Loan Regulations in Nigeria – Finance and Banking

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Nigeria: Loan Regulations in Nigeria

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introduction

The lending business in Nigeria has evolved from the traditional system to a more flexible and digital system for a faster and more convenient process. This development has attracted broad participation in the lending sector, boosting Nigerian domestic credit growth by 16.2% year-on-year in December 2021.1

In this article, we highlight the various regulations and licenses applicable to loans in Nigeria.

Money Lenders License (ML)

The Money Lenders (ML) license is issued and regulated by the Money Lenders Acts of the various states in Nigeria. Since Lagos is the commercial hub of Nigeria, the majority of money lender license holders in Nigeria are registered in Lagos State. The Lagos State Lenders Act2 is the main law that regulates money lending in the state and the office responsible for issuing licenses is the Lagos State Department of Home Affairs and Tourism. The ML license grants any person or business the ability to engage in money lending activities in the state in which they are established.

Under the law, entities such as Co-operative Societies, Banks, Insurance Companies, Pawnbrokers are exempt from obtaining ML in Lagos State.

Licenses expire on December 31 each year and are subject to renewal provided the renewal requirements are met.3

Microfinance banks

Microfinance Banks (MFBs) are financial institutions licensed by the Central Bank of Nigeria (CBN) to provide financial services to microfinance clients (i.e. low income, unbanked and people working in the informal sector). MFBs are governed by several laws, including the Banks and Other Financial Institutions Act 2021 and the Guidelines for the Regulation and Supervision of MFBs 2020.

In addition to providing credit, MFBs are authorized to accept customer deposits and provide other ancillary financial services.

The geographical operation of an MFB depends on the nature of the license obtained from the CBN. There are 3 main categories of MFB licenses, namely: (i) unitary MFBs, which are authorized to operate in certain local government areas; (ii) state MFBs that are licensed to operate in the state in which they are located; and (iii) National MFBs which are licensed to operate in all states of Nigeria.4

Financial company (FinCo)

Financial Companies (FinCos) are financial institutions also licensed by the CBN to provide financing services to micro, small and medium enterprises. They provide customer loans, fund management and credit facilities, asset finance, project finance, debt factoring, debt securitization and other forms of credit facilities , individuals and businesses. They were created to bridge funding gaps and supplement the role of banks.

The table below highlights several major differences between the top 3 lending licenses in Nigeria.














MFB FINCO ML (LAGOS STATE)
Registration calendar Usually 10 to 15 months Usually 10 to 15 months Usually 8 to 12 weeks
Loan limits 80% of total loan portfolio must be micro-loans (not exceeding 1 million naira) Limited to 20% of FinCo equity unaffected by losses There are currently no loan limits.
Official fees · N350,000 + N200 million (escrow deposit) for unit MFBs.

N700,000 + 1 Billion Naira (Escrow Deposit) for State MFBs


N1,300,000 + 5 billion naira (escrow deposits) for domestic MFBs

N350,000 + N100 million (escrow deposit) N400,000 to N500,000
Interest rate limits None (key rate at 11.5%) None (key rate at 11.5%) 5% monthly 5
Operational limits Unit (Tier 1) – can operate 5 branches in urban areas of a state.

Unit (Tier 2) – can operate 2 branches in rural/underbanked areas within a state.




MFB state – can work in integer state.




National MFB – can operate in all states in Nigeria



FinCos can operate in all states in Nigeria Operations are limited to Lagos State6.

Conclusion

It is pertinent to note that no particular license is preferred over the other. The suitability of each license depends on the operations and structure of the applicant and the requirements of the regulatory body. Applicants are advised to consult professionals before starting the application for any license.

Footnotes

1. https://www.ceicdata.com/en/indicator/nigeria/domestic-credit-growth

2. M7 Cap 2009

3. For more information on this, please read our article here.

4. For more information on this, please read our article here.

5]Under regulations of the Lagos State Department of Home Affairs

6. In practice, lenders are able to provide credit beyond Lagos State through the use of technology

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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