markets outside Nigeria.

  • Agricultural credit insurance supports basically the acquisition of trade assets.

  • Loan protection insurance ensures that loans are repaid in the event of unforeseen circumstances like job loss, illness or death.

 

What are the systemic problems hindering the delivery of the perceived synergy required from the insurance industry to support the overall well-being of Nigeria’s credit industry?

Several systemic problems hinder the insurance industry’s ability to fully support Nigeria’s credit industry. Essentially, Nigeria has not been a credit economy but just beginning to evolve. The following are the reasons:

  • Economic instability – high inflation, currency depreciation, and economic volatility affect both insurers and borrowers alike.

  • Regulatory challenges – inconsistent regulatory frameworks and enforcement can create uncertainty and reduce the effectiveness of credit insurance products.

  • Low market penetration – limited awareness and understanding of credit insurance among individuals and businesses lead to low adoption rates.

  • High operational costs – high administrative and operational costs reduce the affordability and attractiveness of credit insurance products.

  • Data and infrastructure deficiencies – lack of reliable credit information and inadequate technological infrastructure hinder risk assessment and management.

  • Weak legal system – long tail judicial system and weaker support for lenders and guarantors within the legal system make difficult for insurance companies to want to deploy capacity along these product lines.

  • High premium rates – because of the huge exposure and poor credit history, insurers are forced to charge economically unviable premium rate in order to protect themselves.

  • Repayment/trust issues and collaterals.

 

What would you say should be the role of the National Institute of Credit Administration (NICA) chartered to ensure that the credit business ecosystem in Nigeria is healthy?

The National Institute of Credit Administration (NICA) should play a pivotal role in ensuring a healthy business ecosystem in Nigeria by:

  • “Setting standards and best practices – establishing and promoting industry standards and best practices for credit management and insurance.

  • Advocacy and policy influence – advocacy for favourable policies and regulations that enhance the credit insurance market and improve credit accessibility in active collaboration with relevant regulatory bodies.

  • Education and awareness – conducting training programs, workshops, and awareness campaigns to educate businesses, financial institutions, and the public about the benefits and mechanisms of credit insurance. This should be done in collaboration with the industry regulator National Insurance Commission (NAICOM) and other insurance industry trade associations like Nigeria Insurance Association (NIA), Nigerian Council of Registered Insurance Brokers (NCRIB).”

  • Research and development – Undertake research to understand market needs, identify gaps, and develop innovative financial instruments and credit mitigation products.

  • Collaboration and partnerships – facilitating collaboration between industry stakeholders, including insurers, lenders, and regulatory bodies to create a cohesive credit ecosystem.

  • Monitoring and evaluation – continuously monitoring the credit market and evaluating the impact of credit insurance products and policies to ensure they effectively support the credit industry.

  • Reinsurance capacity – work with the insurance companies in Nigeria to attract support from reinsurers for these type of products.

  • Ensuring ethical practices and compliance in the credit industry – NICA should play a key role in ensuring that industry players are constantly adhering to a high standard of ethical practice and compliance to enabling laws within Nigeria. For example, NICA should ensure that most products in the market are of high ethical standards and protect consumers from “loan sharks” so to speak.

By playing these roles, NICA can contribute to a healthy credit business ecosystem in Nigeria and help the credit industry to grow, which will in turn drive the economic growth of the nation.

“Access to credit financing is a key factor in improving the standard of living in the advanced economies and Nigeria can also achieve this level if we can create a robust consumer credit industry.”

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