High-cost borrowing often forces people to take new loans to pay off existing debts, creating a vicious debt cycle, particularly affecting lower-income Nigerians.

The number of approved digital lenders in Nigeria has increased by 79.77% since April 2023, reaching 311 registered lenders by September 2024. 

This growth aligns with a 329.28% year-on-year rise in personal loans, which totalled ₦7.52 trillion in March 2024, according to the Central Bank of Nigeria (CBN). 

The Federal Competition and Consumer Protection Commission (FCCPC) registers digital lenders under the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022, requiring registration and approval. 

Fully approved lenders grew from 119 to 269, while conditional approvals fell from 54 to 42. The rise in consumer credit is linked to inflation, which reached 32.15% in August 2024, and the increasing demand for accessible loans through fintech.

Growing Consumer Credit and Inflation

The CBN attributes the surge in consumer credit to inflation and the popularity of loan apps. A 2023 report from Piggyvest showed that four in ten Nigerians are in debt, with 26% owing loan apps. Another study from SBM Intelligence found 27% of Nigerians, across income categories, turning to loan apps to cope with living expenses amidst record inflation. 

Trade Lenda’s CEO Adeshina Adewumi noted that “rising cost directly impacts the need to access more funds.” Similarly, Money Lenders Association President Gbemi Adelekan confirmed that “demand for loans has increased double-fold due to hardship,” with loan demand growing at 5% monthly, according to Babatunde Akin-Moses of Sycamore.

The Impact on Borrowers and Economic Distress

Loan apps are popular for their accessibility and speed. Apps like FairMoney, Carbon, and Palmcredit have made it possible for people to get quick, unsecured loans. 

According to recent reports, these platforms have collectively issued billions of naira in loans. The apps appeal because they require no collateral, have quick processing times, and are available to people without access to traditional banking. 

CBN governor Olayemi Cardoso predicted that mobile money and digital lending would drive service sector growth, with more people borrowing. 

However, Prof. Bongo Adi from Lagos Business School noted that most loans are for consumption, pushing borrowers into deeper debt. His research shows that borrowers spend their loaned funds quickly, then struggle to repay, driving them further into financial instability.

Loan Sharks and the Debt Trap

Loan apps often charge high interest rates, sometimes reaching 90%, mimicking traditional loan sharks. Borrowers face challenges with high repayment demands, hidden fees, and aggressive recovery methods, such as harassment and public shaming. What initially seems like a short-term solution can quickly spiral, leading to a debt trap that is difficult to escape.

On average, digital loan apps charge monthly interest rates of 15-30%, with annual rates surpassing 200% in some cases.

These add to financial distress and mental health issues, with anxiety and depression on the rise among borrowers. 

Poverty and Debt’s Impact

Approximately 70% of Nigerians live on less than ₦1,500 per day. High-interest loan repayments take away household incomes, forcing families to sacrifice essentials and perpetuating the poverty cycle. 

This financial limitation affects the current generation and also risks intergenerational poverty, impacting children’s future education and growth opportunities.

Regulatory Challenges and the Need for Reform

While the FCCPC introduced a regulatory framework in 2022, enforcement remains challenging due to the volume of loan apps and the complexity of monitoring their practices. 

Former FCCPC CEO Babatunde Irukera has highlighted the issue of multiple loans from various apps leading to unmanageable debt. A centralized credit information system will improve accountability by offering lenders insights into borrower histories, promoting better lending methods. 

However, gaps in consumer protection remain, pointing to the need for stronger regulations, including possible interest rate caps, transparency requirements, and limitations on debt collection methods.

Proposed Solutions: Alternatives and Financial Literacy

Expanding financial literacy programs could empower Nigerians to make better borrowing decisions. Community-based lending models, like cooperatives and savings groups, could provide low-interest options. 

Collaboration between NGOs, financial institutions, and the government could help provide affordable loans and support financial education. With these measures, Nigeria can address the risks associated with digital loan apps while providing safe financial alternatives for those in need.

Strengthen Regulatory Frameworks

• Enforce Existing Regulations: The Federal Competition and Consumer Protection Commission (FCCPC) and the Central Bank of Nigeria (CBN) should enforce existing regulations more strictly to ensure compliance by digital lenders.
• Update Guidelines: Regularly update the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending to address emerging issues and close loopholes.

Increase Financial Literacy

• Educational Programs: Implement nationwide financial literacy programs to educate consumers about responsible borrowing, the risks of high-interest loans, and how to read loan terms and conditions.
• Workshops and Seminars: Conduct workshops and seminars in communities to raise awareness about the dangers of falling into debt traps and how to avoid them.

Promote Alternative Financial Services

• Microfinance Institutions: Encourage the use of microfinance institutions that offer lower interest rates and more flexible repayment terms.
• Community Savings Groups: Support the establishment of community savings groups where members can pool resources and access funds without resorting to high-interest loans.

Enhance Consumer Protection

• Transparent Loan Terms: Ensure that loan apps provide clear and transparent information about interest rates, fees, and repayment terms.
• Complaint Mechanisms: Establish strong complaint mechanisms for borrowers to report issues with loan apps and seek redress

Encourage Responsible Lending Practices

• Interest Rate Caps: Implement interest rate caps to prevent loan apps from charging exorbitant rates.
• Ethical Standards: Promote better lending processes among digital lenders, including fair treatment of borrowers and avoidance of harassment and blackmail.

Support for Borrowers in Debt

• Debt Relief Programs: Develop debt relief programs to help borrowers manage and reduce their debt burden.
• Counselling Services: Provide access to financial counselling services to help borrowers develop repayment plans and manage their finances effectively.

The Federal Competition and Consumer Protection Commission (FCCPC) had removed 47 unregistered loan apps from the platform as part of its investigation to curb illegal lending practices. However, many of these apps have turned to using Android Application Packages (APKs) to reach their customers.

APKs allow users to download apps directly via shared links, bypassing the need for official app stores. This tactic has enabled unregistered loan apps to continue their activities, avoiding compliance with FCCPC regulations.

These apps have been notorious for their aggressive and often illegal debt recovery methods, including harassment and defamation of borrowers. By sharing these APK links, the loan apps circumvent the restrictions imposed by the FCCPC and continue to target vulnerable consumers.

Gbemi Adelekan, Chairman of the Money Lenders Association, said these unregistered apps exploit regulatory loopholes to operate freely. He noted that these apps often extend unsolicited loans and use unethical means to recover debts, causing significant distress to borrowers.

In contrast, licensed Digital Money Lenders (DMLs) adhere to the laws and guidelines set by the FCCPC, promoting fair lending practices. Adelekan pointed out that while most licensed DMLs operate ethically, the few unregistered apps damage the industry’s reputation with their unscrupulous tactics.

The FCCPC, under the leadership of Dr. Adamu Abdullahi, is concerned about the rising infractions by these loan apps. In addition to delisting 47 apps, the Commission has placed 88 more on a watchlist and is considering involving law enforcement to address the issue more effectively.

This move aims to bolster consumer protection and maintain accurate standards in Nigeria’s digital lending space. The Commission’s Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending, established in 2022, was designed to ensure fair and transparent lending practices and to protect consumer rights.

Dr Abdullahi highlighted that infractions have been increasing as more Nigerians turn to loan apps due to the challenging economic conditions. The FCCPC’s actions come in response to the proliferation of unregistered and potentially predatory loan apps that have been causing distress among Nigerians.

The registration framework was necessitated by the disturbing activities of loan apps in the country, especially the illegal ones, over allegations of rights violations and unfair practices.

As of May 2024, the number of registered loan apps in Nigeria had increased to 284, including 232 companies with full approval and 41 others licensed by the Central Bank of Nigeria (CBN).

This increase in registered apps is a positive response to the regulatory measures, yet the challenge of unregistered apps is still an issue.