AN X-RAY ON DIGITAL MONEY LENDING IN NIGERIA

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   Ufuoma Eferha     

Ms. O. Iji             Ms.U Eferha          Ms. O. Adebayo

Emmanuel C. Onele    Mindy 01   

Mr. E. Onele       Ms. M. Okibe        Ms. N. Ayantoye

 

  1. INTRODUCTION

The digital money lending landscape in Nigeria is still evolving, and challenges related to data privacy, regulatory frameworks, and over-indebtedness need to be addressed to ensure the sustainable growth of the industry. Digital money lending in Nigeria represents a transformative force in the financial sector, empowering individuals, and businesses with easier access to credit, promoting financial inclusion, and contributing to the overall economic growth of the country. Digital money lending (“DML”) refers to the use of technology and online platforms to facilitate the process of borrowing and lending money. In Nigeria, it is an emerging financial service that leverages digital channels, such as mobile applications and websites, to provide quick and convenient access to credit for individuals and businesses.

With the increasing adoption of smartphones and internet connectivity in Nigeria, digital money lending and “pay-day loans” have gained significant popularity. It addresses the traditional challenges faced by borrowers in obtaining credit from traditional banks, such as lengthy application processes, collateral requirements, and limited accessibility to financial services.

  1. REGULATORY FRAMEWORK FOR DIGITAL MONEY LENDING IN NIGERIA

Digital Money Lenders in Nigeria are regulated by the Moneylenders Law of various states, as well as other regulators saddled with the responsibility of protecting consumer interests. The Lagos State Moneylenders Law is aimed at protecting the moneylender as opposed to the borrower given the nature of their unequal standing. The moneylender and the borrower are seen to be in a financial contract, and the integrity of the moneylender is of paramount importance. Section 4(1) of the Law provides that any person intending to carry on a money lending business, or any person to be saddled with the responsibility of managing the business for that matter, must be a fit and proper person in terms of his character and disposition. This and other qualities of the moneylender must be attested to by a magistrate in a certificate which is issued to the moneylender as a precondition for the grant of a license for the money lending business.

The Joint Regulatory and Enforcement Task Force (“JRETF”) was set up in March 2022 to investigate and clamp down on lenders who violate the ethics of lending and people’s data privacy. The inter-agency task force which consists of the Federal Competition and Consumer Protection Commission (“FCCPC”), National Information Technology Development Agency (“NITDA”), Independent Corrupt Practices and Other Related Offenses Commission (“ICPC”), Nigeria Police Force and Economic and Financial Crimes Commission (“EFCC”) was commissioned in response to the rise in complaints of violations of individuals’ data privacy as loan recovery measures.

The JRETF was charged with the responsibility of suspending or discontinuing operations of offending DMLs, account freezing, search and seizure, removal of lenders’ apps from the Google and Apple app stores. As such, the JRETF revoked licenses of two DMLs, Sycamore Integrated Solutions Limited and Orange Loan and Purple Credit Limited, along with their respective apps “Getloan” and “Camelloan” for illegal, prohibited, and unregulated activities, while ordering others to cease operation until proper partial or full license is obtained. The firms were found to be using Android Package Kits (APK) to attract vulnerable borrowers; a process and practice deemed illegal and unregulated by the government agency. Although, one of the firms, Sycamore Integrated Solutions Limited denied involvement “in the practice that has been alleged” and promises its customers to identify the impostors who are using the Sycamore Integrated Solutions business name. The FCCPC took notice of a resurgence in the occurrence of prohibited loan recovery methods and practices. As a result of this, it was broadcast that anyone whose right has been infringed by any DML can file a complaint with the FCCPC through its official portal.

The Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022 (the “Framework”) is the major regulation implemented for digital money lending. The DL Guidelines was introduced by the FCCPC in August 2022 in line with the power conferred on it by Sections 17, 18 and 163 of the Federal Competition and Consumer Protection Act (“FCCPC Act”). The Framework further regulates the digital lending space and makes registration and its approval a prerequisite for companies seeking to operate as DMLs.

The Framework contains a declaration form that requires DMLs to comply with all provisions of the law with respect to third-party privacy rights and personal data, including data unrelated to principles of lending as well as recovery practices that are consistent with fair lending principles under various applicable Nigerian laws and regulations.

      1. BENEFITS AND RISKS OF DIGITAL MONEY LENDERS

      3.1 Benefits of Digital Money Lenders
      3.1.1. Convenience: Digital money lenders are easily accessible to borrowers as individuals can apply for loans on the go on their personal devices from the comfort of their homes or workplaces.
      3.1.2. Short loan processing timeframes: Digital money lenders provide noticeably shorter loan processing timeframes than conventional banks. These digital money lenders quickly and effectively determine a borrower’s eligibility thanks to artificially intelligent algorithms.
      3.1.3. Reduced interest rates and collateral: Digital money lenders frequently provide lower interest rates and lower fees when compared to interest rates offered by banks. This makes credit more accessible to low-income earners.
      3.1.4. Wider demographic spread: Digital money lenders provide credit to a wider range of the population due to their reduced operational expenses and convenience.
      3.1.5. Several loan options: Through the use of digital money lenders, borrowers are presented with an array of loan options to choose from to cater to their specific financial needs.
      3.1.6. Supporting Small and Medium-sized Enterprises (SMEs): The development of SMEs in Nigeria has been significantly aided by digital money lenders. Small firms may now obtain finance more easily thanks to digital money lenders.

    3.2 Risks of Digital Money Lenders
    3.2.1. Data privacy and security issues: One of the main dangers linked to digital money lenders is the risk of loss of sensitive personal and financial data. Borrowers who are subjected to privacy violations and financial losses due to the improper use of personal data may experience serious consequences.
    3.2.2. Regulatory concerns: There is a discrepancy in the regulatory framework available to cater to the prevalence of digital money lenders available to the public. This regulatory gap can lead to inadequate consumer protection and inconsistent lending practices.
    3.2.3. Exploitive and ambiguous ending operations: Lending practices, such as hidden fees, ambiguous terms, and dishonest loan collection techniques, may be used by some digital money lenders. Due to the lack of transparency, there may be miscommunication and disagreements between borrowers and lenders, which could negatively impact on the borrower’s finances and create other legal problems.
    3.2.4. Lack of customer support: Unlike banks that have in-person customer care as an alternate channel to resolve customer complaints or provide guidance on issues, users cannot access a physical location and have little or no help navigating the technical interface of the digital money lending applications.
    3.2.5. Promotion of debt cycle: The simplicity and convenience of borrowing money using digital money lenders may induce borrowers to take out several loans at once, escalating their debt burdens. Borrowers may struggle to pay back their loans without suitable knowledge about finances and ethical lending procedures which leads to the creation of a debt cycle that can be difficult to escape.

    1. PERSONAL SAFEGUARDS TO OPTIMISE THE USE OF DIGITAL MONEY LENDERS
      4.1. Ensure that the loan app is registered with and approved by the Central Bank of Nigeria (“CBN”) and the Federal Competition and Consumer Protection Commission (“FCCPC”). Here is a link which contains a list of FCCPC approved Digital Money Lenders https://fccpc.gov.ng/registration-status-for-digital-money-lenders-apps/. Please note that the list is updated regularly.
      4.2. Do your research. Know how to spot unregulated digital money lenders. Below are some obvious signs:

      • The digital money lender asks for advance or processing fees. Instead, they should ask for your details for KYC checks on your identity and creditworthiness. If you have good credit, you get access to good loans of substantial amounts.
      • The digital money lender is unavailable on app stores or they do not have websites. You are asked to download the app via a link or join a “Telegram” group.
      • The digital money lender does not have an office address or the address changes often.

      4.3. Ensure that the interest rates are within regulation, which is 18.5% as set by the CBN.
      4.4. Ensure that the digital money lender works with a credit bureau such as CRC Credit Bureau. This proves legitimacy.
      4.5. Review the terms and conditions and ensure that you absolutely agree with them and make an informed decision.
      4.6. Avoid sharing personal or confidential information about yourself.
      4.7. Avoid defaulting on repayment. Instead request for an extension of the due date.
      4.8. Avoid taking multiple loans in a short period.

        1. SUGGESTED REGULATORY REFORMS FOR EXISTING FRAMEWORKS ON DIGITAL MONEY LENDING

      The Digital Lending Guidelines (“DL Guidelines”) implemented by the FCCPC is a worthy framework for digital money lenders. However, there are some shortcomings.

        1. Implication of non-compliance with guidelines: Although section 163(1)(c) of the FCCPC Actempowers the FCCPC to make regulations on fees, administrative penalties, charges or levies, and such other related matters, there are no clear provisions in the guidelines or the directive concerning penalties for non-compliance.

      Suggested Reform: As it currently sits, no penalty or sanction would apply to digital lenders who fail to register with the FCCPC. This may create a situation where the Guidelines are honoured more in breach. It is therefore suggested that the Guidelines be amended to include penalties and sanctions for those in breach of the Guidelines.

            1. Extent of moratorium under guidelines: The directive issued by the FCCPC indicates that the guidelines would provide a limited moratorium for existing businesses to comply with the guidelines’ requirements. However, no timelines are specified under the guidelines.

      Suggested Reform: The Guidelines should be reviewed to include specific timelines for existing digital lending businesses to comply with the Guidelines’ requirements.

            1. FCCPC versus CBN on the regulation of digital lending: The guideline seems to have set a jurisdictional tug of war between FCCPC and the CBN. Section 65(1)(a) of the Banks and Other Financial Institutions Act (BOFIA) 2020provides that the FCCPA shall not apply to any function, act, financial product, or other financial services issue or undertaking and transaction howsoever described, by a bank or other financial institution licensed by the Central Bank of Nigeria (CBN). On its face, this seems to divest the FCCPC of any authority to regulate digital lenders licensed by the CBN. By extension of that reasoning, the FCCPC would have the mandate to regulate non-CBN licensed digital lenders; like the unlicensed digital money lenders and digital money lenders that have obtained their licenses from a state.

      Suggested Reform: The FCCPC and CBN should collaborate closely to establish a standardised regulatory framework for digital lending, encompassing both licensed and unlicensed digital money lenders.

          1. ONCLUSION

          Digital money lending has emerged as a significant disruptor in the financial services industry, revolutionising the way individuals and small businesses access credit. It offers numerous benefits, including increased accessibility, speed, and convenience, which has helped bridge the gap between traditional financial institutions and underserved populations. One of the key benefits is its ability to leverage technology to process loan applications swiftly and assess creditworthiness using alternative data sources. This has enabled borrowers to receive funds quickly, addressing urgent financial needs and providing a lifeline during emergencies.

          However, with the rapid growth of digital money lending, there are concerns about responsible lending practices and consumer protection. Some borrowers, particularly those with limited financial literacy, may be susceptible to falling into cycles of debt, especially when faced with exorbitant interest rates and hidden fees. Hence, regulatory authorities and industry players must work together to establish robust guidelines and standards to ensure fair lending practices and protect vulnerable borrowers.

          Additionally, data privacy and cybersecurity are crucial aspects that require careful consideration. Digital money lending platforms collect vast amounts of personal and financial data, necessitating strict measures to safeguard this information from unauthorised access and misuse.

          As the digital money lending landscape evolves, it is essential for stakeholders to strike a balance between innovation and consumer protection. Collaborative efforts between fintech companies, regulators, and consumer advocates are essential to harness the full potential of digital money lending while safeguarding the interests of borrowers.


          _____________________________________________________________

          For further information on this article and area of law, please contact:
          Oluwabukola Iji, Ufuoma Eferha, Oreoluwa Adebayo,
          Emmanuel Onele, Mindy Okibe and Niniolaoluwa Ayantoye.
          at: S. P. A. Ajibade & Co., Lagos by
          Telephone (+234 1 472 9890), Fax (+234 1 4605092)
          Mobile (+234 08099900344,08151191865, 08097904768)
          Email biji@spaajibade.com,  ueferha@spaajibade.com,
          oadebayo@spaajibade.com  eonele@spaajibade.com,  
          mokibe@spaajibade.com  nayantoye@spaajibade.com   and
          www.spaajibade.com


        1. _____________________________________________________________

          1. CFCM Department at S.P.
          2. A. Ajibade & Co., Lagos, Nigeria.
          3. See Moneylenders Law, Chapter M7, Laws of Lagos State 2004.
          4. See “How to report unethical lending” available at https://blog.lendsqr.com/how-to-report-lenders-for-unethical-practices/ accessed 21st July 2023.
          5. See “Update on Registration of Digital Money Lenders (DMLs) under the Inter Agency Joint Task Force’s Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022” available at
          6. https://fccpc.gov.ng/update-on-registration-of-digital-money-lenders-dmls-under-the-inter-agency-joint-task-forces-limited-interim-regulatory-registration-framework-and-guidelines-for-digital-lending-2022/ accessed 9th September 2023.
          7. See www.fccpc.gov.ng  
          8. See Federal Competition and Consumer Protection Act CAP C25, LFN 2004.
          9. See Codeflare, “ The Pros and Cons of Using a Mobile Bank Lending Application” ( 31st March 2033) available at https://codeflarelimited.com/blog/the-pros-and-cons-of-using-a-mobile-bank-lending-application/#:~:text=Easy%20access%20to%20loans%3A%20One,to%20physically%20visit%20the%20bank  accessed 24th July 2023
          10. See Shiv Nanda “7 Benefits of Having a Personal Loan App on Your Mobile Phone” (23rd February 2019) available at https://www.moneytap.com/blog/benefits-of-having-a-personal-loan-app-on-your-mobile-phone/  accessed 24th July 2023.
          11. See Herofincorp “Benefits of Getting an Instant Personal Loan App” (2nd December 2022) available at   https://www.herofincorpcom/blog/benefits-of-getting-an-instant-personal-loan-app  accessed 24th July 2023.
          12. See The Tribune “Why You Should Use an Online Loan App for Your Personal Loan” (25th May 2023) available at https://www.tribuneindia.com/news/impact-feature/why-you-should-use-an-online-loan-app-for-your-personal-loan-510857 accessed 24th July 2023.
          13. See Property9ja, “Top 5 Dangers of Loan Apps in Nigeria- Disadvantages of Loan Apps” (14th January 2023) available at https://property9ja.com/dangers-of-loan-apps/  accessed 24th July 2023.
          14. See Tare Olorogun , Victoria Oresanwo and Praise Darego “Digital Lending and abuse of Borrowers’ Rights – Multifarious and Chaotic Regulation” (18th November 2022) available at https://businessday.ng/news/legal-business/article/digital-lending-and-abuse-of-borrowers-rights-multifarious-and-chaotic-regulation/ accessed 24th July 2023.
          15. See Adam Hayes “Predatory Lending – How to Avoid, Example and Protections” (23rd May 2023) available at https://www.investopedia.com/terms/p/predatory_lending.asp#:~:text=The%20Bottom%20Line-,Predatory%20lending%20is%20any%20lending%20practice%20that%20imposes%20unfair%20and,loans%20they%20can’t%20afford accessed 24th July 2023.
          16. See Humphrey, “Disadvantages of Using Loan Apps- Revealed” (23rd May 2023) available at https://nyscinfo.com/disadvantages-of-using-loan-apps-revealed/ accessed 24th July 2023.
          17. See Fair Money Microfinance Bank, “Is it Safe to Take Loans from Loan Apps in Nigeria?” (29th November, 2022) available at https://fairmoney.io/blog/is-it-safe-to-take-loans-from-loan-apps-in-nigeria/ accessed 21st July 2023.
          18. See Wasllat Azeez, “CBN raises interest rate to 18.5% ‘to tame inflation” (The Cable, 24th May 2023) available at https://www.thecable.ng/breaking-cbn-raises-interest-rate-to-18-5-to-tame-inflation accessed 5th August 2023.
          19. See Digital Lending Guidelines available at https://fccpc.gov.ng/wp-content/uploads/2023/08/LIMITED-INTERIM-REGULATORY_-REGISTRATION-FRAMEWORK-FOR-DIGITAL-LENDING-2022.pdf accessed 8th September 2023.
          20. See Federal Competition and Consumer Protection Act, 2018 available at https://fccpc.gov.ng/wp-content/uploads/2022/07/FCCPA-2018.pdf accessed 8th August 2023.
          21. See Banks and Other Financial Institution Act, 2020 available at https://www.cbn.gov.ng/out/2021/ccd/bofia%202020.pdf accessed 9th August 2023.

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