The rise in digital lending has been rapid as more people embrace the convenience of online transactions. As a result, loan companies in Nigeria have keyed into many opportunities provided by this increase in digital activities. This has given way to some form of regulation. However, some loan companies have been known to employ underhand tactics in carrying out their business.
Other than providing predatory loans to borrowers, some of these companies, infamously dubbed loan sharks, are known to employ invasive loan recollection methods.
As a result, the Federal Government of Nigeria, earlier in the year, got a court order to pause operations of some money lending apps in Nigeria, as it gets set to introduce a proper regulatory framework for the operators.
Taking a step forward with this move, the Federal Government, this week, directed payment systems operators, PSOs, as well as telecommunication companies in Nigeria to stop providing access to illegal digital money lenders, also known as money sharks, in Nigeria.
What are PSOs?
Simply put, Payment System Operators are organisations responsible for providing payment gateways for companies that carry out financial transactions.
A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. The term includes not only the physical card-reading devices found in retail stores but also the payment processing portals found in online stores.
Payment gateways have also played a key role in transforming digital lending in Nigeria. Through their services, borrowers can receive their funds seamlessly and instantly while lenders can also receive payment when due.
Examples of PSOs in Nigeria are PayStack, Flutterwave, Remita, VoguePay, CashEnvoy, Interswitch and others.
The rise of digital lending in Nigeria
In recent years, digital lending in Nigeria and across Africa witnessed a major increase in activities. This stems from two major factors; increased internet penetration (which is still barely scratching the surface), and a newfound trust in digital transactions.
Through the many digital lending platforms, borrowers can easily get loans from anywhere without needing to make a physical appearance at a bank, credit union, or any other form of financial institution.
The process is also much faster than it used to be because there’s no need for filling out forms or waiting around at the bank branch!
Through increased digital lending, many people can now access credit for the first time. It’s also helping to increase financial inclusion.
According to available statistics, in 2019 alone, there were more than 55 million mobile money transactions, a figure which expectedly, has grown as digital lending becomes more popular.
Activities of loan sharks
While loan sharks have always been in existence in Nigeria, the rise in digital lending gave them a new platform to explore outside the radar of regulatory bodies.
Mostly, they are not registered with the appropriate authorities. One of their most glaring infraction is the infringement on the data privacy right of Nigerians as contained in Section 37 of the 1999 constitution as amended.
Once their app is downloaded, unsuspecting borrowers are asked you grant permission to access their contacts for risk management purposes, promising not to share such information with anybody. But that is not usually the case.
They are also known to give out loans with an interest rate of 45 percent as against the CBN interest rate of 13 percent per annum.
Going by reports, defaulters on those platforms are defamed, contacts blackmailed, and called criminals. Sometimes, they go as far as sharing private information including photographs, phone numbers, and home and work addresses of defaulters.
Their friends, relatives, and sometimes neighbours get harassed and inundated with calls. This is even as a daily default fee is added to the loan in question.
As a way of putting a check on these excessive activities, the Nigerian government, through the Federal Competition and Consumers Protection Commission (FCCPC) ordered all operating payment systems including Flutterwave, Opay, Paystack, and Monify to immediately cease and desist from providing payment or transaction services to lenders under investigation or not otherwise operating with applicable regulatory approvals.
The FCCPC also ordered telecommunication and technology companies including Mobile Network Operators (MNOs)) to stop providing server/hosting, or other key services such as connectivity to disclosed or known lenders who are targets/subjects of investigation or otherwise operating without regulatory approval.
As a way of protecting borrowers, the Commission conducted enforcement actions against a loan company in Lagos State. It then issued a blanked order aimed at disabling or diminishing violators’ ability to circumvent regulatory efforts.
What this portends for loan companies in Nigeria
While the need for innovation will always be present in every sector, it becomes dangerous when it undermines the need for proper regulation.
Government regulation of loan companies not only protects borrowers from fraudulent and unethical practices but also prevents companies from taking excessive risks.
With the new directive, some changes should be expected in the loan companies in Nigeria. Some of those changes are listed below.
1. Proper regulatory approval
Before now, it appears that digital lending in Nigeria was given minimal scrutiny. This meant many loan companies operated without regulatory approval.
The new directive by the FCCPC shows that the body is keen on providing better regulation for existing loan apps and a proper approval process for new entrants.
2. A more transparent market
The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly.
With the latest directive, loan apps are expected to carry out their activities in a more transparent manner. If not for anything, for the fear of being suspended or shut down entirely.
3. Weeding out illegal operators
The new directive by the FCCPC instructs hosting service providers like Google Play to take down the apps of some companies carrying out infractions.
It will also be investigating where some of them are hosted, especially those not found on the popular app stores. With this, it is expected that those left will be given proper regulatory approval.
4. Improved data protection
The nature of the digital lending business model is such that the regulatory framework for data protection cannot be ignored by a digital money lender offering its services to Nigerian residents.
In principle, digital lending platforms are expected to utilise borrowers’ data to verify their identity, assess their creditworthiness or ability to repay the loan, and ensure loan repayment.
However, some have been known to extend their reach by harassing borrowers’ friends, family, or workplaces to repay the loan or compel the borrower to repay.
Now that the FCCPC has its radar in the industry, it is expected that existing loan apps stick to the rules of engagement.
The loan companies are expected to disclose what data is being processed, the specific purpose of processing the data, and obtain the consent of the Data Subjects to process the data.
Borrowers are also expected to be informed of their rights and the ability to withdraw their consent at any time.
As the Nigerian government, through the FCCPC and other regulatory bodies, beams its searchlight on the activities of loan companies, it is expected that better regulation will trigger more innovation in the industry.