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Emerging Markets
Explore the vast potential for consumer lending in emerging markets.
Explore the vast potential for consumer lending in emerging markets.
According to World Economics, emerging market countries account for 50.1% of global GDP. More than 4.3 billion people live here, with an average age of 34 years.
At the same time, such countries have a fairly low standard of living.
For example, GNI per capita in Nigeria amounts to a little over $2 thousand. For comparison, in the USA, this figure exceeds $76 thousand.
This situation leads to increased demand for consumer lending among residents of developing countries. Including to meet their basic needs.
As a result, emerging markets have enormous potential for lending institutions.
Emerging markets are countries with market economies that do not fully meet the standards of developed countries and are characterized by incompletely formed market institutions.
According to the World Bank report, 135 countries can be classified as emerging markets, each with a middle or low income level.
India, China, Indonesia, Brazil, and Mexico are among the largest developing countries.
The diagram below illustrates the classification of all world countries into developed and developing:
In the context of lending, emerging markets are characterized by the difficulty of getting a loan using traditional credit scoring.
This is due to the high proportion of the unbanked and underbanked population, high unemployment, and low incomes.
As an example, consider the situation with access to traditional credit in India, Mexico, and Nigeria.
According to The Global Findex Database, 22% of Indians do not have a bank account. That is, they do not have access to banking services, including lending from traditional banks.
The same source reports that 45% of the Indian population uses credit, but less than a third of them have taken out a loan from a financial institution, most borrow money from friends and family.
The situation is even more complicated in Mexico – only 49.1% of the working-age population have bank accounts.
Despite the fact that the country's authorities are taking all possible measures to increase the accessibility of financial services for the population, this does not bring fundamental changes.
Lack of formal employment and low incomes make it impossible for Mexicans to obtain a bank loan.
According to a report on Nigeria's financial inclusion, 26% of its residents remain unbanked.
Other problems that hinder obtaining a bank loan include the high unemployment rate in Nigeria. According to Statista analytics, here more than 13% of young people are unemployed.
Thus, none of these individuals meet one of the main requirements of traditional financial institutions – the presence of official income.
Due to the high demand for credit and the limited availability of traditional financial services, the demand for fintech companies is rising in many developing markets.
Let's see the importance of the fintech sector in lending to emerging markets.
India. According to Statista, fintech companies in India are experiencing rapid growth. While in 2020, the country's digital lending market size was $150 billion, then in 2023 this figure reached $350 billion.
Mexico. Mexico's fintech market is also showing strong growth. According to the Mexico Fintech Market Report, it will grow by 14.2% annually over the next eight years.
At the same time, lending is the most popular fintech business in the country. This industry accounts for 25 % of fintech companies in Mexico.
Nigeria. According to ICIR, 32% of Africa's entire financial technology industry is fintech in Nigeria.
The survey results show that the country's technology companies have grown to 217, up 50.1% from the previous year.
This popularity of fintech companies in emerging markets is due, among other things, to their enhanced lending capabilities through the use of alternative data.
Using non-traditional data sources to improve scoring models opens up a number of opportunities for fintech companies:
1. Expanding the target audience. By using alternative data, a lender can provide unbanked services to a population “invisible” to traditional banks.
2. Increasing the efficiency of risk management. Non-traditional data allows you to form the most complete picture of the borrower’s creditworthiness and make an informed decision on the application.
3. Reduce fraud. Modern algorithms make it possible to determine the risk of fraud at the stage of consideration of the application and reduce the number of loans issued through criminal means.
The Three Tips on How to Lend More to Emerging Markets
Alternative Credit Scoring in India - How to Issue Loans to the Unbanked Population
Alternative Credit Scoring of the Unbanked Population in Mexico
Consumer Loans in Mexico. Types of Loan Products and Top Financial Service Providers
How to Improve Credit Scoring in Nigeria Using Alternative Data