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Regulation of digital lending in Nigeria

Digital lending has become a source of hope for many SMEs and should be encouraged.

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The New Normal - Digital Transfers and Remittance in Nigeria

It is widely acknowledged that there are limited funding sources for entrepreneurs in emerging economies, such as Nigeria.

Traditional financing usually comes with high-interest rates and collateral security. Consequently, alternative financing options, such as peer-to-peer lending and crowdfunding, have grown more popular amongst SMEs.

SMEs contribute 48% of Nigeria’s GDP, constitute 96% of businesses, and provide 84% of local employment. However, they have been extremely affected by the impact of the coronavirus.

The frantic search for capital to quickly inject into their businesses and constraints to traditional funding has brought digital lending, amongst other financing options, to the fore.

The flexibility, lower interest rates, ease, and speed of digital lending, compared with traditional financing, has increased its attractiveness amongst SMEs searching for capital.

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However, there is currently no specific legislation on digital lending in Nigeria. Thus, digital money lenders are forced to operate within the extant moneylending laws of the States, which are modelled after the UK’s Money Lenders Act, 1927.

While these laws contain general provisions on money lending, they are not in tune with developments in the lending market.

For instance, section 14(2) of the Lagos State Money Lenders Law, 1972 renders a contract between a money lender and a borrower unenforceable if the money borrowed was not lent through a cheque drawn on the current account of the lender to the order of the borrower.

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With digital money lenders promising five-minute loans through an automatic transfer to the borrower’s digital wallet or bank account, such archaic provisions pose an otiose limitation to digital lending.

Additionally, the cracks in the extant moneylending laws have provided an opportunity for some digital lenders to offer lending services without registering as a Money Lender.

The moneylending laws of the States exclude co-operative societies registered under the Co-operative Societies Law from the purview of the law. Consequently, some digital lenders have set up as co-operative societies to receive contributions from their members and give loans to same.

These concerns call for greater clarity in the regulation of digital lending in Nigeria.

An individual or company that wishes to carry on the business of digital lending must obtain a Money Lending License in any of the 36 states of Nigeria and the Federal Capital Territory. A license obtained under the Money Lending Law of a state permits money lending activities only within that state.

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The process involved in obtaining a license within each state is similar. It generally involves making an application in the prescribed form with the applicant’s letter headed paper to the designated authority within the state.

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The application will be supported with requisite documents, such as the incorporation documents of the company, empowering it to carry on business as a moneylender, tax clearance certificate, and evidence of payment of requisite application fees.

Upon the fulfillment of all regulatory requirements, an annually renewable license will be granted to the company.

The absence of a federal law on lending and the requirement for money lenders to be licensed under the laws of each state they intend to operate creates extra layers of regulatory requirements and increases the cost of lending. Therefore, it is not rare to see digital lenders opt for a Microfinance Bank license, which permits them to operate in all states of the country and offer a greater diversity of services.

Alternatively, a company wishing to carry on money lending activities in Nigeria may be licensed by the Central Bank of Nigeria as a Finance Company under the Revised Guidelines for Finance Companies in Nigeria (“the Guidelines”). This license is, however, more suitable for companies wishing to offer ancillary services in addition to money lending.

The Guidelines permits finance companies to provide consumer loans; funds management; asset finance; project finance; local and international trade finance; debt factoring; debt securitization; financial consultancy; loan syndication, and issuing of vouchers, coupons, cards, and token stamps.

It is worthy of note that both money lenders and finance companies are prohibited from receiving deposits from the public unless they acquire a Microfinance Bank License.

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.

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This is more so as the digital lending platforms utilise borrowers’ data to verify their identity, assess their credit worthiness or ability to repay the loan, and ensure loan repayment by asking their friends, family, or workplace to repay the loan or compel the borrower to repay.

Data collected include contact information, call logs, SMS logs, Facebook friends, contact list from other social media accounts, mobile money transaction history, geolocation, bank verification numbers, emails, passport photos, videos, and data from use of any third-party application.

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The Nigeria Data Protection Regulation, 2019 places an obligation on digital lenders as Data Controllers to disclose what data is being processed, the specific purpose of processing the data, and obtain consent of the Data Subjects to process the data. The Data Subject must also be informed of his right and the ability to withdraw his consent at any time.

These disclosures are expected to be made in a conspicuous Privacy Policy written in clear and plain language and placed on the website of the Lender. Lenders must, however, be wary of demanding for excessive data.

Consent is deemed to have not been freely given where the performance of a contract, including the provision of a service, is conditional on consent to the processing of personal data that is not necessary (or excessive) for the performance of that contract.

This plays out where a borrower is required to either give consent to use of excessive data to access funds via the application or withdraw consent to excessive data requested by logging out and uninstalling the application.

Additionally, where the data is to be used for a purpose other than that for which it was collected, the Data Subject must be informed of this purpose and give additional consent.

Notably, before collecting personal data, the Data Controller must disclose the period for which the data will be stored, or if that is not possible, the criteria used to determine that period. This is usually missing, or at best, vague in the Privacy Policy of some lending applications.

Any harmonisation or amendment of the current laws should be carefully drafted to ensure a balance between regulating the market and killing the market.

Digital lending has become a source of hope for many SMEs and should be encouraged. An attempt to create excessively stringent laws will not only stifle the market, but also limit funding to SMEs in an already difficult business environment.


Olayanju Phillips is a lawyer and an Associate within the Corporate Finance and Capital Markets Department of SPA Ajibade & Co. He can be reached at [email protected] or [email protected]

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform. To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

1 Comment

1 Comment

  1. Adegbemile Tolu

    September 6, 2020 at 5:25 pm

    The last paragraph is a key point that should not be ignored by the Nigerian lawmakers. Though consent seeking and consent granting is very crucial in making deals, many prospective borrowers seldom take their time to read through the usually lengthy, boring, and esoteric privacy policy/terms and conditions of service to ensure the security and secrecy of their data. Finally,there should be a federal law rather than the excessively costlier state laws license that increases the cost of lending.

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Market Views

Biggest IPO: World’s biggest Fintech plans to raise $34 billion 

Ant Group has begun the process of a concurrent initial public offering in what could mark one of the biggest IPOs of 2020.

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Biggest IPO: World's biggest Fintech plans to raise $34 billion 

The world’s payment juggernaut, Ant Group, is hoping to raise $34.5 billion in its dual initial public offering (IPO) after setting the price for its shares today, making it the biggest listing of all in modern history, in a report credited to CNBC news.

The Chinese financial powerhouse had earlier disclosed previously that it would divide its stock issuance equally across Chinese major stock exchanges, which include Shanghai and Hong Kong, issuing 1.67 billion new shares at each of those exchanges.

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Ant Group’s Shanghai-listed shares will be quoted at 68.8 yuan each. The issuing of 1.67 billion shares would raise 114.94 billion yuan or $17.23 billion.

  • The Hong Kong-listed shares have been priced at 80 Hong Kong dollars each, raising 133.65 billion Hong Kong dollars or $17.24 billion.
  • The listing would produce a return of at least $34.5 billion, as the figure could go higher if the so-called over-allotment option is exercised, depending on demand.
  • It would make it the largest initial public offer of recent memory, putting it ahead of previous record-holder Saudi Aramco, which raised about $29 billion.

READ: MTN may rake in $600 million from Jumia’s planned listing

READ: Jack Ma’s fintech firm is set for IPO, signalling prospects for Nigerian fintechs

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READ: Gold futures drops to $1727.80 as America, China tension deepens

What you should know

Ant Group, formerly known as Ant Financial and Alipay, is an affiliate company of the popularly known e-commerce company Alibaba.

  • Ant Group remains the world’s most valuable FinTech company, and most valuable unicorn company, with a target valuation of over US$280 billion.
  • The group owns China’s largest digital payment platform, Alipay, which serves over one billion users and 80 million merchants, with total payment volume (TPV) transaction reaching RMB118 trillion in June 2020.

Explore Data on the Nairametrics Research Website

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Business

5 Nigerian startups selected to join 7 others at the Africa Tech Summit Connects (ATS)

5 Nigerian startups to join 7 other African firms on the Africa Tech Summit Connects (ATS).

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Five Nigerian firms have been shortlisted among the 12 African startups to pitch live at this month’s digital Africa Tech Summit Connects in Kigali, Rwanda.

This is to showcase their solutions to the global audience of 500 investors, corporates, and other stakeholders.

Disrupt Africa and Africa Tech Summit (ATS) disclosed it had reviewed its partnership to integrate startup-focused sessions plenary and pitching chances in its virtual Africa Tech Summit Connects event scheduled to hold virtually on the 20th – 22nd of October 2020.

What you need to know

ATS is a fully-virtual event and not a webinar. The event would maximize their time with AI-powered smart matchmaking and give startups opportunities in the online business community.

Why this matters

The three days course will enable them to engage with parties through a variety of online mediums. It would encourage the exhibition of recent developments in the continent across the start-up world, and it would focus on fintech, logistics, ed-tech, agri-tech, e-commerce, investment, regulation and policy, blockchain, connectivity.

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With over 50 African tech start-up applicants seeking to raise either pre-seed, seed, or Series A funding; 5 out of the 12 selected to participate and present their solutions to the audience, and also connect virtually with those interested are Nigerian start-ups. The selected start-up companies are;

  • Medsaf (Nigeria),
  • Seso Global (Nigeria),
  • Wella Health (Nigeria),
  • Vybe (Nigeria),
  • Scrapays (Nigeria),
  • Agro Innova (Ghana),
  • PayDunya (Senegal),
  • Snode (South Africa),
  • Moja Ride (Ivory Coast),
  • Eneza Telecom (Kenya),
  • Kolute Systems (Senegal),
  • Abiria (Kenya).

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Spotlight Stories

#EndSARS: Popular hacking group, Anonymous allegedly hacks Nigerian Govt. websites

Anonymous disclosed via its Twitter handle, that it had breached some Nigerian government websites.

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#EndSARS: Popular hacking group, Anonymous allegedly hacks Nigerian Govt. websites, How to protect your bank account from phishing attempts

Popular hacking group, Anonymous has claimed via its Twitter handle, that it had breached some Nigerian government websites.

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The act is said to be in support of the ongoing #EndSARS protest that has taken over many cities in Nigeria, following calls for the disbandment of notorious police unit, the Federal Special Anti-Robbery Squad (FSARS) which has been alleged to be involved in abduction, harassment, extortion and murder of innocent victims.

READ: #EndSARS: I support the youths in this peaceful protests – Pastor Adeboye

Anonymous tweet, “Nigeria: Anonymous hacks multiple government websites in solidarity with #EndSARS protestors and retribution for violence by police. #OpNigeria #EndSARS Protest.”

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That said Anonymous did not disclose the identity of websites breached.

READ: #EndSARS: IGP says checking phones of Nigerians by any officer not acceptable

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Backstory

Nairametrics had earlier given vital insights on how for years, young Nigerians, mostly via social media, have called for the unit to be disbanded and rogue elements in the force brought to justice. Despite repeated promises by the government, they have failed to heed to their demands, triggering a new wave of protests that have now spread across the country.

READ: #EndSARS: Lagos sets up N200 million fund for victims of police brutality

What you should know

Anonymous is a popular decentralized global activist group that is popularly known for many cyberattacks against several governments, government agencies, corporations, and the Church of Scientology.

READ: #EndSARS: Despite scrapping SARS, why are Nigerians still protesting?

Why it matters

From demanding an end to SARS, prosecution of rogue police officers, and reforms; protesters are more emboldened, threatening to continue if all their demands are not met. The government is scrambling to contain a situation that is escalating and could dangerously metamorphose into violent clashes with authorities, leading to loss of lives and destruction of properties.

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