A strong financial system is important for the growth of any country because it helps individuals and businesses get access to money when they need it. In the past, Nigerians mostly got loans from traditional banks, which required a lot of paperwork, collateral, and long waiting periods for approval. However, things have changed with the rise of technology, making it easier and faster to borrow money through digital lending platforms, also known as loan apps.
Digital lending allows people to apply for loans online and get quick approvals without the need to visit a bank. These platforms use technology to check a person’s creditworthiness based on their personal data and financial history. This has made it easier for many Nigerians, especially those without bank accounts or access to traditional loans, to get financial help when they need it.
While digital lending has made borrowing more convenient, it has also come with challenges. Some lenders charge very high interest rates, and there have been concerns about the way customer data is collected and used. In some cases, borrowers have faced harassment from lenders who use unethical methods to recover loans. This article discusses how digital lending works in Nigeria, the laws that regulate it, and the challenges faced by borrowers.
Understanding Digital Lending
Digital lending is a modern method of securing financial assistance that utilizes technology to simplify the loan application and approval processes. Unlike traditional lending, which requires borrowers to visit financial institutions in person, digital lending allows individuals to apply for and receive loans entirely online through digital platforms. These platforms enhance accessibility and convenience by enabling users to submit loan applications from anywhere at any time.
Digital lending allows people to apply for and receive loans using mobile apps or online platforms. These apps work with telecom networks, making it easy to apply without visiting a bank or meeting with a lender. The process typically involves filling out an online application form on the chosen digital lending platform and submitting necessary financial documents, such as income statements, credit history, employment details, and a valid means of identification.
Lenders then assess the applicant’s creditworthiness based on the provided information. Once the evaluation is complete, the borrower is presented with loan options, including interest rates and repayment terms. Upon final verification, the application is approved, and the funds are disbursed accordingly. This makes the loan process quick, easy, and convenient, reducing the time it takes from application to getting the money.
Several fintech companies, microfinance institutions, and traditional banks have embraced digital lending. Examples include Fairmoney, Renmoney, Carbon, Aella Credit, etc. These loan providers have helped to bridge the gap for businesses that find it difficult to obtain traditional bank loans.
Legal Framework Regulating Digital Lending in Nigeria
Digital lending has become a growing sector in Nigeria, especially after the COVID-19 pandemic, as it has improved access to financial services and promoted financial inclusion. However, there is no specific law regulating digital lending in Nigeria. Instead, existing laws and institutions help address certain aspects of digital lending. They include the following:
1. The Nigerian Constitution (1999, as amended)
The Constitution guarantees the privacy of citizens, including their personal data and communications. Since digital lending involves collecting and processing personal information, this right to privacy applies to digital lending activities. Courts have also interpreted this privacy provision broadly to cover all aspects of human life, including digital transactions.
2. Regulation by the Central Bank of Nigeria (CBN)
The Central Bank of Nigeria (CBN) and other regulatory bodies oversee digital lending activities to ensure financial stability, consumer protection, and fair lending practices. Digital lenders must register with the CBN as microfinance banks (MFBs) or fintech operators.
3. Money Lender Law of Various States
The Money Lenders Law of various states regulates money lending, including digital lending, across Nigeria. These laws outline the licensing requirements for companies engaged in money lending. Lagos State has one of the most structured money lending laws, known as the Lagos State Money Lenders Law (MLL) 2018. Under this law, anyone engaged in money lending must obtain a license before operating. Failure to do so attracts sanctions.
A key restriction under the law is that money lenders, including digital lending platforms, can only operate within the state where they are licensed. If a state does not have a moneylender law, digital lenders operating there must obtain a finance company license from the Central Bank of Nigeria (CBN) under the CBN Revised Guidelines for Finance Companies (2014).
4. The National Information Technology Development Agency Act (NITDA) 2007
This Act regulates information technology infrastructure and electronic data exchanges in Nigeria, making it relevant to digital lending. Since digital lending is largely driven by private sector investments and involves handling large volumes of personal data, the Act indirectly provides some level of oversight. A new bill (the Nigeria Information Technology Bill 2021) is under consideration to expand its scope.
5. The Nigeria Data Protection Regulation (NDPR) 2019
Issued under NITDA, this regulation safeguards individuals’ rights to data privacy. It sets rules for collecting, processing, and storing personal data, which applies to digital lenders as they handle borrowers’ sensitive information. Under this regulation, digital lenders are considered data controllers and must comply with data protection laws.
6. The Federal Competition and Consumer Protection Act (FCCPA) 2018
This is Nigeria’s main consumer protection law, ensuring fair business practices. In digital lending, consumer protection focuses on fairness, transparency, and responsible lending. Some lenders hide important loan terms in long, complicated contracts, making it hard for borrowers to understand.
Others use aggressive debt collection tactics, such as excessive calls, threats, or contacting employers and family, which violate consumer rights. Some platforms also mislead borrowers by promising loans with “no credit checks” or “guaranteed approval” without explaining the real risks and costs.
To regulate digital lending, the FCCPC introduced Interim Guidelines in 2022. These guidelines require all digital lending platforms in Nigeria to register with the FCCPC by submitting necessary documents, including details of their funding, website, tax records, and business legitimacy. This ensures that digital lenders operate legally and transparently, protecting borrowers from unfair practices.
7. The Companies and Allied Matters Act (CAMA) 2020
CAMA governs company registration and administration in Nigeria. Digital lenders must register as legal entities under this law. The Corporate Affairs Commission (CAC) oversees compliance, ensuring transparency and accountability in business operations.
Are There Challenges to Digital Lending in Nigeria?
Yes, there are. Despite its benefits, digital lending in Nigeria faces challenges such as high interest rates, cybersecurity risks, inadequate regulation, and privacy violations. Two key issues common with digital lending are: personal data abuse/misuse and privacy rights violations.
1. Personal Data Abuse or Misuse
Digital lenders handle large volumes of personal data, which should be processed only for the purpose it was collected, as required by the Nigeria Data Protection Regulation (NDPR). Misuse occurs when lenders use customer data for unauthorized purposes, like sharing data with third parties or using customer information in ways that violate privacy policies or contracts.
This practice breaches customer trust and has led to regulatory actions, including sanctions and clampdowns on non-compliant lenders.
2. Privacy Rights Violations
Privacy rights are constitutionally protected in Nigeria. Violations occur when digital lenders disclose customers’ financial information without consent or expose personal data to unauthorized individuals.
This practice violates the doctrine of privity of contract, which limits contractual rights and obligations to the parties involved. Loan agreements are contractual matters, and in cases of default, the appropriate remedy should be sought through legal means, not by exposing personal information unlawfully.
Financial transactions should remain private, except when legally required or with customer consent. Regulators have criticized digital lenders for such breaches, leading to legal and regulatory consequences. Therefore, addressing these challenges is important for ensuring a trustworthy and compliant digital lending environment in Nigeria.
Conclusion
The emergence of digital lending in Nigeria’s financial sector is a positive development. It helps to provide faster, more convenient, and easily accessible loan options for individuals and businesses. It complements traditional financial institutions by offering alternative credit sources. Additionally, digital lending is cheaper to establish compared to conventional financial institutions, making it a viable solution for bridging funding gaps.
However, despite its advantages, the challenges must be addressed to ensure a transparent, secure, and well-regulated lending environment. At Resolution Law Firm, they specialize in regulatory compliance, data protection, and financial law to help businesses navigate the complexities of digital lending in Nigeria. Whether you need legal guidance on licensing, data privacy compliance, or contractual matters, their expert legal team is here to assist you, so reach out to them today.
