Most technology-based products are founded on the idea of addressing pain points through solutions infused with ease, speed, and simplicity. Generally, ideas with these three features disrupt an industry legacy business model. When credit providers carved their niche in the fintech space, they capitalized on these principles – providing loans to virtually anyone, anywhere, and within minutes – as well as the apparent failure of traditional financial institutions to simplify their processes and provide loans to a large percentage of the population.
Many loan seekers rejoiced at the prospects offered by fintech companies, forgetting that the loan market is the clearest depiction of high risk, high reward in the business world. By taking on greater risk burdens to fulfill their promise of easy access to credit for everyone, digital loan agencies reduced their chances of staying afloat and mitigating the risk burden required by factoring in the risk into their interest rates and debt collection conditions – a strategy which has been implemented in extreme forms by some of these credit providers, earning them the tag ‘loan sharks’.
For loan sharks, staying afloat involves employing drastic measures, which have crossed many ethical boundaries. For these businesses, it has become commonplace to resort to tactics such as public naming and shaming – especially through social media platforms-, forced seizure of assets, as well as privacy breaches through persistent calls and texts to contacts. These actions, which amount to character defamation, cyberbullying, and data privacy invasion crimes have been worsened by the lack of regulation, which aided the unscrupulous activities of the illegal operators in the burgeoning industry.
However, regulatory bodies in various countries -alarmed by the social menace these loan sharks have constituted – are beginning to respond to the need for policies to give structure and guide to the activities of firms in the industry and more importantly, fish out the loan sharks who capitalize on the public’s thirst for quick loans.
In India, where the actions of these loan agencies have resulted in a growing number of suicide cases among small business owners, traders, and farmers, the government has taken stringent steps to rein in the fraudulent activities of the lenders on three fronts – legal and regulatory, technology and financial consumer protection. To ensure that customers borrow from only authentic mediums and that the FinTech companies in the lending space operate under the purview of the code of conduct and guidelines set by the Reserve Bank of India (RBI), the plans in motion include subjecting the digital lenders to a verification process by a nodal agency and requiring direct disbursement to bank accounts of borrowers. Establishing a self-regulatory organization covering the participants in the digital lending ecosystem such as digital loan aggregators and credit bureaus is also being considered to increase transparency and maintain tight supervision in the industry.
Kenya has also doubled down on its regulatory efforts to clamp down on predatory lending by digital credit providers. New laws have been set to regulate monthly interest rates levied on loans by digital lenders, in a bid to stamp out these predatory practices. Under the new law, digital lenders will require approval from the central bank to increase lending rates or launch new products. This comes in tow to data protection laws and the ban on digital lenders blacklisting a category of lenders and names of defaulters with credit reference bureaus, which were implemented by Kenyan authorities earlier this year
The regulatory clampdown is slowly snaking its way to various countries, implying that an industry shakedown may be imminent in Nigeria. The ten million naira fine imposed on a loan agency – Sokoloan – in August as well as the investigative efforts championed by several agencies – including the Central Bank of Nigeria (CBN)and the Economic Financial Crimes Commission (EFCC)- that was launched in November 2021 to investigate complaints about the questionable credit repayment practices by loan sharks, may be the first signs of the regulatory clampdown to come.
To many, technology is synonymous to ease. However, with digital loan sharks, the ease they offer has strings attached. Poverty-ridden countries like India and Nigeria provide the ideal landscape for these loansharks to pounce on the need for quick cash, and capitalize on the stigma attached to borrowing in these societies to get the repayments. Although they fulfill the dreams of the masses by granting any and everybody loans, these loan sharks have taken advantage of the limited regulation in the industry. As such, policies are needed to prevent even more preys from entering the jaws of loan sharks. The introduction of regulations may moderate the growth of the digital credit industry in Nigeria, however, it is required to protect the interest of customers and ensure a healthy business environment in the industry.