With the great surge in demand for fast and convenient access to credit facilities by both individuals and businesses across Africa, traditional lending institutions such as banks continue to fall below expectations with tedious paperwork, high-interest rates, high collateral, and in some cases delayed processing. This has given rise to the emergence of digital lending/credit platforms such as Branch, Palm Credit, Fairmoney, e.t.c which provide fast and convenient lending services with little or no collateral.
Although likely to be undervalued, Microlending institutions have played a key role in solving the problems of financial institutions, particularly in the area of access to capital for SMEs.
WHAT LAWS GOVERN DIGITAL LENDING IN NIGERIA?
When it comes to the business of lending, the primary legislation which comes to mind is the Money Lenders Law of various states in Nigeria. The law makes it mandatory for persons or companies undertaking such activities to obtain a Money lenders license. Such licenses are however authorize money lending activities within a State.
Although it is possible to for a money lending company to leverage technology in serving various States within Nigeria, it is advisable that a company wishing to offer money lending services across more than one State obtains the required license from the various States it wishes to operate. A company that fails to obtain the required license in the State it wishes to operate would be unable to enforce a loan agreement or recover the loan amount issued to a debtor.
The procedures for setting up a money lending business are similar in the various States across Nigeria. For more information on how to obtain a money lenders license in Nigeria, click HERE
For companies who do not wish to restrict their operations based on location and activities, a Microfinance bank license is an alternative option to consider. The Central Bank of Nigeria in its guidelines provides a list of permissible and non-permissible activities Microfinance bank license holders are permitted to undertake. Furthermore, holders of Microfinance bank licenses are permitted under the CBN guidelines to receive deposits and grant loans to customers. There are also restrictions on the minimum issuing loan amounts for Microfinance banks which a lending institution should take note of.
Finally, another unpopular license option to consider for setting up a digital lending company is the Finance Company license. Holders of a Finance Company license are permitted under the CBN guidelines to carry out certain activities such as; fund management, and grant of credit facilities to individuals and companies. Holders of this license are however not permitted to receive deposits. The share capital requirement for obtaining a Finance Company license is N100,000,000 (one hundred million naira).
OTHER KEY CONSIDERATIONS DIGITAL LENDING INSTITUTIONS MUST TAKE NOTE OF
1. Data Protection: The Nigeria Data Protection Regulation (2019) governs electronic data exchange in Nigeria. Some key regulations digital lending startups should take note of in this regard are as follows;
a. For an individual’s personal data to be processed, the data subject must give his or her consent.
b. Adequate security measures must be put in place to protect the data of subjects.
c. Reasons, why specific data is obtained from a data subject, must be explained to him or her.
2. Incorporation: A digital lending platform should be registered with the Corporate Affairs Commission
3. Tax and other transaction charges: It is important that digital lending platforms gain clarity on tax implications for operating such businesses.
4. Cyber Security: As part of the private sector, digital lending platforms have an obligation to cooperate with law enforcement agencies
5. Customer due diligence.
FCCPC REGISTRATION REQUIREMENT FOR DIGITAL LENDING COMPANIES IN NIGERIA
As a result of the increased violation of the privacy of customers and shaming of debtors by some digital money lenders, the Federal Competition and Consumer Protection Commission (FCCPC), has recently issued a registration framework for businesses operating in the digital lending space.
What this means is that, if you are considering setting up a digital lending business in Nigeria, your company as part of its compliance requirement, must be registered with the FCCPC. For more information in this regard, read our article HOW TO REGISTER A DIGITAL LENDING COMPANY WITH THE FCCPC here.
Unlike other financial transactions such as payment services, savings, etc., there are presently no specific laws governing digital lending in Nigeria. What we have is a combination of various laws some of which have been considered.
We hope you found this article useful. If you need assistance with setting up your digital lending platform, feel free to reach out to us HERE and we would be happy to help you.