Three years ago, while presenting my show “Red Tape Africa” on Africa Business Radio, I hosted Eke Urum, then CEO of a company called Cash Estates. You might be more familiar with the name Risevest, which it later morphed into.
On that episode, I was talking about the Kenyan government’s decision to shut down two popular ride-hailing services in Nairobi for not operating under the proper licence. My position was simple:“Africa needs jobs and innovation creates jobs. Under no circumstances should a regulator ever stand in the way of job-creation in Africa.”
I expected Eke, as the founder of a fintech startup to share my position 100 percent. Instead, he adopted a significantly more cautious, middle-of-the-road tone. It was true, he said, that operators should obtain the correct licences and obey the law, but the government should also try to work with them to assist them attain compliance, instead of merely wielding the big “ban” hammer against them.
At the time, I thought he was merely being diplomatic, given that his startup was in the process of obtaining regulatory approval from the SEC to morph into what later became Risevest, but in the intervening three years, I have grown to understand his viewpoint better.
Everyone is a Libertarian until…
Anyone who regularly reads this column or follows my stream of consciousness on Twitter knows that my economic and political ideologies are very much pro-market, anti-state overreach, and pro-individual freedom. The evidence my eyes have showed me in my 32 years of being a Nigerian, is that markets are much better at delivering prosperity and better living standards to the majority of people than overbearing, incompetent nanny states like Nigeria’s federal and state governments.
In my lifetime, I have seen ownership of a telephone go from being a status symbol that once marked my family out as part of Nigeria’s 1 percent, to a completely unremarkable fact of literally every Nigerian’s everyday life. Once upon a time in the late 1990s, my dad’s Nokia mobile phone with the exposed antenna and the Multilinks CDMA connection regularly drew gasps from bystanders. Nowadays, a five-year-old child in Orile-Iganmu would wrinkle their nose at such an ancient technological relic before pulling out their Android smartphone to play Cocomelon on YouTube.
Only the market could have performed such a miracle in 20 years, and I often make reference to the game-changing, economy-redefining impact of market-driven telecoms as an example of how states need to stay out of the market’s way at all cost. I do believe that markets are generally quite efficient at allocating resources and ensuring that effort is rewarded proportionally, but between 2019 and now, I have learnt something else about markets that has changed my position on the importance of regulators and regulations.
Take my recent investigation into Chinese loan sharks in Nigeria, for example. Going by my 2019 position, these loan sharks should simply be left alone. They are after all, creating debt collection and accounting jobs in an area where jobs are in short supply. They are also filling a gap in the market – easily accessible, unsecured consumer credit. The banks certainly want nothing to do with that market space, and using the efficient market theory, you cannot hold it against them.
The market for consumer credit in a fundamentally black market-oriented economy like Nigeria, is unattractive from a bank’s point of view. Nobody has ever been able to build a proper credit scoring system that realistically captures the creditworthiness of anyone from a vulcaniser in Owerri to a salaried worker in Abuja. Ethical debt collection may likely not yield much success due to a huge trust/behavioural deficit in our broken society.
Frankly, the effort expended in trying to offer proper consumer finance to 100 million+ Nigerians will likely exceed the reward.
Enter the Chinese loan sharks who mitigate all these risk factors using ingenious but completely unethical and horrifying tactics. The lack of credit history and proof of creditworthiness is mitigated by offering loans to anything with a pulse and using the threat of disgrace before their entire social group as a sort of collateral. Collection rates are inevitably much higher than anything the banks would have achieved using their ethical methods. From a market point of view, this is efficiency – a more competitive player stepping in to create value that a less competitive player is unwilling or unable to do.
And yet it does not take a genius or a Communist to work out that substituting unregulated, unlicensed criminal loan sharking syndicates for actual consumer finance from a country’s official banking system is the furthest thing from a desirable outcome that anyone would wish for. Whenever you receive one of those awful messages informing you that one of your contacts is a child rapist or a dangerous criminal because they did not pay their usurious N30,000 loan on time, the market is working efficiently. Which clearly means then, that the market and its form of efficiency have limits in any kind of livable civil human society.
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The rules exist for a reason
In the aftermath of the Enron collapse in the early naughties, a passing comment from the prosecutor handling the resulting case became something of an iconic quote. It went something along the following lines: “These individuals were smart enough to break the rules, but not smart enough to understand why the rules exist in the first place.” In the three years since my conversation with Eke that day in Ikoyi, I have started to understand his caution in greater depth.
The reality is that humans are selfish and greedy. Capitalism and markets are broadly positive and productive ways of channelling human greed and selfishness into outcomes that broadly favour the entire species. The catch is that it is like hitching a ride from Point A to Point B on the back of a hungry tiger chasing an antelope located at Point B. If the process is well managed and regulated, there is a quid pro quo. We get to Point B where we safely dismount the tiger as it tears into its meal. Everyone is happy. If, however, it is not properly regulated, there is always the risk that the tiger will abandon getting to Point B and simply turn us into its meal.
Whether it is the rules guiding issuance of consumer credit and debt collection methods, or the rules guiding who is permitted to solicit and gather investor funds for collective investment schemes, or the rules guiding who is permitted to gather consumer data and how such data is used, these rules came into being for specific purposes. It can definitely be argued that in Nigeria, regulators often come up with regulations for no reason bigger than simply extorting productive areas of the economy and this is certainly true. It does not mean, however, that rules and laws are to be circumvented altogether – because that would be a much worse state of being.
Over the past two weeks, we have seen breaking stories concerning Chinese criminal loan sharks like Sokoloan, which are linked to Hong Kong’s Triads, and collective investment platforms like GetEquity, which have no regulatory licences whatsoever and operate entirely outside the law selling unrecognised financial instruments that are unenforceable in court. One hopes that both the insiders and the public stakeholders involved in such operations understand the same thing that the Enron prosecutor articulated all those years ago.
“These individuals (are) smart enough to break the rules, but not smart enough to understand why the rules exist in the first place.”
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