The digital lending market in Nigeria is booming despite challenges and complaints of harassment by borrowers, as new companies are coming up to secure approval from the Federal Competition and Consumer Protection Commission (FCCPC) for the business.
The FCCPC is the regulatory body that oversees the activities of digital money lenders, otherwise known as loan apps, in Nigeria. The Commission has published a list of 161 companies that have received full approval to operate as digital lenders, as well as 40 others that have been given conditional approval and are in the process of getting their full license.
The Commission also disclosed that 55 loan apps are now on its watchlist, an increase from 20 in April. These are apps that are suspected to be engaging in unethical practices such as charging exorbitant interest rates, violating privacy rights, and using abusive debt collection methods.
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Why digital lending is important
Digital lending is a form of alternative finance that uses technology to provide loans to individuals and businesses through online platforms or mobile applications. Digital lending can offer several benefits to both lenders and borrowers, such as:
- Convenience: Digital lending can provide fast and easy access to credit without the need for physical visits, paperwork, or collateral.
- Inclusion: Digital lending can reach underserved segments of the population, such as the unbanked, underbanked, or low-income earners, who may not have access to traditional financial services.
- Innovation: Digital lending can leverage data analytics, artificial intelligence, and blockchain to offer customized and flexible products and services that meet the needs and preferences of different customers.
According to a report by McKinsey1, banking in Nigeria remains an attractive sector, with over $9 billion in value pools, but the vast majority of consumers are underserved. Lack of access to services, especially in rural areas, issues of affordability, and poor user experience all contribute to the frustration consumers experience across the customer spectrum.
This has created an opening that fintechs have been quick to take advantage of, with many stepping up to develop enhanced propositions across the value chain to address pain points in affordable payments, quick loans, and flexible savings and investments, among others.
How digital lending is regulated
The FCCPC came up with the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending, 20222, in collaboration with the Joint Task Force (JTF) to promote fair, transparent, and beneficial alternative lending opportunities for Nigerians.
The registration was also necessitated by the disturbing activities of loan apps in the country, especially the illegal ones, over allegations of rights violations and unfair practices. Some of the loan apps charge interest rates that violate the ethics of how lending is done and are involved in naming and shaming, which is a violation of people’s privacy with respect to how these lenders recover loans.
The FCCPC requires all digital lenders to be incorporated and licensed by the Central Bank of Nigeria (CBN), which is the primary regulator governing financial services. The CBN sets out licensing requirements under the Banks and Other Financial Institutions Act 2020 (BOFIA), which defines banking business as “accepting deposits from the general public as a feature of business or soliciting for deposits orally, electronically, or through any form of advertisement or otherwise…”
The FCCPC also monitors the conduct and practices of digital lenders through its Consumer Complaints Resolution Service (CCRS), which receives and resolves complaints from consumers against service providers. The CCRS has a dedicated portal for digital lending complaints where consumers can report any issues they encounter with loan apps.
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What are the opportunities and challenges
The digital lending market in Nigeria offers significant opportunities for fintechs across the consumer spectrum, notably within the small and medium-sized enterprise (SME) and affluent segments and increasingly in the mass-market segment.
According to a market forecast by Statista3, the marketplace lending (consumer) market in Nigeria is projected to grow by 5.29% (2023-2027), resulting in a market volume of US$96.57 million in 2027.
However, there are also some challenges that digital lenders face in Nigeria, such as:
- Competition: The digital lending space is becoming crowded with over 200 fintech standalone companies, plus a number of fintech solutions offered by banks and mobile network operators as part of their product portfolio.
- Regulation: The digital lending sector is still evolving and subject to changing regulations and guidelines from different authorities. Digital lenders need to comply with various rules and standards on data protection, consumer protection, anti-money laundering, taxation, etc.
- Trust: The digital lending sector suffers from a lack of trust among consumers due to some bad actors who engage in fraudulent or predatory practices. Digital lenders need to build trust and reputation by offering transparent and fair products and services that deliver value to customers.
Digital lending is a promising sector that can contribute to financial inclusion and economic development in Nigeria. However, it also requires proper regulation and supervision to ensure that consumers are protected and that digital lenders operate ethically and responsibly. The FCCPC plays a key role in ensuring that digital lenders comply with the law and respect the rights of consumers.
