Digital loans: Regulatory gaps create sweet-sour experiences for consumers in Nigeria

Emmanuel  Okoegwale

Principal Associate, MobileMoneyAfrica

As many African government authorities scratch their heads on how to deal with the emergence of  digital lending, the sector  keeps growing unregulated  in a continent where access to formal credit is very limited for small businesses and individuals. For many citizens, digital loan is their first formal credit access.

Despite the compelling value of digital lenders filling the vacuum of credit access, there is also a  growing concern of consumer abuses, predatory pricing etc which is causing authorities to rethink the appropriation of risk, creating certainty, and improving consumer’s confidence in the instant credit ecosystem in Africa.

Recently, President Uhuru Kenyatta of Kenya, approved a change in law that will allow the central bank to regulate digital lending in the country. This piece of legislation is a missing part in the digital credit playbook in many African countries where SMEs and individuals struggle to access credit from  traditional financial services providers like banks.

Despite the near immediacy of credit, ease of access, reduced waiting time to access credit offered by digital lenders, some of the consumers found themselves with the tail-end of the transaction due to the, sweet-in-the-middle terms and conditions that is not favorable to consumers.

Technology is leapfrogging Fintechs over traditional lenders for digital credit which is used to justify ‘ability’ for credit qualification  but they can’t do same for ‘willingness’ to repay hence the strong arm tactics of some lenders by weaponizing of the same mobile data access that was leveraged for the credit qualification  to public shame the lender by reaching out to their family and friends.

In Nigeria most digital lenders operate under the state government’s  money lender’s permit edict which dates back to colonial era however some state’s  edict transitioned into laws but most important to note is that whereas  the rules guiding the qualification for the permit is clear and quite straight forward, same cannot be said for the oversight, supervision and regulation  hence the permit is the easiest entry path for most Fintechs rather than pursuing a Micro finance bank license which may not be fully aligned for lending-only and also, hide from any regulatory monitoring.

Ease of market entry, product alignment, flexible ownership,  reduced time-to-market, regulatory blindsides are some of the reasons to acquire a lender’s permit rather than a full-fledged micro finance license which has more stringent requirements, longer wait-time for licenses, higher paid-up capital and tight-fist regulation etc

Liability can be sanctioned on credit provider if responsibility is very clear and well defined under a cohesive national regulation otherwise various government institution will have to form a ‘reactive’ group to clutch at the back-side of digital credit providers through sanctions. These Adhoc groups may react to abusive, unethical and predatory practices but do not by itself, chart the way to  smoothening  the path to a responsible customer experience by defining industry  standards, best practices, appropriate risk and create certainty in the marketplace.

With the recent coming together of the Central Bank of Nigeria, Federal Competition and Consumer Protection Commission, the Independent Corrupt Practices Commission, and the National Information Technology Development  to address the irresponsible and predatory practices by some of the credit providers and allay the consumer’s grievance in recent times though reactive in nature but it should set the tone for long lasting regulations, standardization and monitoring.

Such monitoring can be from a government approved standard setting organization or industry self-regulation. As the industry evolves rapidly, regulators and government authorities across Africa will have to rejig their market operator’s model in the microfinance space to allow for digital lenders and improve on market supervision to sustain growth and protect consumers.