Introduction
Money Lending in Nigeria has evolved from traditional banking to a more flexible and technology-driven system which accommodates FinTechs and other digital companies, and has allowed for more convenience, speed, and efficiency. Following the evolution of money lending in Nigeria, there grew the need to regulate the activities of entities and their relations with borrowers.
In this publication, we highlight some regulatory and compliance considerations which are relevant to establishing and operating money lending businesses in Nigeria.
- Who can Offer Money Lending Services in Nigeria?
In addition to the traditional banks such as the Deposit Money Banks (DMBs) and Microfinance Banks (MFBs), money lending services can also be offered by finance companies, corporative societies, and financial technology companies operating through a money lenders' licence to carry out such activity.
- What are the Regulatory Concerns to Note in the Money Lending Business in Nigeria?
There are various regulatory and compliance issues to navigate in the operation of a money lending business. Some of these regulatory and compliance concerns are highlighted below:
a. Licensing
Any entity wishing to carry on the business of money lending in Nigeria is required to obtain a Money Lending License. This license permits the holder to carry on money lending activities only in the state where it was issued. The Money Lender's License is typically issued by the Ministry of Home Affairs in each state in Nigeria and is regulated by the money lending law applicable in each state. It is important to note that the license once issued expires on the 31st of December every year, regardless of the date of issuance.
Institutions such as deposit money banks, microfinance banks, merchant banks and finance companies are exempt from applying for a money lender's license, as the relevant operating licenses issued by the Central Bank of Nigeria (CBN) and other regulating authorities also permit them to provide lending services to their customers.1
b. Registration with the Federal Competition and Consumer Protection Commission (FCCPC)
Further to the “Limited Interim Regulatory/Registration and Guidelines for Digital Lending 2022” (“Framework”) issued by the FCCPC, entities intending to carry on the business of digital lending in Nigeria are required to register with the FCCPC. Our previous newsletter highlights the requirements for the registration of a digital lender with the FCCPC. An approval must be obtained from the FCCPC before such entity may continue or commence the business of digital lending in Nigeria. Such registration is a one-time registration and requires compliance with the Framework to sustain the permit.
Where an entity proceeds to commence the business of digital money lending without this registration, such entity runs the risk of being banned from operating a money lender and having its lending mobile application delisted from the relevant digital distribution service hosting the mobile lending application (e.g. Google Play Store, or Apple Store).
It is important to note that entities which are exempt from applying for a money lender's license are also exempt from applying for registration with the FCCPC. Such entities are however required to apply to obtain an exemption from the FCCPC on the basis that they are CBN regulated entities.
c. Consumer Protection
The FCCPC, in keeping with its mandate to safeguard the rights of consumers in Nigeria has set measures in place to deter digital lenders from exploiting consumers, or engaging in abusive conducts, in respect of balance calculations, loan default enforcement and recovery processes.
Digital money lenders are also required to develop and implement policies and systems aimed at protecting the rights of consumers of their services. In the engagement of money recovery agents, money lenders should ensure that the agents are not harassed and abused in an attempt to recover debts owed by consumers. Where necessary, the money lender should also enter into agreements with recovery agents which should contain provisions safeguarding the rights of the consumer/borrower.
Money lenders are also required to ensure transparency and accountability with the consumers, especially with respect to interest rates, penalties, mode of calculation, and disclosure of all charges.
Under the FFCPC Act, 2018 (FCCPA), the money lender is required to avoid unfair, unreasonable and unjust terms in its loan contract, such as waiver of any rights or assumption of obligation by the consumer and terms that limit or exempt the money lender from any loss directly or indirectly caused by its gross negligence.
The CBN Consumer Protection Framework also provides for minimum standards to be observed by financial institutions to adequately address customer complaints. Financial institutions are required to be transparent in their relations with customers, and to establish effective complaint channels.
d. Data Protection
As is the case with all entities collecting and processing personal data of Nigerian citizens, it is important that digital money lenders acknowledge and observe the requirements of relevant data protection laws in Nigeria, especially the Nigeria Data Protection Act, 2023 (NDPA). This is especially as digital money lenders utilize data provided by the borrowers for various processing activities including verification of identity, credit rating and assessment, marketing, etc.
There is an obligation on the money lender to observe all the provisions of the NDPA including informing the borrower of the data being collected and processed, the purpose for processing, details of any third-party with whom such data will be shared and obtaining the consent of the borrower before commencing any processing activity in respect of such personal data collected.
Furthermore, the CBN Consumer Protection Framework prohibits the disclosure of customer's data by financial institutions that are regulated by the CBN.
e. Anti-Money Laundering /Combating Financing of Terrorism (AML/CFT) Requirement
Digital money lenders, especially those regulated by the CBN, are also required to observe and establish a governance framework that shows their commitment to adhere to AML/CFT regulations, and set up internal controls to mitigate against the risk of money laundering and terrorism financing.
Consequently, money lenders are required to have policies on AML/CFT; develop appropriate and effective know-your-customer (KYC) requirements; and implement internal controls to avoid the use of their facilities for money laundering and terrorism financing.
Money lenders are also required to identify and verify the identity of their customers prior to the disbursement of any facility. It is also important that the money lenders determine the categories of data/information required to conduct satisfactory customer due diligence, and the extend of such due diligence, especially putting into consideration the level of risk such customer may pose to the lender.
Conclusions
The above list is not exhaustive, and it is advised that entities stay up to date on regulatory and compliance requirements for their operations as money lenders. It is also important that there are periodic upgrades and improvements to their governance framework, policies, and systems set in place in furtherance of any regulatory or compliance requirement as a money lender.
Footnote
1. For more information on this, please see our previous newsletter highlighting the operational limitations of these financial institutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.