Uncontrolled ambition, lax regulations: the genesis of predatory digital lenders in Nigeria
Ebuka Anyaeji thought he had seen it all, so when he first received a threat message that he was guarantor of a runaway debtor, he dismissed it as a joke, a message sent by an angry creditor to the wrong phone number. But the messages (WhatsApp and SMS) kept coming; then Anyaeji found out that his friends also received the same.
Later, the harassment shifted from messages to phone calls – real-time, pre-recorded calls. The content of the messages changed from simply informing him that someone owed the creditor money to threatening to embarrass him if he did not charge the defaulting debtor in question.
“The messages usually followed this line: ‘This person owes us money, and you are one of their guarantors. Tell him to pay or we’ll embarrass you both, ”Anyaeji told TechCabal. “In some cases they mentioned the amount of money owed, which was surprisingly low – around 10,000 ($ 17.8) or 30,000 ($ 53.6) – or in other cases they simply called it the debtor of a chronic debtor or of a fraudulent individual. “
Of the many messages he received, there was only one occasion when he got to know the debtor referred to: a college friend. What did he do about this case? He didn’t bother to inform the person, as they weren’t close.
A screenshot of Anyaeji’s Whatsapp chat.
For Anyaeji, who sometimes gives 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 shame tactics and , more importantly, if this new trend would continue unchecked.
it was not always like this
There is no doubt that Africans have adopted lending through digital lending apps. They are discreet, quick to access and do not require any warranty. But it also means that lenders who use users’ repayment habits to assess their creditworthiness – and never physically meet their customers – often struggle to repay their loan.
But this has not always been the case in Nigeria. The loans were mainly issued by traditional banks, which rarely granted loans without the backing of guarantees or guarantors.
In the event of a default, before the collateral of a defaulting debtor is seized, a number of controls are put in place. First, loans are only granted after credit checks have been completed and the customer relationship manager can vouch for a potential borrower. When a borrower defaults, the customer relationship manager first contacts the lender to find out the reason, and even goes to confirm. Guarantors and arbitrators are also contacted, if necessary.
“As long as both sides are open and transparent, the penalties don’t come yet. Until they are past due, which is usually over 90 days, ”a Nigerian bank employee told TechCabal, who spoke on condition of anonymity.
Often times, while the account executive is following up on the defaulting customer, the monitoring team and even bank managers can also check on the defaulting customer. Conversations typically revolve around checking the customer’s repayment capacity, restructuring the loan to extend the term, and possibly removing penalty charges.
If all efforts to reach a reasonable agreement or collect the debt fail, the bank reverts to possession of the item (usually a house or car) used as collateral. This is a last resort that the bank is unwilling 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 loan applications come into play?
For a long time, Nigerian banks preferred to lend to businesses and not to individuals. This has led to the rise of new lenders like Carbon (formerly Paylater), Renmoney and Branch who have filled the void by offering fast loans through smartphone apps.
Credit risk analyst Temi Sodipo recalls the early days when there were only a few large Nigerian digital lenders like Renmoney and Paylater. But, over the years, new digital lenders have popped up on different streets. People were skeptical at first, but over time consumer confidence has grown.
“I remember at the end of 2017, when we disbursed 1 billion yen ($ 1.8 million) in loans at Renmoney, we threw a party to celebrate. At the start of 2019, when we issued 4 billion yen ($ 7.3 million) loans, it was just a normal month, ”he said.
With the arrival of more digital lenders in the space, Sodipo believes that despite the fact that many claim to include more people financially, most digital lenders serve the same group of people as the conditions for access to loans are similar. Requirements include a six-month bank statement, verifiable government ID, letter of employment, or business email verification.
He thinks this created an avenue for a few ambitious players who wanted market share to become lax with their rules. Some digital lenders have even started giving loans to people with low ratings on the credit bureau, a clear red flag.
“It’s no wonder they are turning to desperate debt collection measures as they face a high default rate. It’s just bad underwriting and not paying attention to the basics of credit risk, ”Sodipo said.
Commercial banks have also started offering instant loans.
By 2020, at least half of Nigeria’s 22 existing commercial banks began offering unsecured instant loan products, which was unheard of years ago. What was the driving force behind this movement? 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%, from 57.64%. At the end of September, she further 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 a 65% LDR, this meant that if, for example, a bank had 100 billion euros in customer deposits, it had to have at least 65 billion euros issued in the form of loans. The increase was made to encourage commercial banks to issue more loans to individuals and businesses in order to stimulate the economy.
To avoid the penalties associated with non-compliance with the LDR, these commercial banks began to offer instant loan products without collateral, with a risk of high default rate. When debtors defaulted, banks, however, unlike digital lenders, responded to defaults differently.
A source close to the incident told TechCabal that, unlike digital lenders, these large commercial banks can afford to introduce these types of loans and incur a loss, as they make tens and hundreds of billions. naira of profit.
In addition to being able to absorb the loss, the CBN issued 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 others. banks, to reduce the amount of non-performing loans, a measure that reduced the risk of defaulting customers while having money with other banks.
Options available for digital lenders
Currently, digital lenders do not have the right to debit defaulting debtors’ accounts at other banks through GSI. But do these methods work?
Julian Flosbach, CEO of BFree, an ethical debt collection company, believes they do if they consider 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 goes bankrupt, or because of health emergencies that affect clients’ affordability. He believes that assessing a client’s new financial capabilities and offering new reimbursement plans through convenient communication channels can then dramatically increase reimbursement rates for those clients.
An employee at a digital loan company explained that sometimes reporting to the credit bureau can be effective. She cited the case of a defaulting debtor whose visa application was refused because he did not repay his loan for more than a year. Credit checks are a prerequisite for issuing visas in some countries.
She also affirms Sodipo’s view of an influx of lenders with lax rules saying, “It is usually companies not registered with the credit bureau that use unethical debt collection practices.”
Slow and steady don’t win this race
It’s 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) fined N 10 million ($ 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 her friends were ever to be immune to the disruption and intimidation of these predatory digital lenders, Nigerian regulators should step up the pace of their response.