Inadequacy of Nigeria’s digital credit playbook, lessons from Kenya’s regulations – Emmanuel  Okoegwale

Informal credit providers had always existed in Sub-Sahara  from time immemorial, they operate at  communal level and it was easy to establish trust, income capacity, administer justice to defaulters. With the advent of technology, increasing smartphone penetration, remote onboarding tools, improved digital identification, FinTechs are deploying  digital credit platforms across Africa to bridge the credit gap which the licensed and authorized financial services could not meet.

Few countries in Africa are considering regulations to guide the sector and Kenya took the lead. The Central Bank of Kenya, Digital Credit Providers Regulations, 2022, was gazetted on March 18, 2022. The Regulations provide for the licensing and oversight of previously unregulated Digital Credit Providers (DCPs) by CBK. The Central bank recently approved additional DCPs in January 2023, to bring licensees to 22.

The Kenyan framework is consumer focused and  robust document which will shape the market conduct by qualified and well governed digital lenders armed with proper assessments, tools, systems, policies, pricing, credible credit and customer  management  lifecycle processes  and rules. A robust framework will inspire confidence and growth in a continent, struggling with significant credit gap.

The Central Bank of Nigeria which is seen as innovative in many areas  such as recently deplored  Nigeria’s digital currency and Domestic National card, can no longer play the ostrich by burying its head, in the rapidly moving sand of Fintech’s digital credit space.

The emergence and  rapid growth of  non -licensed digital credit providers (DCPs) brought some reliefs to the excluded segments but came with own risk of high defaults due to   extreme high cost, improper market conducts and  abuses which were so prevalent running up to 2022,  that the  Federal Competition and Consumer Protection Commission (FCCPC) had to step in and provide leadership during the turbulent period.

During the uproars of 2022 about unjust and unfair treatments, the Central Bank of Nigeria whose job is to provide market stability, ensure certainty and appropriate risk, educated the citizens on the risk of taking loans from unlicensed and unregulated entities repeatedly but did not provide any insights into long term solutions to explore the opportunities to push for formalization of the sector from ‘under-the-table’ category.

Plausible reasons for the non-recognition of DCPs may be, to encourage the digital credit  providers to transition into full-fledged micro finance bank (Some already did). It looks like a ready-made regulatory solution but it won’t address the underlying factors because FINTECHS are wired differently from traditional Microfinance bank if we must face the reality of the emerging ‘uncontrolled market’ category.

Post  intervention of 2022 and to ensure some level of order, the FCCPC then developed a ‘Limited interim framework for digital leading which is the commission’s approach to provide some guidelines in the  qualification for approval to carry out the business of digital credit in Nigeria. The framework does what the commission wants to achieve in short term, to establish fit and proper ownership, loan calculation methodologies etc but not covering extensive domain areas of provisioning a financial services platform which a DCP is.

FCCPC has shown leadership to steady a rocking ship but for how long? There is need for an encompassing and compelling digital credit framework which will address many present grey areas and future potentials so that the ecosystem is not stifled due to lack of  framework guiding market operators, end-to-end processes, standards, consumer protections  etc

DCPs are playing some important roles in the bridging the credit gap but they should do it within the rule of law so that the ecosystem can grow.

Nigeria should accelerate the development of its own DCP framework with the contribution from  relevant agencies, standard setting bodies, regulators, knowledge matter experts, market operators to come up with a draft that is innovation led while balancing risk, customer protection and market dynamics in a timely manner.

Closing the national credit gap will require many stakeholders at different level of the pyramid and the bottom of the pyramid should not be left devoid of any regulatory oversight. As long as significant  credit gaps exist, DCP cannot be wished away but proper framework that will guide the ecosystem should come into the National financial system’s playbook.