Central Bank of Nigeria (the “CBN”) reviewed and issued the revised Microfinance Policy Framework, dated 29.04.2011 (the “Microfinance policy”). Microfinance Policy Framework, 2005, that predated the Microfinance policy sought to enhance micro-entrepreneurs’ and low-income households’ access to financial services. It claimed that no inclusive economic growth could be achieved without improving access to microfinance services.
Microfinance services is broader than microfinance credit or microloan services. Clause 1.3 of the Microfinance policy defined microfinance services to include “loans, deposits, insurance, fund transfer and other ancillary non-financial products targeted at low-income clients.”
The following 3 features distinguish microfinance services from other formal financial products: smallness of loans and savings; absence or reduced emphasis on collateral; and simplicity of operations.
Key Drivers of Microfinance Loans in Nigeria
From CBN standpoint, a microfinance bank (“MFB”) is the favoured national driver for microfinance credits in Nigeria. Given that MFBs’ are authorized to take deposits while other microfinance credit service providers are not authorized to take deposits.
CBN acknowledges the immense contributions of cooperative societies, money lenders licenced by respective State governments and other microfinance service providers that not regulated by the CBN.
Following the Microfinance policy, the CBN in December, 2005, issued the regulatory and supervisory guidelines for microfinance banks in Nigeria that was revised in year 2012 as the revised regulatory and supervisory guidelines for microfinance banks in Nigeria (the “MFB framework 2012”).
Clause 1.2.1 of the MFB framework 2012, provides that unless otherwise stated, a microfinance bank “shall be construed to mean any company licensed by the CBN to carry on the business of providing financial services such as savings and deposits, loans, domestic fund transfers, other financial and non-financial services to microfinance clients”.
Clause 1.4 of the Microfinance policy admits that before the emergence of MFBs, the people that were un-served or under-served by formal financial institutions usually found succour in non-governmental organization-microfinance institutions (NGO-MFIs), moneylenders, friends, relatives, or credit unions (the “informal sources of funds”).
The informal sources of funds assisted to partially fill a critical void, in spite of the fact that their activities were neither regulated nor supervised by the CBN.
The Microfinance policy continues to take cognisance of informal sources of funds, which have now become key players in the Nigerian microfinance landscape.
Microfinance loans and digital financial services
Clause 1.2.4 of the MFB framework 2012, describes microfinance credit as loans granted to the operators of micro-enterprises, such as peasant farmers, artisans, fishermen, youths, women, senior citizens and non-salaried workers in the formal and informal sectors.
Microfinance loans are usually unsecured, but typically granted on the basis of the applicant’s character and the combined cash flow of the business or household that now include real-time data-driven credit assessment.
The CBN acknowledged in the Revised National Financial Inclusion Strategy, 2018, that the potential economic benefits of digital financial services as an essential component of financial inclusion encompass:
- bringing 46 million new individuals into the formal financial system and;
- providing new credit worth $57billion
“Digital Financial Services is a strategic opportunity to expand the access and reach of basic financial services to the un-banked or under-banked population in Nigeria through innovative financial technologies and platforms.”
Nigerian banks and other financial institutions are leveraging on digital financial services to increase loans and deposits. Nairametric report of April, 2021, claims that MFBs in Nigeria recorded an 82% boost in lending rising from ₦300.2 billion in 2019 to ₦546.6 billion in 2020.
Owogram published its list of top 10 best digital lending applications (Apps) in Nigeria. Sone Osakwe in April, 2021, appraised performance of Nigeria’s financial inclusion strategy. Sone Osakwe recommends that “there is a need to expand indicators being measured to include not just individuals/households, but micro, small and medium enterprises”.
Emmanuel Paul emphasized how “beyond OPay, your favourite lending apps may be at risk for alleged violation of Google’s policies”. In our view, NITDA (National information technology development agency) and the CBN exist to ensure that no lending Apps violate any provisions of the NDPR (Nigeria Data protection Regulation), 2019 or CBN’s data protection framework.
Consumers’ Protection Framework
CBN’s Consumer Protection Framework, 2016 (the “consumer protection framework”) defines financial consumer protection as laws, institutions, practices and policies that safeguard consumer rights and ensure fairness in the provision of products and services by financial institutions”. We now use financial institution to include MFBs and other financial institutions that offer microfinance lending and regulated by CBN (the “FIs”).
A consumer (or customer), according to the consumer protection framework refers to a person that has a relationship, by reason of benefiting from any financial products or services offered by FI.
We note that clause 2.2 of the consumer protection framework requires FIs to “observe high ethical standards and professionalism in their business transactions with consumers.
FIs are required to assess the financial capabilities of consumers and offer suitable microfinance loans based on customers’ needs and capability. This in our view underscores the FI’s implicit duty of utmost good faith to digital financial consumers in Nigeria.
Consumers’ Rights in Digital Microfinance lending
The following are the consumers’ rights in digital microfinance lending under the consumer protection framework.
(a) Right to correspondence: An FI shall respond clearly, timeously and in writing or via the consumer’s means of communication with appropriate documentation. Mere acknowledgement of a request is not a response. FI shall act in the best interest of customers and a customer shall be notified when an activity threatens to violate any terms of his contract.
FI shall provide detailed information on the terms and conditions of a digital credit agreement to consumers prior to executing any agreement. Such information must at a minimum include the pricing, repayment schedule, repayment amount, tenure and opt out options. In a manner not intended to confuse the customer.
(b) Right to receive financial advice: FI shall provide consumers with objective advice to enable consumers make informed decisions or choice. All features, costs, risks, penalties, terms and conditions of any digital lending application must be disclosed to the consumer prior to the contract.
FI will assess whether the facility to be granted suits the consumer’s needs as well as the consumers’ ability to fulfill the terms and conditions associated with the contract. Where a product requested does not meet customer’s needs, the FI is obliged to advise or caution the customer in writing before granting the loan.
FI are required to document any pre-contractual and subsequent deliberations with consumers in respect of microfinance loans that are complex or potentially risky. In addition, records of meeting must be acknowledged by the customer.
We opine that an addict (or an Estate of an addict) of online gaming or gambling who is indebted to an FI in respect of microfinance loans used to fund such addiction may successfully repudiate the contract where an FI failed to comply with its duties under clauses (b) and (c).
(c) Right to credit counselling: it is the responsibility of FIs to determine the manner of satisfying customers’ right to credit counselling to prevent consumers’ indebtedness due to limited financial knowledge.
Credit counselling is the process of educating consumers on borrowing and debt settlement. The credit counselling aims to promote responsible lending and positive credit culture in the industry. Reckless and predatory lending is prohibited.
Where consumers default on digital microfinance loans, FIs are to adopt fair and ethical debt recovery practices. We note that all marketing communications are required to be fair and accurate in all respects.
(d) Right to information: FI shall conspicuously display specific and up-to-date information such as interest rates and financial calculation tools on their websites to assist consumers to perform simple calculations that may be required to ascertain the suitability of certain digital loans.
Right to information include the right to receive notice of variation in applicable interest rates or other regulatory changes that impact on the contract.
(e) Right to fair treatment: Consumers shall be treated equitably without discrimination at all stages of the relationship. Eligible consumers must be granted access to loans; treated equitably at all times; and the contract terms must not undermine the rights of consumers or give undue advantage to FI.
Instances of unfair contract terms include clauses that (i) limit FI’s liability in the event of total or partial non-performance of obligations or excludes its liability in the event of negligent breach of obligations; (ii) bind a consumer while the corresponding obligation on FI is conditional; (ii) allow FI’s to vary or terminate agreement without reasonable notice to the consumer; (iv) limits FI’s liability for actions of its agents; (v) allow FI to transfer its obligations under the contract without customer’s consent, where this may reduce the rights of the consumers; and (vi) that conflict with regulations are null and void ab initio.
(f) Right to privacy and redress: Subject to CBN’s regulatory framework for open banking in Nigeria, FI shall keep confidential, customers’ personal information. As a duty of care, FIs are obliged to safeguard the privacy of their customers’ data, except as provided in the regulatory framework for open banking in Nigeria or the NDPR, 2019.
The federal competition and consumer protection commission established pursuant to federal competition and consumer protection act, 2018, itemized similar consumers’ rights on their website as follows, rights to value for money; safety: information; choose; redress; consumer education; and representation.
Digital Financial Consumers’ Duties
Flowing from the principle that existing rights have corresponding duties, the consumer protection framework states the following duties of a digital microfinance creditor.
The obligations include duties of knowledge and understanding; to perform or honour fair contract terms; to protect financial instruments and information; to provide accurate and up-to-date information and; to report unethical practices, fraud and error to customer protection department of the CBN or federal competition and consumer protection commission, and law enforcement agents, where applicable.
Tenure of Microfinance Loans
The MFB framework 2012, pegs tenure of microfinance loans, generally, at within 180 days (6 months). Tenures longer than six (6) months would be treated as special cases.
In the case of agriculture, or projects with longer gestation period, however, a maximum tenure of twelve (12) months is permissible and in housing microfinance, a longer tenure of twenty-four (24) months is permissible.
In line with best practice, the maximum principal amount shall not exceed ₦500,000, or one (1) per cent of the shareholders fund unimpaired by losses and/or as may be reviewed from time to time by the CBN.
Although Nigeria improved on its financial inclusion agenda, 2020, it did not fully meet its agenda for year ended, 2020. According to EFInA, Nigeria is not likely to meet the year 2020 financial inclusion agenda before year 2030.
Microlending Apps are nearly ubiquitous in Nigeria – even though comparatively, many Nigerians, especially in rural areas and urban-poor are still either under-banked or un-banked.
Consumer protection in Nigeria is evolving. With all the challenges to access to justice and regulatory weaknesses. FI and civil societies should partner to deepen financial education pending when CBN is able to include financial education in curriculum across schools in Nigeria.
Utilizing technology to further consumer education may be ineffective in Nigeria’s rural and urban-poor segments, thereby further excluding persons within such segments.
Well educated consumers assist to stabilize the financial sector in the interest of all stakeholders. Financially literate consumers are no obstacles to FIs but necessary stakeholders.
Software developers employed by FIs should include compliance and regulatory audits in their process and UI/UX (user interface/user experience). Software developers should seek out legal practitioners who are knowledgeable on financial technology (fintech) compliance and regulatory as collaborators in software audit and compliance.
This will ensure that micro lending Apps are compliant to regulation and consumers’ rights are duly protected.