Why Digital Lending Lags in Nigeria and How It Can Thrive
By Seun Lari-Williams :
While Fintech has taken root in Nigeria, attracting the attention of both foreign and local investors, it has not been all roses for both customers and operators in the industry, especially when it comes to digital lending. As a result, the industry is currently not experiencing its expected growth, as Nigerians have become rather skeptical about acquiring loans from digital lenders notwithstanding how attractive they may be. This article takes a sympathetic view to the plight of the lenders and seeks a workable way forward.
Let us begin with a scene from Chinua Achebe’s classic novel ‘Things Fall Apart’. When a character, Okoye, sought to recover his loan from Unoka, Okonkwo’s father, the following discussion ensued:
“Look at that wall,” he said, pointing at the far wall of his hut, which was rubbed with red earth so that it shone. “Look at those lines of chalk;” and Okoye saw groups of short perpendicular lines drawn in chalk. There were five groups, and the smallest group had ten lines. Unoka had a sense of the dramatic and so he allowed a pause, in which he took a pinch of snuff and sneezed noisily, and then he continued: “Each group there represents a debt to someone, and each stroke is one hundred cowries. You see, I owe that man a thousand cowries. But he has not come to wake me up in the morning for it. I shall pay you, but not today”
Digital lenders in Nigeria are currently sharing a similar fate with Okoye regarding loan repayments. This is so, even though many thanks are due to the lending market for meeting crucial needs.
Indeed, at the start of the disruption of the lending industry, Fintech firms were praised for providing consumers with more control over their financial lives and improving financial services for households and small businesses. Securing a loan for personal or business purposes became more seamless, as anyone with a smartphone and internet connection may quality for a loan within minutes. These alternative lenders were more attractive than traditional banks due to their willingness to use non-conventional means in determining an applicant’s creditworthiness and risk. The disruption also affected the traditional lending firms in a positive way. Low barriers to entry, brought about by digitization, forced traditional financial service providers to deliver better and cheaper services. The traditional lending market who used to require consumers to wait several months before a loan may be approved have now been forced to increase their speed. Also, both traditional and digital lenders complement each other in that while big banks have the power and money to grant multimillion-dollar loans, digital lenders meet the need of providing the masses access to smaller loans.
However, because this category of lenders are often startups, they are usually constrained by factors such as the lack of data (e.g., a searchable database of recalcitrant and delinquent debtors), and as such, are unable to establish creditworthiness and provide the improved financial services they have to offer. As a result, digital lenders are facing a hard time recovering loans from defaulters and are sometimes having to resort to highly condemnable behaviour such as sending embarrassing text and WhatsApp messages to close contracts of loan defaulters. For example, on 17 August 2021, following a complaint filed by Bloomgate Solicitors on behalf of its client, a data subject, the National Information and Technology Development Agency (NITDA) slammed a lending platform with a fine of ₦10 million (ten million naira) for privacy invasion.Thus, unfortunately, the once celebrated innovators who brought competition to banks are now being seen by many as a nuisance. While data protection lawyers and other stakeholders (including this author) have celebrated this news, it is noted that not much has been said about why lending platforms have had to resort to such behaviour in the first place and what solutions may be available in the circumstances.
The financial technology industry is fundamentally powered by data: data that validates someone’s identity, data that shows the flow and frequency of financial activities on an account, etc. Generally, by law and by general industry practice, financial institutions are precluded from granting access to customers’ data to third parties, except in very limited circumstances. While this is understandable, and indeed necessary, it might be important to permit access when the access-seeking third-party is another licensed financial institution from which the consumer seeks a loan or transact any other business. Access to such information as directly verifiable account activities might help digital lenders make more informed lending decisions and reduce the instance of default by borrowers. Instead of limiting data, the industry should be focused on exploring ways to make sure that financial data access, once granted, is safe and secure.
Granted that exclusive ownership of and access to data is one of the tools for maintaining dominance in the banking industry, it is arguable that the need to create access to sustainable small-scale loan outweighs the need to score extra competition point through exclusive access to data. To enable strong competition and empower small players, it would be necessary to grant access to rich banking data. In that scenario, banks would look for fairer ways of holding dominance in the industry. Accordingly, public policy needs to be adapted to these developments to protect not only customer data but also competition among lenders. Thus, while SMEs should be prosecuted for violating data privacy law, there is also a need for the Federal Competition and Consumer Protection Commission to address the information asymmetries and economic forces (such as economies of scale and scope) working against small players in Nigeria’s financial sector.
Section 59(1) of the Federal Competition and Consumer Protection Act 2018 might be instructive in this regard. It provides for the prohibition of agreements or decisions that have as their object or effect of restraining competition. Consequently, data sharing arrangements should be encouraged, as they often are pro-competition. Increased availability of data has led to businesses taking actions aimed at developing existing goods and services or launching new, innovative goods and services. For example, in the pharmaceutical sector, access to data enables optimisation of drug development processes, while in the automotive sector, data sharing has proved crucial for the development and safety of autonomous (driverless) vehicle technologies.
To prevent things from further falling apart, digital lenders in Nigeria could also take a leaf out of the book of digital lenders in jurisdictions such as the EU and the US. Alternative lenders in these places navigate the problem of ascertaining credit worthiness by collecting and analyzing a combination of algorithms, using artificial intelligence, and machine learning. Therefore, apart from using in-depth bank account details and behaviour, Fintech lenders may determine creditworthiness using footprints such as rent, utility, and telecom payments to gather an accurate picture of integrity and intentions.
About the author: Seun Lari-Williams was called to the Nigerian bar in 2014. He has extensive experience working as a litigation lawyer in Nigeria and as an IP Consultant. Seun has worked closely with diverse clients in the entertainment industry, helping them innovate faster while protecting their IP. He has also garnered experience working with Montgomery IP, Brussels, Belgium. He studied law at the University of Lagos, Nigeria and obtained an LL.M in IP & Competition Law from the Munich Intellectual Property Law Center, Germany. Seun is also the 2021 winner of the ALAI European Author’s Rights Award.
 Topsy Kola-Oyeneyin et al, ‘Harnessing Nigeria’s Fintech Potential’, McKinsey & Company, 23 September 2020: https://www.mckinsey.com/featured-insights/middle-east-and-africa/harnessing-nigerias-fintech-potential (accessed 31 October 2021); Omotayo Yusuf, ‘Harassment, Impersonation, and Blackmail: How Nigerian Lending Apps Went Rogue on Customers’, Neusroom, https://features.neusroom.com/how-nigerian-lending-apps-went-rogue-on-customers/ (accessed 31 October 2021)
 Damilare Dosunmu, ‘Five top instant loan apps in Nigeria’ Tech Cabal 27 August 2021 https://techcabal.com/2021/08/27/best-quick-loan-apps-in-nigeria/ (accessed 31 October 2021)
 Paige Puntillo, Alternative Lenders Dynamically Change the Finance Landscape’, LQD Business Finance, 10 December 2020 https://lqdfinance.com/insights/alternative-lenders-dynamically-change-the-finance-landscape/ (accessed 31 October 2021)
Abiola Odutola, ‘Loan apps go gangster, send ‘shame’ messages to close contacts of loan defaulters’ NairaMetrics, 15 October 2021 https://nairametrics.com/2021/10/15/loan-apps-go-gangster-send-shame-messages-to-close-contacts-of-loan-defaulters/ (accessed 31 October 2021)
 Sami Tunji, ‘NITDA imposes N10m fine on firm for privacy invasion’ Punch Newspaper, 18 August 2021: https://punchng.com/nitda-imposes-n10m-fine-on-firm-for-privacy-invasion/ (accessed 31 October 2021)
 Law available for download: https://placng.org/i/wp-content/uploads/2019/12/Federal-Competition-and-Consumer-Protection-Act-2018.pdf (accessed 3 November 2021); the Central Bank of Nigeria have also been reported to have pushed for data sharing: https://techcabal.com/2021/03/25/open-banking-nigeria/ (accessed 3 November 2021)
 Paige Puntillo, ‘Alternative Lenders Dynamically Change the Finance Landscape’, LQD Business Finance, 10 December 2020: https://lqdfinance.com/insights/alternative-lenders-dynamically-change-the-finance-landscape/ (accessed 31 October 2021)