Introduction
The gap created by underbanked communities has allowed digital lenders to rise in Nigeria and other parts of Africa. The difficulty of obtaining loans from commercial banks has forced the need to bypass traditional lending infrastructure and encouraged the growth of digital lenders. Digital lenders are financial service providers that offer lending services through technology-driven methods, such as apps, websites, USSD, and APK.
One of the major problems digital lenders face is the problem of increased indebtedness. As a means to recover debts, digital lenders are known to adopt unethical debt recovery practices which infringe on the rights of customers. This has given rise to several complaints which necessitated the intervention of the regulatory authorities in different jurisdictions. Some of these unethical practices are as follows:
- Harassment of loan defaulters;
- Defamation of customers;
- Use of abusive words when contacting borrowers
- Lack of transparency in loan terms including hidden charges;
- Violation of customers’ privacy rights by accessing the contact list and photos of borrowers without authorization.
In 2022, the Federal Competition and Consumer Protection Commission (“FCCPC”) came up with the limited interim regulatory/registration framework for digital lending. Similarly, in 2024, the Bank of Tanzania (“BoT”) issued a Guidance Note for Digital Lenders. Both regulatory interventions are a means to protect consumers and encourage the adoption of best practices in the digital lending sector. Ghana is proposing to issue a guidelines on digital lending to take effect in August 2025.
What are Top Ten (10) Best Practices for Digital Lenders in Africa?
Best practices are approved and established methods, widely considered and accepted to provide the most desired outcomes in a sector. These practices may be based on guidelines provided by regulators, associations, stakeholders, researchers or experts. The purpose of implementing best practices is as follows:
- To protect the interest of stakeholders
- Promote ethical standards
- To encourage accountability
- Minimise risk
- Ensure compliance with applicable laws
In every industry, some practices are highly recommended without which, an organization will be said to be in non-compliance and the digital lending sector is not left out. Some of the best practices for digital lenders are as follows:
a. Obtaining of Operational Licence
Digital lending, is a regulated sector.It is a mandatory requirement for digital lenders to obtain an operational licence before carrying out any lending activities. Operating without first obtaining a licence from the regulatory authority in any jurisdiction, is an offence and noncompliance could lead to devastating penalties and sanctions.
b. Obtaining Mandatory Approvals
As stated above the unethical debt recovery practices carried out by digital lenders necessitated the intervention of regulatory authorities. This intervention requires that digital lenders in different jurisdictions may require additional approvals before commencing operations. According to the Limited Interim Regulatory/Registration Framework for digital lenders in Nigeria, digital lenders are mandated to obtain the approval of the FCCPC to operate digital lending platforms. The process requires that applicants must present the names of the apps with which they intend to operate. Also, the public is encouraged to only patronise lenders listed on the FCCPC website as they are the only ones who are presumed to have obtained the necessary approvals. For enforcement, the FCCPC has made it mandatory for appstores like Google Playstore and the like to reject the uploading of a digital lending app without the developer presenting a valid FCCPC approval.
In Tanzania, in addition to obtaining the operational licence from the BOT, digital lenders are required to obtain a “no objection letter” also from the BOT. The process of obtaining this letter requires that the digital lender provide pictures showing the step-by-step process flow of the digital lending platform and how it works.
Digital lenders must proactively identify and obtain all additional regulatory approvals or licences required within their jurisdiction. This is a form of best practice in the digital lending space as it demonstrates commitment to legal compliance and responsible lending practices.
c. Implementation of Adequate Data Protection and Security
Digital Lenders must ensure that the personal data of customers are adequately protected and processed within applicable data protection laws.
In Nigeria, this requirement is reinforced by the FCCPC. As a prerequisite for obtaining FCCPC approval, data controllers and processors are required to engage the services of a Data Protection Compliance Officer to conduct an annual data protection compliance audit. This audit ensures that data processing activities align with the provisions of the Nigeria Data Protection Act and relevant regulations. Data processors and controllers in Nigeria must carry out this audit annually before the 31st of March of every year.
Similarly, in Tanzania, as part of the requirement for obtaining the “Letter of no Objection”, digital lenders are mandated to implement adequate measures to protect the personal data of consumers. This underscores the broader regulatory trend across jurisdictions requiring lenders to prioritize data protection as part of responsible and lawful lending practices.
Some essential data protection measures expected to be implemented by digital lenders include:
- Processing of personal data in a lawful and transparent manner. This implies that data subjects must be aware of the purpose for which the data is being processed.
- Defined and legitimate data collection purposes.
- Limiting data requests to what is necessary.
- Restricting data retention to legal time frames
- Keeping data accurate and up-to-date
- Obtaining user consent before accessing personal data.
- Avoiding unauthorized sharing of personal data with third parties.
- Implementing adequate security measures using data encryption and access controls to ensure the safety of the personal data of consumers.
- Implement audit logs to track staff access and changes to records.
d. Ethical Debt Recovery Practices
Digital Lenders are required to adopt ethical debt recovery practices and refrain from intrusive debt recovery practices that involve accessing the phone contacts and picture storage of borrowers, shaming and breaching the fundamental rights of borrowers. Section 34 of the Constitution of the Federal Republic of Nigeria, 1999 provides for the right to dignity of human person. It protects humans from being meted with inhuman and degrading treatments. Violating the right to dignity of a human person can have legal consequences on a company which include sanctions such as fines, penalties and in some cases, revocation of the company’s operational licence depending on the level of breach and damage.
In Tanzania, the Fair Competitions Act, 2003 and the Bank of Tanzania (Financial Consumer Protection) Regulations, 2019 provide for ethical communication with defaulters, mandates the use of only registered debt recovery agents and promotes fair credit practices.
Digital lenders must NOT do the following:
- Use threatening or defamatory messages to recover loans
- Access and message borrowers’ contacts without consent
- Provide false or unclear loan conditions on their platforms
e. Transparent Lending Practices
In Nigeria as well as many other jurisdictions with growing digital lending sectors, transparency in lending practices is a core regulatory requirement. Digital lenders are required to provide clear, comprehensive and non-misleading information about their lending practices. This position is driven by the need to protect consumers from predatory lending and hidden charges. On the face of the digital lending platform, the following should be displayed:
- Loan terms and conditions
- Interest rates
- Fees and charges
- Repayment information
- Total cost of credit
- Privacy and data use
- Consumer rights, redress mechanisms and complaint channels
In jurisdictions with low literacy populations, digital lenders may be required to display information on their platforms using local languages. In Tanzania specifically, the Bank of Tanzania (Financial Consumer Protection Regulations) 2019 requires that information on digital lending platforms must be displayed in Kiswahili with the option to use the English language.
f. Establishment of a Comprehensive Consumer Protection Policy
Service providers are required to uphold a high standard of consumer treatment. To this end, digital lenders especially those regulated by the CBN must establish a consumer protection policy or customer complaint redress policy. The policy must outline the processes, regulations and structures put in place to address consumer protection and complaints according to the regulations. As a means to drive an improved consumer protection regime in the digital lending sector in Nigeria, the following Guidelines shall apply:
- The FCCPC Limited Interim Regulatory Framework and Guidelines for Digital Lending (2022): the aim of this Guideline is to ensure responsible lending practices in the digital lending ecosystem.
- CBN Consumer Protection Regulations (2019): The Regulation provides the minimum standards required of institutions under the regulatory supervision of the CBN on fair treatment of consumers, disclosures and transparency, business conduct, complaints handling and redress in order to protect the rights of consumers and to hold the institutions accountable.
Similarly, in Tanzania, the Fair Competitions Act, 2003 and the Bank of Tanzania (Financial Consumer Protection) Regulations, 2019 are regulations enacted to protect consumers from unfair and misleading market practices and conducts.
g. Implementation of Internal Controls
Digital lenders, like all financial institutions, are required to implement robust internal controls, compliance systems and automated tools to combat fraud, money laundering and terrorism financing. When noticed, suspicious transactions should be reported.
As an internal control measure, digital lenders must establish and maintain the following:
- A documented AML/CFT policy
- Internal risk-based procedures for identifying and reporting suspicious transactions and activities
- The engagement of an Anti-Money Laundering Compliance Officer
- Adequate measures for conducting Know Your Customer (KYC) and Customer Due Diligence (CDD).
- Records of customer transactions and KYC documentation for the required period.
- Register with the necessary agency as a reporting entity and file suspicious transaction reports regularly.
As an additional internal control measure, digital lenders may integrate with credit bureaus and national ID databases for real-time checks and use artificial intelligence monitoring tools for fraud detection and behavioural monitoring.
h. Staff Training and Awareness
There should be regular training of employees of digital lending organizations on the following:
- AML/CFT obligations
- How to detect and report suspicious activity and the need to always report suspicious transactions when detected.
- Data protection and security as a collective responsibility
i. Periodic Risk Assessment and Audits
Digital Lenders should perform annual risk assessments to review emerging risks and threats. There should also be a regular review to evaluate the effectiveness of the existing Risk Management policy against emerging risks and threats and where there is a need, the policy should be updated.
j. Financial Inclusion Focus
As earlier posited, the aim of digital lenders is to cater to the underbanked communities. Therefore, it is advised that digital lenders design products that serve low-income earners and rural populations.
Being that the majority of persons in the target market for digital lenders may not be financial literates, as a means to drive financial inclusion, customer education on basic thing such as interest rates, loan tenor, repayment schedule is advised.
In conclusion, the growth of digital lending across Africa reflects the continent’s ongoing drive toward financial inclusion and innovation. With this growth, there is an urgent need for responsible practices and alignment with the necessary regulations. Regulators have also made it clear that adhering to best practices is no longer optional, it is essential and sustainable.
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About KORIAT & CO.
We are a commercial law firm in Nigeria with network of lawyers and consultants in Ghana, Kenya and Rwanda. The above article is not legal advice and does not automatically make our readers our clients unless they specifically instruct us to act or represent them in any way.
We provide company registration, business licensing and secretarial services and regulatory compliance services. We also assist local and foreign clients to process company registration and business licences in Nigeria, Ghana, Kenya and Rwanda.
Please contact Koriat & Co. through admin@koriatlaw.com or 09067842241 if you require additional information about or legal assistance in Ghana, Nigeria, Kenya, Rwanda and Uganda.
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