7 best things the Central Bank has ever done for digital lending in Nigeria

The Central Bank of Nigeria bears the weighty task of driving the nation’s economy. Yet, like a powerful engine without wheels, their efforts can only go so far. We know that Nigeria’s transformation hinges on providing credit. But despite low lending rates, there are still some silver linings for digital lending in Nigeria.

The Central Bank of Nigeria (CBN) has made extraordinary strides to bolster the flow of capital.

Let’s explore seven of the CBN’s most impactful initiatives that have forever changed the landscape of digital lending in Nigeria.

#1 Bank Verification Number (BVN)

The Central Bank’s introduction of the Bank Verification Number (BVN) was a watershed moment in Nigerian financial services. This simple 11-digit number has become the bedrock of financial identity, fixing issues that once paralyzed the credit market. 

As of March 2024, over 61 million Nigerians, representing roughly 70% of bank customers, have enrolled for their BVN which signifies its near universal adoption.

Before the BVN, broken systems made it easier for individuals to engage in fraud or default on loans by using multiple identities. While isolated cases of people having multiple BVNs may exist, their impact on digital lending in Nigeria is negligible compared to the overwhelming benefits:

Know your customer (KYC): The BVN links all an individual’s bank accounts, creating a single, verifiable source of truth for lenders. This reduces the risk of identity fraud and makes assessing borrowers’ creditworthiness much more efficient.

Deters bad debts: Before the BVN, loan defaulters could simply vanish into the system. Now, lenders can track borrowers across institutions, discouraging reckless borrowing and encouraging timely repayment.

Boosts financial inclusion: The BVN has made it easier for those with limited financial history to access credit, as lenders can confidently verify their identities.

#2 Global Standing Instruction (GSI)

The CBN’s Global Standing Instruction (GSI) is a bold and, in many ways, pioneering tool within the global lending landscape. It empowers participating banks to recover unpaid loan balances by directly debiting other accounts held by a defaulting borrower.

Let’s break down why it’s so transformative:

Rare global system: GSI is a relatively uncommon regulatory tool globally, as such, CBN has placed Nigeria at the forefront of technological innovation in loan recovery. Most countries still rely on lengthy legal battles to recover defaulted loans.

Improves credit culture: The GSI aims to instill greater discipline among borrowers. Knowing that loan defaults can have consequences across multiple accounts could, in theory, encourage more timely repayments.

There is still room for improvement. For example, making it accessible to every lender and not just financial institutions. As long as it evolves within a fair and transparent regulatory framework that finds the right balance between empowering lenders and protecting consumers.

Featured read: 6 common misconceptions about using GSI for loan recovery

#3 Welcoming fintechs

CBN deserves significant credit for its forward thinking approach in actively welcoming and promoting fintechs in an enabling space where they could thrive. The number of active fintech companies in Nigeria has increased from 234 in 2022 to a staggering 254 firms.

CBN’s proactive approach included regulatory frameworks for fintechs to operate legitimately and offer lending services. Launched in 2007, Payment System Vision 2020 prioritized electronic payments and digital financial services, laying the foundation for fintech solutions to gain traction.

The impact of this support is immense. Without the rise of fintechs, digital lending in Nigeria wouldn’t have gone anywhere.

There’s now healthy competition: Fintechs have shaken up traditional lending, injecting competition that benefits consumers with better rates and more convenient services.

They can reach the underserved population: Digital lending platforms powered by fintech offer credit solutions to those traditionally excluded by formal banking channels. Just like how Coverdey is empowering traders with credit.

Smarter lending decisions: Many fintechs go beyond traditional credit scores to consider a broader range of information, like a person’s digital payment history or utility bill payments. This allows them to approve loans for people who might not qualify for credit from a bank based on limited data.

#4 CBN support for growing fintechs

The Central Bank of Nigeria understands that collaboration is often more powerful than competition, and its willingness to partner with fintechs has been a major boon to the lending sector.

For example, the CBN’s collaboration with Bitt Inc, a fintech company, was instrumental in developing Nigeria’s digital currency, the eNaira.

There are clear pathways for this collaboration, including:

Regulatory sandboxes: The CBN’s Regulatory Sandbox provides a controlled environment for fintechs to test new products and services, including innovative lending solutions, under regulatory supervision.

Fintech licenses: The CBN has created clear licensing categories for different types of fintech companies, such as Payment Service Banks (PSBs). This makes it easier for fintechs to operate legally and offer a wider range of financial services, including lending.

Here’s how this collaboration benefits digital lending in Nigeria:

Reaching new borrowers: Fintech companies are often quicker and more flexible than traditional banks. This allows them to create loan products that are a good fit for people who might not qualify for a loan from a bank.  By working together, CBN can extend its reach and include more people in the financial system. For example, the Shared Agent Network Expansion Facilities (SANEF) which aims to deepen financial inclusion through the use of agent banking facilitated by fintechs

Expanded financial services: CBN-fintech collaborations have fueled the development of novel financial products and services, particularly in areas like micro-lending, digital payments, and financial advisory tools.

#5 Virtual accounts

This is one of the greatest payment inventions in Nigeria in the last few years, invented by Monnify, kudos to Tosin Eniolorunda. Here are 4 other Monnify virtual account alternatives. Although CBN didn’t directly invent virtual accounts, they deserve praise for recognizing their potential and creating a regulatory environment that allows them to flourish.

Why virtual accounts matter for digital lending in Nigeria:

Slashing costs: Instead of relying on card payments, which often carry high transaction fees, virtual accounts provide a direct bank transfer model. This translates to significant savings for both lenders and borrowers.

Clearer tracking: Each virtual account is tied to a specific loan or borrower. This makes it easier for lenders to keep track of payments and ensure everything is accurate.

Better user experience: Virtual accounts offer an easier way to manage loan repayments, especially for recurring payments. They remove the need to enter card details each time, reducing the chances of errors and smoothen the repayment process.

#6 Pressured banks to give loans to customers

The Central Bank of Nigeria has actively encouraged traditional banks to increase their lending to customers, particularly within specific economic sectors. This shows the CBN is aware of how important credit access is to businesses for expansion, job creation and ultimately economic growth. 

The directive: The CBN implemented the Loan-to-Deposit Ratio (LDR) policy, which requires banks to maintain a minimum percentage of their deposits as loans.

But this approach has varying degrees of success. This policy may have spurred some banks to seek lending opportunities and engage more actively with specific sectors, like agriculture or SMEs (Small-to-Medium Enterprises).

On the other hand, this approach raises several concerns:

Riskier lending practices: Focusing on achieving specific LDR targets can potentially lead banks to choose loan volume over careful risk assessment; which can lead to riskier lending practices and non performing loans.

Not sustainable for long term: Lending rates may increase but it doesn’t really address the underlying reasons, such as lack of access to reliable credit information, that contribute to low lending rates.

Here’s where CBN can do better:

Improve the credit infrastructure: CBN should be focusing on investing in credit bureaus, shared collateral registries, and other systems that support responsible lending.

Rewarding smart lending: The CBN could create programs that encourage banks to lend to specific areas of the economy that are important for growth, such as farming, small businesses, or manufacturing. This would help these sectors get the financing they need to thrive, without pressuring banks to lend in ways that could be risky.

#7 Anchor borrowers programs

The CBN’s Anchor Borrowers’ Programme (ABP) is a flagship program designed to help develop agriculture and make lending in this sector more accessible. The program connects large businesses that buy crops (“anchors”) with small farmers who grow them.

This connection provides farmers with low-interest loans through financial institutions and a reliable buyer for their crops, which helps them increase production. The loan covers inputs like seeds, fertilizers, and mechanical tools.

ABP first prioritized crops like maize, rice, cotton, and soybeans but has gradually expanded to cover other commodities with high value such as roots and tubers, sugarcane, tree crops, legumes, tomato and livestock.

Former president Muhammadu Buhair, ABP pioneer, reported that the program has reached over 4.8 million farmers across Nigeria in 2022. In the same year, CBN reported the program had disbursed 629 billion to farmers under the program.

Sadly, as with most things in Nigeria, investigations revealed the program failed in many places with the government unable to recoup a large chunk of the loan already disbursed.

CBN has laid a strong foundation for digital lending in Nigeria

The CBN has laid a strong foundation, but its work is far from over. While tools like the BVN and GSI are powerful, they alone cannot solve the complexities of digital lending in Nigeria. Increased collaboration with stakeholders, refined regulations, and a sustained focus on borrower education will be necessary to create a truly thriving and sustainable credit ecosystem.