Money Lending License and Regulations in Nigeria

In Nigeria, the financial services sector plays a critical role in the country’s economy, providing essential services that facilitate commerce and trade. Among the various components of this sector, money lending is a significant one. Money lending involves providing loans to individuals or businesses, typically with interest. However, due to its potential for abuse and the importance of protecting borrowers, the Nigerian government has established strict regulations governing this practice. This article looks at the requirements for a money lending license in Nigeria. It also delves into money lending regulations, highlighting the legal framework and regulatory bodies involved in governing money lending business in Nigeria.

Legal Framework for Money Lending in Nigeria

Money lending in Nigeria is primarily regulated by state laws, with each state having its specific legislation governing money lending activities. The primary legal instruments include the Moneylenders Act (for states that have adopted it) and various state-specific Money Lending Laws. The governing law in the Federal Capital Territory (FCT) is the Moneylenders Act. These laws set out the conditions under which money lending can occur, the obligations of money lenders, and the protections afforded to borrowers.

Apart from the Moneylenders law, the money lending business is now governed by the Federal Competition & Consumer Protection Act. Due to the severe abuse of money lending activities by operators using cruel and barbaric methods for the collection of their debts, the federal government, through the Federal Competition & Consumer Protection Commission (FCCPC), now directly supervises money lending. For an operator to be eligible to carry on operation, such an operator must obtain requisite approval from the FCCPC.

Requirements for Obtaining a Money Lending License

To operate legally as a money lender in Nigeria, one must obtain a money lending license from the relevant state authority or FCT. While the specific requirements can vary from state to state, the general process typically involves the following steps:

1. Application Preparation & Submission: A business entity seeking to become a money lender must apply to the relevant state authority. This application usually includes:

• A completed application form.
• Incorporation documents for corporate applicants.
• Evidence of financial stability, such as bank statements or financial records.
• A bank reference letter
• Police clearance for the directors of the company
• A business plan detailing the proposed money lending activities.

2. Payment of Fees: Applicants are required to pay a non-refundable application fee. The fee amount varies depending on the state but is generally designed to cover the administrative costs of processing the application.

3. Background Checks and Character Assessment: The state authority typically conducts thorough background checks on the applicants. This includes verifying the criminal history and overall integrity of the individuals involved in the money-lending business. Consequently, the directors of the company are required to submit their police character certificates showing they have never been convicted for any money lending-related offences.

4. Provision of Security: In some states, applicants may be required to provide security in the form of a bond or other collateral. This security is intended to cover any potential liabilities or defaults that may arise from the money lending activities.

5. Inspection of Premises: The state authority may inspect the proposed business premises to ensure they are suitable for conducting money lending operations. This is to verify that the business location is accessible and equipped to handle financial transactions securely.

6. Issuance of License: Upon successfully completing the application process and fulfilling all requirements, the state authority issues a money lending license. In some states, the licenses will be issued by the courts only, while in some states, both courts and ministries issue the licenses jointly. This license must be renewed annually, with renewal conditions similar to the initial application process.

Regulatory Bodies and Their Roles

Several regulatory bodies oversee money lending activities in Nigeria. The key ones include:

1. Courts/ State Ministries

In many states, the primary institution that supervises and issues money lending certificates is the Court, especially the Magistrate Court. In some states, such as Lagos State, the Ministry of Home Affairs is responsible for issuing money lending licenses and ensuring compliance with state-specific money lending laws. The ministry also handles complaints and disputes arising from money lending transactions.

2. Central Bank of Nigeria (CBN)

While the CBN does not directly regulate money lenders, it plays an indirect role by setting broader financial policies and guidelines that may affect the money lending sector. The CBN’s regulations on interest rates, for example, influence how money lenders set their lending rates. Furthermore, some companies engaging in money lending activities hold the CBN licenses to enjoy broader coverage. Some of the financial institutions engaging in money lending that are directly licensed by the CBN include finance companies and microfinance banks.

3. Competition & Consumer Protection Commission (FCCPC)

FCCPC must approve any money lending companies that intend to operate digitally. The FCCPC started regulating the money lending activities in Nigeria to protect consumers as part of their statutory obligations. Consequently, the FCCPC issues various guidelines that money lending companies must comply with before they can commence business operations in Nigeria. FCCPC is the sole federal agent that directly monitors the activities of money-lending companies throughout Nigeria. The commission handles complaints and ensures that money lenders adhere to fair lending practices.

Key Regulations and Borrower Protections

Several key regulations govern money lending activities in Nigeria, aimed at protecting borrowers from exploitation and ensuring fair practices:

1. Interest Rate Caps: Many states impose caps on the interest rates that money lenders can charge. These caps are designed to prevent usurious practices and ensure that borrowers are not subjected to exorbitant interest rates.

2. Disclosure Requirements: Money lenders are required to provide clear and comprehensive information about the terms and conditions of loans. This includes the interest rate, repayment schedule, fees, and any other charges associated with the loan. This transparency helps borrowers make informed decisions.

3. Prohibition of Unfair Practices: Money lenders are prohibited from engaging in unfair or deceptive practices, such as false advertising, harassment, or undue pressure on borrowers. They must also ensure that loan agreements are fair and not overly burdensome to the borrower.

4. Consumer Education: Regulatory bodies often engage in consumer education campaigns to inform the public about their rights and responsibilities when dealing with money lenders. This education helps to reduce the incidence of exploitation and financial mismanagement.

Conclusion

Dr Olusola Jegede, a Partner at Resolution Law Firm, wrote via info@resolutionlawng.com said money lending sector in Nigeria is a vital component of the country’s financial services industry, providing much-needed credit to individuals and businesses. However, to ensure that this sector operates fairly and effectively, stringent regulations and licensing requirements are in place. These regulations are designed to protect borrowers, maintain market stability, and promote ethical lending practices. Despite the challenges, ongoing efforts by regulatory bodies and the continued evolution of the legal framework are crucial in fostering a transparent, accessible, and fair money lending environment in Nigeria. As the sector continues to grow and adapt to new technologies and market demands, maintaining a balance between regulation and accessibility will be crucial to its sustained success.

Dr Olusola Jegede, a Partner at Resolution Law Firm, wrote via info@resolutionlawng.com