Investing N10 Million in Nigeria – Financing Trade Wins

In a piece on how to invest N10 million (about $28,000) in Nigeria, I explained that financing trade could be very lucrative. Largely, returns of 40% have been recorded within four months.

Put 40% to finance trade. In Aba and Onitsha, some people put money to finance trade. Some men mop cash and travel to China to bring containers. The return can be close to 40% with my recent data in four months. It is a solid business outside the banking sector run by some Igbo men. Say someone needs to import something of N220 million, they pool money and once the items come in, they sell wholesale and balance the people that funded them. This is the real investment and can technically make you whole. But it has risks if you do not know the person. You would not like to give money to someone you do not know.

Someone followed up and commented as follows

Thanks for the clarity of your write up and of course the well researched content. One question though; why would traders be willing to offer up to 40% returns in as few as 4 months while rejecting bank loans which typically hover around 21% per annum. Is it just the interest rates or more about the quality of their collaterals.?

This is my response (edited for clarity)

I am not a trader but if you work with these guys, they can mobilize cash in 72 hours. I am not sure any bank can achieve that in Nigeria. Also, banks most times will ask you to import in their names or something like that, holding the assets until you have cleared the loan. But here, the trader is in control. People do not go to payday loans because there is no bank; people go there because they are more convenient with lesser frictions.

So, people do give away 10% of their salaries for immediate cash in America even though a bank will do it largely free. But the problem is that a bank will ask for many things while a pay day master does not ask for anything.  Convenience matters to the people who patronize payday lenders.

The payday loan in U.S. is like fiction until you see people queuing to give out 10% of their salaries to get cash about 3 days before the cheque is due. So, you have a cheque of $1,000 and you collect $900 today for someone to cash that cheque and keep $100 in 3 days. It is a big business in U.S.

Sure, government does tell people to stop that. But the reality is that the ease of walking into a small office and coming out in 10 minutes with that $900 without filing any major form or going through background check seems to be better option for some people than trying to save the $100 by going through the vetting process of the banking system.

It is that philosophy that drives traders. Banks will need you to submit all kinds of materials and waste 3 months to mop that cash. Members can help you move money in 72 hours. Even if bank is offering 21% interest per annum, that is irrelevant because of the friction involved. Payday masters could make 10% in 3 days and yet people go there! It is unfortunate on that level of margin but it happens.

In Nigeria, companies like Lidya which are focusing on SME lending can fix some of these frictions by finding better ways to engage traders and businesses. The requirements in the formal banking system remain a huge burden to most traders. But you cannot blame the banks because they need to meet financial ratios set by the regulator while making sure they are not tripped into bad loan paralysis.

Lidya, the digital financial services platform focused on improving access to credit for micro-, small-, and medium-sized enterprises (MSMEs) in Africa, today announced that it has raised $6.9 million in a Series A investment round, one of the largest in Nigerian tech history.

Of course financing trade will remain challenging until Nigeria builds a top-grade credit system. With a credit system, the risk will drop and banks can easily offer loans and credits without demanding onerous collaterals.

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