The business of lending in Nigeria has evolved from the traditional system to a more flexible and digitally enabled system for a faster and more convenient process. This evolution has attracted extensive participation in the lending sector spurring the growth of the Nigeria Domestic Credit by 16.2% YoY as at December 2021.1
In this article, we highlight the various regulations and licenses applicable to lending in Nigeria.
Money Lenders (ML) License
The Money Lenders (ML) license is issued and regulated by the money lenders laws of the various states in Nigeria. Given that Lagos is the commercial hub of Nigeria, majority of the money lenders license holders in Nigeria are registered within Lagos State. The Lagos State Moneylenders Law2 is the principal law which regulates money lending in the state and the office responsible for issuing licenses is the Lagos State Ministry of Home Affairs and Tourism. The ML license grants any individual or company the ability to carry on business of money lending in the state within which it is established.
Under the Law, entities such as cooperative societies, banks, insurance companies, pawnbrokers are exempted from obtaining the ML in Lagos State.
Licenses expire on the 31st of December of every year and are subject to renewal provided that the requirements for renewal are met.3
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 earners, the un-banked and persons operating in the informal sector). MFBs are regulated 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 permitted to accept deposits from customers and provide other ancillary financial services.
The geographical operation of an MFB is dependent on the nature of the license obtained from the CBN. There are 3 major categories of MFB licenses to wit: (i) Unit MFBs, which are permitted to operate within certain local government areas; (ii) State MFBs which are licensed to operate within the state they are located; and (iii) National MFBs which are permitted to operate across all states within Nigeria.4
Finance Company (FinCo)
Finance 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, to individuals and companies. They were created to bridge the financing gaps and complement the roles of banks.
The table below highlights several major differences between the 3 major lending licenses in Nigeria.
|MFB||FINCO||MLs (LAGOS STATE)|
|Timeline for Registration||Usually 10 - 15 months||Usually 10 - 15 months||Usually 8 - 12 weeks|
|Lending Limits||80% of the total loan portfolio must be Micro loans (not exceeding N1 million)||Limited to 20% of the FinCo's shareholders' funds unimpaired by losses||There is currently no lending limit.|
|Official Fees||· N350,000 + 200 Million Naira (Escrow
deposit) for Unit MFBs.
· N700,000 + 1 Billion Naira (Escrow deposit) for State MFBs
· N1,300,000 + 5 Billion Naira (Escrow deposits) for National MFBs
|N350,000 + 100 Million Naira (Escrow deposit)||N400,000 to N500,000|
|Interest Rate Limits||Nil (Key lending rate at 11.5%)||Nil (Key lending rate at 11.5%)||5% monthly 5|
|Operational Limitations||Unit (Tier 1) -can operate 5 branches within urban
areas of a state.
Unit (Tier 2) - can operate 2 branches in rural/underbanked areas within a state.
State MFB - can operate within an entire state.
National MFB -can operate in all the states in Nigeria
|FinCos can operate across all states in Nigeria||Operations are limited to Lagos State6.|
It is pertinent to note that no particular license is preferred over the other. The suitability of each license depends on the operations and the structure of the applicant and the requirement of the regulator. Applicants are advised to consult with professionals before commencing the application for any license.
2. Cap M7 2009
5] Under the Lagos State Ministry of Home Affairs regulations
6. In practice, moneylenders 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 to the subject matter. Specialist advice should be sought about your specific circumstances.