Why Many Nigerians prefer loan apps over conventional bank loans

The financial landscape in Nigeria is undergoing a transformation, with more individuals opting for fintech loan apps over conventional bank loans.

The shift is largely driven by convenience, speed, and less stringent requirements compared to traditional banks. While fintech companies have revolutionized access to loans, concerns over high-interest rates, short repayment periods, and lack of physical offices persist.

The Appeal of Loan Apps

For many Nigerians, the process of securing a loan from traditional banks is often long and cumbersome. Joe Michael, a schoolteacher, shared his experience when he first attempted to secure a loan from his bank in 2021.

The bank required extensive documentation, including a completed application form, employee status verification, employment ID, BVN, and credit checks. Unable to meet these requirements promptly, he turned to a loan app and received his loan within 48 hours.

Michael’s experience is not unique. The rise of fintech companies has changed the financial services industry, offering digital-first solutions with fewer hurdles. Unlike traditional banks, fintechs operate as digital-only entities, providing services such as payments, savings, and loans without the need for physical branches.

READ ALSO: Tech CEO urges embrace of AI at Nigeria fintech festival

Their ability to lower operational costs allows them to offer competitive fees and faster processing times.

“Loan apps are easier. You don’t need to see anybody; it’s strictly online. You just download the app and apply, and they easily give out loans,” Michael explained.

Traditional Banks’ Stringent Loan Processes

While fintech loan apps offer ease and accessibility, commercial banks maintain more rigorous pre-approval requirements. Business loans from banks often require company registration, full KYC documentation, BVN, TIN, proof of business operation for at least one year, and a minimum three-month relationship with the bank.

Additionally, banks frequently demand collateral, such as property or car documents, making it difficult for many individuals to access credit.

Advertisement

Sunny Udoka, a grocery store operator in Lagos, recounted his brother’s struggle to obtain a N4 million loan from a top-tier bank. The bank demanded property collateral worth N25 million and required repayment of N6 million within six months.

“How much are you making that you pay N6 million within six months? You can imagine now, in January and February, there is no market (sales). If I collected a loan in October last year and have six months to pay, how will I do it when there are no sales?” Udoka questioned.

READ ALSO: MTN Group to boost data, fintech services with fresh $1.8bn investment

Banks face several challenges in providing retail loans, including strict regulations like Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, thorough credit risk assessments, and capital adequacy requirements.

These regulatory measures, while ensuring financial security, also slow down the loan approval process.

“As commercial banks, we conduct thorough credit risk assessments, which can be time-consuming and costly. Also, traditional banks require collateral, especially for large amounts, making it difficult for individuals who do not have tangible assets to access loans,” said a senior staff member of a leading commercial bank.

“However, traditional banks still hold an advantage because we offer long-term, lower-interest, and larger loans, which fintechs don’t.”

Challenges of Loan Apps

Despite their advantages, loan apps are not without drawbacks. High-interest rates, short repayment periods, and issues related to unauthorized deductions have raised concerns.

Michael noted that some fintech employees continue to deduct money from accounts even after loan repayment. “Some dubious workers in these loan apps can continue to deduct from your account even after you have completed repayment because they have your PIN, BVN, and account number.

Unfortunately, there is no physical office to go and complain, you only complain on the app, and most times, it does not change anything. Also, the interest is too high, and the refund period is too short. Some of them are seven days, while some are one month,” he said.

Esther Ugwumba, a POS agent in Lagos, suggested that fintech companies improve their services by allowing customers to choose flexible repayment schedules, ensuring customer data protection, and providing financial management resources.

“They should always protect customer data and ensure secure transactions. Offering resources and workshops to help customers manage finances effectively would also be beneficial.

Advertisement

Additionally, keeping customers informed about loan status, repayment schedules, and promotional offers can build trust and improve customer experience,” she stated.

Fintech’s Disruption of Traditional Banking

The rapid rise of fintech loan apps has disrupted Nigeria’s traditional banking sector, forcing commercial banks to invest in digital transformation to remain competitive. Many banks have improved their mobile and online banking services in response to fintechs’ success.

However, experts believe that a balanced approach is needed. While fintechs provide quick and easy access to loans, the regulatory frameworks governing them need to be strengthened to prevent predatory lending practices and unauthorized deductions.

At the same time, traditional banks must continue to innovate and simplify their loan application processes to remain relevant in the evolving financial ecosystem.