Lending is a tough nut to crack, and Nigeria’s biggest banks, valued at trillions of naira, know this too well. Only 6.2% of Nigeria’s adult population had access to loans in 2019, a measure of how much banks avoid retail lending. Lending to small businesses is the same story; banks avoid it like a plague.
Fintech startups saw the opportunity in this untapped market, but turning digital lending into a viable business has been tougher than expected. Without strong incentives to pay back loans, defaults are common and losses can mount quickly. Every lesson in digital lending is expensive.
Enter BlackCopper, a Nigerian digital lending startup founded in 2020 to give small and medium businesses collateral-free loans. Despite its bright start and significant press coverage, the startup soon faced an existential crisis: it could not recover over 60,000 loans disbursed to customers.
The Techstars-backed startup, cofounded by Olumuyiwa Faulkner (CEO) and Azeez Oluwafemi (CTO) claimed customers falsifed crucial information like addresses during the Know-Your-Customer (KYC) process, allowing them to drop off the radar once they took loans. Some other customers simply cannot repay.
BlackCopper is working with loan recovery companies to claw back some of the loans, but Faulkner has no faith in the process.
“It is expensive to chase thousands of individuals to return ₦5,000 or ₦10,000. It would have been more feasible if we were chasing down a few individuals owing us large amounts of money each.”
The defaults are not BlackCopper’s problems alone. At least 75 investors who made debt investments in BlackCopper in hopes of a return, will take it in the neck for yet another ill-conceived digital lending venture that once talked up the strength of its loan decisions. The company has also laid off about 30 of its 40 employees.
The scale of the defaults is staggering and the numbers are distressing. Of the over ₦2.1 billion BlackCopper loaned to customers, it is unclear how much was recovered. Nevertheless, extraordinarily high default rates have led to a ₦1.2 billion debt. Of that amount, BlackCopper has only paid back ₦200 million in the last eighteen months.
Faulkner says he has explored several options to repay investors—selling personal belongings and pivoting BlackCopper to generate new income streams. So far, nothing has worked out on the scale required to return the billions of naira owed and his investors are unimpressed.
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Five investors who spoke to TechCabal say Faulkner failed to communicate the true state of affairs at the company at the start.
“He would give one excuse or the other whenever I brought the matter of my payment up,” said one person who invested the proceeds from the sale of her house in the US in hopes of a return.
While they waited in vain for returns on their investments, Faulkner relocated with his family to Canada. Some investors viewed it as an attempt to escape responsibility, but Faulkner claims he travelled to Canada for his wife’s education.
He told investors after his relocation that their payments were delayed because BlackCopper’s customers were not repaying their loans. To those investors, the most puzzling aspect of Faulkner’s claim was that all the customers who received loans defaulted.
“It made no sense, the only way to have 100% non-performing loans (NPL) is through poor risk assessment, poor underwriting, or issuing fraudulent loans,” said an investor who also owns a digital lending startup.
Another investor told TechCabal that it is possible BlackCopper didn’t give out any loans to customers and squandered investor funds.
“From the data I’ve seen of a company with over 300,000 customers, you can expect anywhere from 40% to 65% loss of NPL in a month,” Mejero Emmanuella, the founder of Yana Finance, a company that provides cashflow solutions to SMEs, wrote in a blog post about the economics of lending.
But Faulkner denies any foul play, insisting BlackCopper’s NPL ratio was initially between 12-15%. He blamed the failure of the business model on a “funding mismatch.” While lending needs sufficient long-term capital, he argued that his investors were more focused on the short to medium-term.
“In Nigeria when people give you money they benchmark it against the treasury bills and the foreign exchange markets,” Faulkner said.
“So if a person gave you the money for six months and the foreign exchange moved in two months, they usually will come back to ask for their money back. This is because, going by the foreign exchange, they could make more than what I am offering to give in a whole year.”
Faulkner claims the demand for payback from investors prompted the company to stop disbursing loans.
“The reason why such people pay their loans is that they can increase their credit score on the app and get more money when they borrow again. If the company is shutting down, what incentive do they have to pay back?”
Despite all the signs pointing to a shutdown, Faulkner claims he’ll take the company’s “technology and skill set to help other companies build apps and automate processes.” While he claims it could provide the revenue stream the company so badly needs, he also mentions equity fundraising, raising questions about whether Faulkner understands the precariousness of the situation. Time will tell if his confidence is misplaced.
Ultimately, Faulkner’s investors will look back on this moment and wonder how the script got so badly mangled. In an environment where VC firms say they back teams and the antecedent of the team leads, it was easy to buy into Faulkner. He counts GTBank, Moniepoint, and Flutterwave as past employers and claims his grandfather Bruce Faulkner, was secretary to Lord Lugard. And like most figures in digital lending, he talks a good game.
“50 years from today, when my children ask me what I did to help Nigeria in my youth, I will tell them that I founded a business that helped many Nigerians to thrive,” Faulkner told The Vanguard in a 2022 interview.
These days, Faulkner is a more subdued figure and jokes that the burden of a struggling startup has greyed his beard faster than he expected. He’ll give digital lending another go if he gets another chance, he says.
“The reason why traditional institutions do not serve these customers is solid and valid, but it can still be done.”
More cynical observers will retort that there’s a reason the market was untapped in the first place.
