Online lending business in Nigeria has exploded as dozens of firms are set up to provide easy and quick access to credit to thousands of businesses and individuals. Beyond just making loans available at a more convenient manner, these firms have reduced the time from weeks to days to hours and now to minutes.
Chijioke Dozie, co-founder and CEO of Carbon, former Paylater, told BusinessDay that its platform can disburse loans in less than five minutes of downloading its mobile application and applying for a loan. Renmoney and Page Financials have even gone on street to street campaigns with boxes and kiosks to give more people access to loans.
These days, deposit money banks are not left out in the online lending party. GTBank, for instance, have evolved from mild participation to an aggressive competitor, offering one of the most attractive interest loans (23%) to salary earners.
The problem is that lending to individuals and small businesses often fall through the regulatory cracks, specifically on borrower protection. Generally, the legal framework in Nigeria is very weak and lacks the bite required to hold firms accountable or keep them transparent in a more sustainable manner.
Online lending – and lending in general – falls under the regulatory purview of the Central Bank of Nigeria (CBN). The apex bank provides that any entity that wishes to provide lending could only do so by registering as a bank or Other Financial Institution (OFI) pursuant to the Banks and Other Financial Institutions Act, Chapter B3.LFN 2004.
Additionally, a marketplace lender may be registered as a money lender in accordance with the Money Lenders Law of the state in Nigeria which it wishes to operate from, according to lawyers from Udo Udoma & Belo Osagie.
“States also have lending laws which are restricted to activities within the state,” Enyioma Madubuike, founder of Legitng, a digital legal services provider, told BusinessDay. “Usually, fintechs go the CBN route. They can apply to register as Micro Finance Banks.”
The firms run with a unit-Microfinance Bank license which now cost N100 million to get. The MFB provides NDIC insurance cover which means the firm pay 17/19 of 1 percent of the deposit balance to the NDIC each year.
One of the problems with the Moneylenders Law is in its definition of who can be considered a money lender.
Section 31 of the Moneylenders Law provides that Moneylender includes every person whose business is that of money lending or who carries on or advertises or announces himself or holds himself out in any way as carrying on that business, whether or not he also possesses or owns property or money derived from sources other than the lending of money and whether or not he carries on the business as a principal or as an agent; but shall not include –
a. Any society registered under the Co-operative Societies Law; or b. Any body Corporate, incorporated or empowered by special Law to lend money in accordance with such Law.
The Moneylender Law’s exclusion of co-operatives is a potential loophole that some firms are exploiting. Rather than apply for a moneylender’s license these firms opt for co-operative license. Many co-operatives entities loan money to their members, but these are not properly captured.
In Nigeria, Cooperative Societies are regulated by Nigerian Co-Operative Societies Act which is a Federal Law that grants powers to the Governor of each state to establish a Directorate for Cooperatives which will be in charge of registering and regulating cooperatives. Due to limited resources many states do not have a directorate, hence there is little regulatory oversight on cooperatives in these states.
Babatunde Babs Ogundeyi, CEO of Kudabank told BusinessDay that there is a limit to what a Moneylender’s license can do for an online lending firm. Kudabank recently secured an MFB license from the CBN.
“Technically if you are lending your own money, you don’t need a license to lend. It‘s your risk,” he said. “But if you want access to independent information that helps you make credit decisions, then you need at least a money lender license. This applies to any lender not just an online lender.”
Another challenge with the Moneylender law is that it was written at a time when online lending did not exist. The Lagos Moneylenders’ Law for instance was written in 1960 with the last review in 1972, in essence, it has not been reviewed to keep up with the changing times. Hence, the Moneylender does not consider the peculiarities of online lending. In addition, the fact that they are administered by states means there are variations of interpretations. The implication could be a firm who has applied for a license in Lagos may need to apply again in Ondo state if they desire to operate there.
“I think the CBN needs to breakdown the existing licenses into chunks so that fintechs can deal with what they have the capacity to do,” Adedeji Olowe, CEO of Trium Networks told BusinessDay. “For example, separate licenses for: lending, digital lending, wallet and digital bank. Each license could be a super-set of the other. For example, lending can do just lending, but lending can do lending and also in a digital way.”
Madubuike however believes a better approach would be to create a new category for online platforms, because as it stands a unit MFB license is meant to cover for a particular sone but most lending platforms just go for it because it is the cheapest and use it as extensively as they choose.
The new category would consist of an MFB license for SMEs with a national scope but similar requirements (in terms of costs and other licensing requirements) as unit MFBs.
“Online platforms require small teams, they don’t need branches everywhere. If CBN is okay with giving unit MFB licenses to online lenders, it is fine. They know these platforms operate on a national scale and have oversight into their operations to ensure they do not go overboard. I know there are some portions which do not fit perfectly but as long as online lending businesses are operating within CBN oversight and not in the shadows, I don’t see any problems” he said.
