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Nonbank Lenders in Nigeria: Opportunities and Challenges

 

OLU OJO PHILLIPS

Over the past few years, something interesting has been happening in the banking sector and I’m not talking about the proliferation of digital banking.

I’m talking about the increasing market share of non-bank lenders, also known as money lenders. The money lenders have always been with us. But the rate at which the money lenders licenses are been procured by entrepreneurs call for a close attention.

For instance, the Lagos State government recently announced that it has registered 400 money-lenders in the last two years, even with its stringent licensing processes that take a minimum of three to six months to complete.

Likewise, the government of Ogun state may likely record a higher number of registered money lenders because, not only does the state charge less than one third of what Lagos State tariffed, the process takes less a one month.

It is almost a walk-through experiences in Oyo, Osun, Ondo, Ogun and Kwara states, Financial Technology Africa findings revealed.

Nonbank lending has existed for decades, but the burgeoning alternative lending gain prominence in large part thanks to digital financial system and very stringent Central Bank of Nigeria’s licensing requirements for fintech firms.

Money lenders are a crucial source of capital for small- and medium-sized businesses and other borrowers who collectively fuel the economy.

However, the existence of a large financial sector players without a direct access to the Central Bank could become a systemic risk to the national financial system.

Most of the states governments that issue the money lender licenses have practically no system to monitors the operators. This is so since the money lender licenses are issued in Lagos State by the Ministry of Home Affairs.

Regulation is a double-edged sword. It can restrict innovation in one sector, and spur innovation in another. It can reduce risk in one industry and increase it in another. Regulation is required in the money lender sector not only to reduce the risk but also to protect the operators and the consumers.

Self-Regulation by Money Lenders

As money lenders further enter the mainstream financial community, some form of regulations are inevitable.

There are two basic types of oversight: the voluntary type where the firms self-regulate, and the rules handed down by the state governments. It doesn’t take a business degree to guess which of the two options the industry would prefer.

Money lenders in Nigeria should study their counterparts in the United States of America, a country with similar dual-regulatory regime for financial services.

The nonbank lenders in the USA have been self-regulating. For example, the nonbank lending industry formed the Innovative Lending Platform Association (ILPA), a trade organization of online lenders dedicated to advancing best practices and standards that support responsible innovation and access to capital for small businesses.

Together the nonbank lenders in the USA have taken steps to prepare and adopt best practices that best-positioned them to succeed as regulation evolves.

Here are the top three things I’d like to see in a regulated environment for money lenders in Nigeria:

  • A specialist regulatory agency, or self-regulatory organization, dedicated to money lenders: It would ensure that there is a consistent regulatory framework, and that money lenders don’t get unfairly pigeonholed into complying with regulations that may not be appropriate for their business models.
  • Less stringent liquidity requirements than what is required for traditional banks: Money lenders are small in comparison to the big banks, and not as exposed to global market activities, and thus should be free to take on more risk within reason so they can serve more businesses.
  • More transparency into what’s on a lender’s balance sheet: If there’s one lesson we’ve learned from the financial crisis, it’s that a bank or a lender’s financial health may not be what it seems. While it’s impossible to predict future market conditions, it’s important for borrowers, creditors and investors to have transparency into any potential business risks.

That transparency starts by understanding exactly what is on a company’s balance sheet and how that business calculates risk. This is particularly true for the money lending space, which features a spectrum of different business models ranging from direct lending, where all the loans are backed by collateral on the lenders’ balance sheet, to marketplace lending, where loans are funded via a combination of institutional and retail investors.

It’s up to the players in the nonbank lending ecosystem to take the initiative and contribute ideas and debate.

The alternative is to wait for the state and federal authorities to establish regulations that may disrupt the sector and the flow of capital, and potentially put many money lenders out of business.

Networked supervision by the state authorities

State government cannot continue to be lackadaisical about the regulation of money lenders. Issuing licenses is not enough as a growing and innovative economy creates challenges for the financial sector that is its lifeblood.

The state governments must acquire the requisite skills, resources and understanding to fulfill their oversight role. A sound financial system is the bedrock to economic stability and consumer protection.

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The state governments should collaborate under one umbrella and build connections by exploring technology, data and people. With such understanding, the state regulatory system can be ahead of the trends in the ever growing and innovative economy.

Again, the state governments should take a cue from their counterpart in the USA. Faced with similar challenges, in 1902, 16 state regulators in the USA gathered in Detroit because they knew they had common challenges and could learn from each other. Then they formed the National Association of Supervisors of State Banks. In 1971, the name changed to the Conference of State Bank Supervisors (CSBS) to reflect the ongoing nature of its activities.

CSBS supports state regulators in advancing the system of state financial supervision by ensuring safety, soundness and consumer protection; promoting economic growth; and fostering innovative, responsive supervision.

State Representation in Federal Agencies

Collaboration between state and federal regulators is as equally important as state-to-state collaboration. In fact, today’s dynamic financial services industry demands increased state-federal regulatory coordination.

State-federal coordination should top the priority for state governments, including ensuring that the perspective of state supervisors is represented at the highest levels of the federal government.

The umbrella body should play an integral role in facilitating state regulators’ representation on several federal bank supervisory councils and boards.

Having a seat at the table with federal regulators ensures the state perspective on financial policy is considered and fosters a more informed financial regulatory regime in the Nigeria.