Chika Nwosu, the managing director of PalmPay, a digital payment platform, has urged digital lenders to prioritise transparency and consumer education on responsible borrowing and promote financial literacy through targeted initiatives.
He disclosed this in a report titled, ‘A New Era of Credit: The Rise of Digital Lending in Nigeria.’ According to him, digital lenders and consumers alike have a pivotal role in fostering a culture of responsible borrowing,
He urged consumers to thoroughly research lending platforms before applying for loans, advising them to engage only with licensed and regulated entities to protect their data and ensure ethical practices.
“This not only safeguards the borrower but also provides a channel for recourse in case of disputes,” he said.
According to the National Bureau of Statistics, approximately 90.5 percent of MSMEs lack access to financing. SMEs constitute around 90 percent of businesses in Nigeria and employ more than 70 percent of the workforce, but many lack access to credit.
Digital lenders are stepping in to bridge the financing gap for SMEs. According to the ‘Moniepoint Informal Economy Report 2024,’ 15.1 percent of businesses in the informal economy rely on loans from loan apps and platforms for credit.
Nwosu acknowledged the convenience of digital lenders but also noted the deterrent of high interest rates, which can reach up to 30 percent monthly. He noted that traditional banks typically cater to low-risk applicants, whereas digital lending startups serve a broader demographic, necessitating higher interest rates to mitigate the risk of defaults.
He said digital lenders have developed innovative strategies to address rising default rates, such as using data science and alternative data sources for credit scoring.
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He noted that lenders also rely on innovative product design to incentivise good repayment behaviour, such as starting borrowers on lower credit limits that increase with consistent on-time repayments and offering Buy Now Pay Later options for products on their own platforms that contribute positively to credit scores.
However, Nwosu pointed out the unethical practices of some digital lenders in loan collection. In March 2024, the Nigeria Data Protection Commission began investigating loan apps after over 400 privacy breaches were reported.
In 2023, the Nigerian government collaborated with tech giants Google and Apple to remove 37 unlicensed loan apps from their stores, aiming to curb exploitative lending practices.
Nwosu stated, “The rise of digital lending signifies a transformative shift in Nigeria’s financial landscape, presenting new opportunities and challenges. As the sector evolves, maintaining a balance between accessibility and responsible lending is crucial to realising the full potential of digital credit for all Nigerians.”
