Digital Lending in Nigeria: FCCPC guidelines & more

In Nigeria, the popularity of online lending is exploding. At the end of the third quarter of 2022, the digital lending market was estimated to be worth over $1 billion. Experts attribute the pandemic, which caused millions of Nigerians to lose their jobs and dozens of businesses to close, as well as other factors for the rapid growth in the digital lending market. 

Digital lending is a subset of fintech that provides credit facilities to people and businesses while using technology to interact with the public.

The issuance of the Bank Verification Number (BVN) by Nigerian banks is arguably where the historical evolution of digital lending in the country began. The BVN feature made it possible for digital lenders to access client account information without having to visit or contact banks, which typically took some time. In the world of digital lending, due diligence was completed by a digital lender using a client’s BVN to access the bank account’s creditworthiness. 

One in ten Nigerians now borrows money from digital lending platforms, demonstrating the industry’s larger growth than could have ever been anticipated. This article aims to discuss how the lending industry has changed over time, moving from the traditional system of due diligence to the innovative era of creditworthiness. 

Should digital lending be regulated?

At the beginning of the digital lending boom, several waves of abuse and malpractices that were inconsistent with ethical business practices occurred. The regulators were unable to keep up with the industry’s rapid growth as the digital lending sector developed. According to experts, it took the regulators well over five years to study the digital lending industry.

Digital lenders have adopted unethical business practices over time, including intimidating customers to repay loans; harassing customers with repeated phone calls; calling customers’ contact lists; sending messages to customers’ contact lists; violating customers’ privacy; offering loans with absurd terms; offering credit at exorbitant interest rates; and enlisting the help of the police to harass and intimidate customers to pay up loans. The need for a formal regulatory framework for online lenders was prompted by all of these.

The Central Bank of Nigeria’s Guidelines for Mobile Money Services marked the first step in regulating online lenders. However, the Central Bank’s regulation on mobile money services fell short of the demand for a framework that creates a civil money lending practice and merely sets specifications regarding the minimal requirements needed to operate mobile money services. Additionally, the National Information Technology Development Agency (NITDA) fined Sokoloan (a digital lending company in Nigeria) ten million Naira in August 2021 for violating the privacy of its customers. 

Nevertheless, the Federal Competition and Consumer Protection Commission (FCCPC) closed more than ten loan companies in Lagos in August 2021 after having conducted raids because they had violated their customers’ data privacy.

The FCCPC’s regulation for digital lending in Nigeria

Notably, the FCCPC has played a crucial role in the struggle against the unethical practices of digital lending companies. The FCCPC has the authority to regulate the market for the overall protection of consumers under Sections 17, 18, and 163 of the Federal Consumer Protection Act (FCCPA) of 2018. The Regulatory Framework and Guidelines for Digital Lending 2022 (the Regulation) was provided by the FCCPC in September 2022 following this provision.

The FCCPC’s regulations are thought to resolve any issues that have arisen in the past regarding the digital lending sector. Steps for registering digital lending platforms are provided by this regulation. The provisions of the regulation should lead to the easy identification of digital lenders. Standards of enforcement were previously hampered by regulators’ inability to identify digital lenders. Due to the mandatory registration of digital lending companies with the FCCPC under the new regulatory framework established, the identification issue has been resolved.

Digital lending registration

The regulation mandates that directors and shareholders of digital lending companies complete the Interim Digital Lending Guidelines Form 01 (Form 01) before providing digital lending services in Nigeria.

Form 01 requests information about the digital money lender, including the lender’s name, address, phone number, email address, website, promoters, funding source, partnerships with other businesses, agents (if any), bankers, proposed interest rate, operating licence, and a list of apps that are currently active or that are planned to be active.

Form 01 is submitted to the FCCPC office with the following:

1. a list of the names and addresses of the owners of the business;
2. the name of the person in charge of receiving all business correspondence;
3. documents attesting to the company’s affiliation with any relevant professional organisations;
4. any service level agreements (SLAs) reached with brokers and service providers; 
5. evidence of a feedback mechanism within a list of the company’s objectives;
6. a duplicate of the incorporation certificate;
7. proof of all payments made for fees, taxes, and contributions, and
8. declaration for Digital Lending Business in Nigeria, Form 02, which has been signed.

The regulation’s complications

The regulations were implemented at a crucial juncture. The public, however, responded to the regulation in a variety of ways. Numerous grievances were raised regarding the rule. The two main issues with the regulation were that the registration requirement was essentially already in place and that the FCCPC doesn’t have the authority to control digital lending businesses in Nigeria. We would investigate these controversies to determine their veracity.

1. Registration Provision already Exists: The argument against the regulation is that every state in the federation has a money lending law. Each money lender’s law of states provides detailed processes for money lenders to obtain registration licenses to operate. Experts argue that the money lender laws of states also apply to digital money lenders operating in any state.
   
   The argument in favour of the regulation has been the lack of enforcement of state money lenders’ licence legislation since the demand for a regulatory framework has begun. Nonetheless, the unenforceability of the executive can not override the duties of a level of government.

2. The FCCPC does not regulate digital lending: The FCCPC is cited as not being the appropriate regulator of the digital lending industry in arguments against the regulation. According to Section 104 of the FCCPA 2018, all domestic consumer protection laws, except the Nigerian constitution, are superseded by the FCCPA’s provisions. At the same time, the FCCPC is expressly prohibited from regulating consumer protection in relation to financial institutions by Section 65 of the Bank and Other Financial Institutions Act (BOFIA) 2020.

The FCCPA 2018 and BOFIA 2020 conflict when it comes to the authority to control the consumer protection rights provided by financial institutions. In Attorney General of Anambra State v. Attorney General of the Federation (1993) 6 NWLR (Pt 302) 692 at 713–714, the Supreme Court ruled that the later piece of legislation takes precedence in cases where there is a conflict between two pieces of legislation. The latest is the BOFIA 2020. Therefore, according to its experts, the BOFIA 2020’s rules apply.

Conclusion

Digital lending is here to stay in Nigeria. The industry is positioned for continued growth in the upcoming years with a clientele of over ten million. With high hopes for the development of the sector and society, the FCCPC Regulations point the way in the right direction.

The FCCPC’s registration forms 01 and 02 can be downloaded from the FCCPC website.