In July 2023, the Commissioner of the Federal Capital Territory police command, Haruna Garba, disclosed that some Nigerians were obtaining loans using phone numbers assigned to the command.
As bizarre as it sounds, this presents a snapshot of the kind of challenges digital lenders in Africa’s most populous country battle with.
Getting a loan is a tall order for most of Nigeria's 200 million citizens. By some estimates, only 2% of the country has access to credit for personal or business purposes.
Despite having more than 54 million Nigerians with a Bank Verification Number (BVN), commercial banks in the country are reluctant to provide loans to most of their customers.
That reluctance has created a gap that fintech startups hope to fill, but such an undertaking comes with serious challenges. One of the reasons commercial banks were reluctant to give loans was the absence of accurate data on a customer and their finances.
To fix this, fintechs require customers to submit bank statements and grant access to phone contacts as they try to establish a pattern. Others begin with small loans to build a customer’s credit profile.
Giving vs recovering loans
While more people can now access loans, recovering them remains a challenge for many fintechs. A Rest of World report revealed that Nigerians who had been harassed by digital lenders are organising to avoid repaying their loans.
However, victims are not the only ones involved in this. The report claims that some Facebook groups share tips on scamming lenders by creating false identities, while others claim they can remove a borrower’s name from a lender’s database for a fee.
For Babatunde Akin-Moses, CEO of Sycamore, the biggest obstacle digital banks face in loan recovery is the absence of consequences for bad borrowers.
“You can actually argue that it is harder to be a bad lender than it is to be a bad borrower. If you engage in bad practices as a lender, the FCCPC will come for you, but as a borrower, you can hide under the fact that the business you borrowed for didn’t work out and nothing will happen
“The only consequence for bad credit is your ability to get another loan, but even then, some people have different thresholds.”
Nigeria’s Federal Competition and Consumer Protection Commission (FCCPC) has been working hard at cracking down on predatory lenders. Under the leadership of Babatunde Irukera, the Commission has worked with Google to remove apps provided by predatory and unlicensed lenders from the Play Store.
It has instituted regulations that have forced digital lenders in the country to get some form of approval before beginning operations. It is also frequently in the news for registering or delisting digital lenders. But where these actions help to reduce cases of predatory lending, one could argue that lenders who are frequently victims of bad borrowers do not have similar protection.
Since most digital lenders in the country are not public companies, it is difficult to ascertain the extent of their losses. However, this report from 2022 claimed that Kuda had a 69% non-performing loans ratio. Conversations with industry insiders also show that many lenders struggle with debt recovery, while startups like BFREE help them keep their NPL low.
While some lenders have resorted to blackmail to recover loans, increasing scrutiny from the consumer protection watchdog means they risk being fined or delisted.
For the few that refuse to toe this line, a system that ensures customers repay their loans or face the consequences could help protect their business but also unlock credit in the economy.
The Central Bank of Nigeria (CBN) introduced the global standing instruction (GSI) in 2020 to reduce NPLs in the banking system and place consistent loan defaulters on a watch list. The GSI is enabled by the BVN and mandates borrowers to link all existing bank accounts to the BVN.
Consequently, in the case of a default, the bank can recover the loan from any bank account linked to the BVN. While this provides some form of security for commercial banks when lending, it does not cover fintechs.
Who is protecting fintechs from bad borrowers?
In the absence of a government agency to drive this consequence mechanism, Akin-Moses advocates for an industry-led approach. For inspiration, he points to open banking and bank verification numbers, all initiatives heavily driven by the private sector.
“That hard work has to be done by somebody or a group of people. When the banks were struggling with identity issues and they were waiting for NIN, they were like, ‘Guys, we're going to be in trouble if we don't have a way to identify people in the industry.’ The banks came together, invested money and set up BVN. Everybody thinks it's a CBN initiative, but the banks actually were the ones that spent money to make that happen."
An ecosystem-led effort is not a novel idea. In March 2023, Semafor reported that a group of fintech startups, including representatives from Kuda, Flutterwave, and Cowrywise were working on a blacklist to prevent fraud in the sector.
Project Radar, as it was named, would enable fintechs to pool details of individuals who have made or attempted fraudulent transactions. But Adedeji Olowe, CEO of Lendsqr, a startup that enables lenders to disburse loans effectively, expressed scepticism pointing to the reluctance of startup founders to collaborate on such matters.
Jude Dike, CEO of Get Equity, makes a similar argument in this article. Citing examples of how fraudsters collaborate to exploit weaknesses in fintechs, he argues that the focus on competition among fintechs means they often fall prey to similar fraudulent attempts.
Acknowledging these potential challenges, Akin-Moses points out that any effort at curbing fraud for digital lenders will almost be a sacrificial move. He adds that it may require the participation and backing of experienced finance or fintech professionals for any sort of progress to be made.
“A lot of the efforts to establish a database of bad actors have not been as successful as they should be because they have been disjointed. Those of us in the industry need to put aside gains or potential gains and work together to solve this problem. I think eventually, one or two people will have to almost act selflessly to figure things out.”