Unchecked Ambition, Lax Regulation: The Genesis of Predatory Digital Lenders in Nigeria

Ebuka Anyaeji thought he had seen it all, so when he first received a threatening message about being a bailiff for a runaway debtor, he dismissed it as a joke, a message sent by a creditor angry at the wrong phone number. But the messages (WhatsApp and SMS) continued to arrive; then Anyaeji found out that his friends were also getting the same.

Later, the harassment moved from messages to phone calls – real-time and pre-recorded calls. The content of the messages went from simply informing him that someone owed the creditor money to threatening to embarrass him if he did not make the defaulting debtor in question pay.

“The messages usually went like this: ‘This person owes us money, and you are one of their guarantors. Tell him to pay, otherwise we’ll embarrass you both,” Anyaeji told TechCabal. “In some cases they mentioned the amount owed, which was surprisingly low – around ₦10,000 ($17.8) or ₦30,000 ($53.6) – or in other cases they simply called the debtor, chronic debtor or fraudulent individual.”

Of the many messages he received, there was only one occasion when he knew the debtor he was referred to – a fellow student. What did he do with this case? He didn’t bother to tell the person, because they weren’t close.

A screenshot of Anyaeji’s Whatsapp chat.

For Anyaeji, who now occasionally provides witty replies to the senders of these messages just for fun, he wonders why the debt collection practices of digital lenders like Soko Loan, LCash, 9Jacash among others use shameful tactics and , more importantly, if this new trend would continue unchecked.

It wasn’t always like this

There is no doubt that Africans have embraced lending through digital lending apps. They are discreet, quick to access and do not require any guarantee. But it also means that lenders who use users’ repayment habits to gauge their creditworthiness — and never physically meet with their customers — often struggle to repay their loan.

But it has not always been so in Nigeria. Loans were mainly issued by traditional banks, which rarely granted loans without the support of guarantees or guarantors.

In the event of a payment default, before it gets to the point where a defaulting debtor’s security is seized, a number of checks are put in place. First, loans are only issued after credit checks and the account relationship manager can vouch for a potential borrower. When a borrower defaults, the account relationship manager first contacts the lender to find out the reason, and even makes visits to confirm. The guarantors and referents are also contacted, if necessary.

“As long as both parties are open and transparent, the fines don’t come in yet. Until they’re overdue, which is usually over 90 days,” an employee of a company told TechCabal. Nigerian bank, who spoke on condition of anonymity.

Often, while the account officer is monitoring the defaulting customer, the monitoring team and even bank managers may also verify the defaulting customer. Conversations typically revolve around verifying the customer’s ability to repay, restructuring the loan to extend the term, and possibly waiving penalties.

If all efforts to reach a reasonable agreement or collect the debt fail, the bank reverts to possession of the object – usually a house or car – used as collateral. This is a last resort that the bank does not wish to exercise, another banker told TechCabal. “We hate having to own people’s land or houses, which serve as collateral; the bank is not in real estate,” he said.

How did lending apps come into the picture?

For a long time, Nigerian banks preferred to lend to companies and not to individuals. This led to the rise of new lenders like Carbon (formerly Paylater), Renmoney and Branch who filled the void by offering quick loans through smartphone apps.

Temi Sodipo, a credit risk analyst, recalls the early days when there were only a few top Nigerian digital lenders like Renmoney and Paylater. But, over the years, new digital lenders have appeared in different places. People were skeptical at first, but over time consumer confidence grew.

“I remember at the end of 2017, when we disbursed £1bn ($1.8m) in loans at Renmoney, we threw a party to celebrate. At the start of 2019, when we issued £4bn ($7.3m) loans, it was just a normal month,” he said.

With more and more digital lenders entering the space, Sodipo believes that despite many claiming they are financially inclusive of more people, most digital lenders serve the same group of people because the terms of access to loans are similar. Requirements include a six-month bank statement, verifiable government ID, letter of employment, or work email verification.

He thinks this created an avenue for a few ambitious players who wanted a slice of the market to get lax with their rules. Some digital lenders have even started granting loans to people with bad credit bureau scores – an obvious red flag.

“It’s no wonder they’re turning to desperate debt collection measures as they face a high rate of default. It’s just poor underwriting and a lack of attention to the basics of credit risk,” Sodipo said.

Commercial banks have also started offering instant loans

In 2020, at least half of 22 existing Nigerian commercial banks started offering collateral-free instant loan products, which were unheard of years ago. What was the driving force behind this move? A new directive from the Central Bank of Nigeria (CBN).

In July 2019, the CBN announced an increase in the minimum loan-to-deposit ratio (LDR) required of commercial banks to 60% of 57.64%. At the end of September, he again increased the LDR to 65%. LDR stipulates the volume of loans that a bank must grant as a percentage of its total deposit. In the case of 65% LDR, this meant that if, for example, a bank had £100 billion in customer deposits, it had to have at least £65 billion issued in loans. The increase was made to encourage commercial banks to provide more loans to individuals and businesses to stimulate the economy.

To avoid punishments who came up with not meeting the LDR, these commercial banks began offering unsecured instant loan products at risk of high default rates. When debtors defaulted, banks, unlike digital lenders, reacted differently to defaults.

A source familiar with this incident told TechCabal that unlike digital lenders, these large commercial banks can afford to introduce these types of loans and suffer a loss, given that they are making tens and hundreds of billions. profit naira.

In addition to being able to absorb the loss, the CBN Posted a directive – the Global Standing Instructions (GSI) Policy– which gave banks the right to deduct the amount owed from the bank account of defaulting debtors in other banks, in order to reduce the amount of non-performing loans – a decision which reduced the risks of customer default while having money with other banks.

Options available for digital lenders

Currently, digital lenders are restricted from debiting defaulting debtors’ accounts at other banks via GSI, so they rely on automated card debits, repayment reminders, and customer notification to the office of credit as a last resort. But do these methods work?

Julian Flosbach, CEO of BFree, an ethical debt collection company, thinks it does if he takes into account why customers default as well as their current financial situation. According to Flosbach, the majority of borrowers default because they lose their jobs, their business fails, or because of health emergencies that change the affordability of customers. He believes that assessing a client’s new financial capabilities and offering new repayment plans through convenient communication channels can then significantly increase those clients’ repayment rates.

An employee of a digital lending company explained that reporting to the credit bureau can sometimes be effective. She cited the case of a defaulting debtor whose visa application was refused because he failed to repay his loan for more than a year. Credit checks are a prerequisite for issuing visas in some countries.

She also confirms Sodipo’s view of an influx of lenders with lax rules, saying, “These are usually companies not registered with the credit bureau that use unethical debt collection practices.”

Slow and steady don’t win this race

It is clear that digital lenders involved in unethical debt collection practices do so because of their unchecked ambition and the convenience of operating outside the law.

Fortunately, a number of governing bodies are starting to do something about these digital lenders. In August 2021, the National Information Technology Development Agency (NITDA) imposed a fine of 10 million naira ($18,000) (a questionable small amount) on Soko Lending Company, one of the digital lenders who repeatedly contacted Anyaeji.

A few months later, in October, Google removed a number of predatory lending apps from its Play Store for violating its policies. Despite these actions, the pace of response from Nigerian regulators is slow compared to Kenya, where in December, a new law was put in place to curb the excesses of digital lenders.

If victims like Anyaeji and his friends were ever safe from the disruption and intimidation of these predatory digital lenders, Nigerian regulators would have to step up the pace of their response.

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