The Potential of DeFi Lending in Nigeria & The Reality of Its Legality

DeFi lending could transform financial inclusion in Nigeria, but what’s the true possibility of it becoming the norm?

Robert Greenfield IV
Umoja Protocol

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“The Burdened Nigerian Borrower” Generated by Midjourney AI (@.blackcrypto)

The State of Nigerian Credit

The traditional lending sector in Nigeria faces significant challenges that hinder access to finance for individuals and businesses. One of the main challenges is the lack of collateral and credit history, which makes it difficult for borrowers to secure loans from traditional sources such as banks. This is particularly true for small and medium-sized enterprises (SMEs) that often lack the necessary assets or creditworthiness to qualify for loans. According to the Small and Medium Enterprises Development Agency (SMEDAN), there is a financing gap of $158.1 billion in the MSME sector in Nigeria.

Another challenge in the traditional lending sector is the high interest rates and stringent lending requirements imposed by banks. The interest rates in Nigeria are among the highest in the world, making it expensive for borrowers to access credit. Additionally, the collateral requirements are often too high for many individuals and businesses to meet, further limiting their access to finance.

Furthermore, the traditional lending sector in Nigeria is characterized by a lack of transparency and inefficiencies. The loan application process can be lengthy and bureaucratic, with a high risk of corruption and fraud. This discourages many potential borrowers from seeking loans from traditional sources.

In terms of data, reliable statistics on the financing gap in Nigeria’s traditional lending sector are limited. However, the World Bank’s Enterprise Surveys provide some insights into the challenges faced by SMEs in accessing finance. According to the latest survey conducted in 2018, only 31.8% of SMEs in Nigeria had a loan or line of credit from a financial institution, compared to the Sub-Saharan Africa average of 35.2%. This indicates a significant gap in access to finance for SMEs in Nigeria.

An Overview of Nigeria’s Lending Regulations

The current lending regulations in Nigeria are primarily governed by the Central Bank of Nigeria (CBN) and the Bank and Other Financial Institutions Act (BOFIA). The CBN regulates the banking sector and sets the monetary policy, while the BOFIA provides the legal framework for the operation of banks and other financial institutions.

The CBN has implemented various regulations aimed at promoting financial inclusion and improving access to finance in Nigeria. For example, the CBN introduced the Microfinance Policy, which provides guidelines for the establishment and operation of microfinance banks. The policy aims to increase access to financial services for the unbanked and underserved population, including SMEs.

In addition, the CBN has launched initiatives such as the Anchor Borrowers’ Program, which provides loans to smallholder farmers at low interest rates. The program aims to boost agricultural production and improve food security in Nigeria.

However, there are still regulatory challenges that hinder access to finance in Nigeria. For example, the high capital requirements imposed by the CBN for the establishment of microfinance banks make it difficult for small players to enter the market. This limits competition and innovation in the sector, which could have otherwise served the benefit of borrowers.

The Legality of DeFi in Nigeria

Decentralized finance (DeFi) lending in Nigeria is currently in a gray regulatory area, given the nascent stage of its associated laws. No specific legislation exists addressing DeFi lending directly, but the Securities and Exchange Commission’s (SEC) regulations for digital assets do offer some regulatory guidance.

The SEC mandates registration and compliance from digital asset exchanges and trading platforms. Even though these directives do not directly refer to DeFi lending platforms, they could extend to them if digital assets are traded. However, the unique nature of DeFi technologies and business models creates an ambiguity in how these regulations are applied.

Meanwhile, the Central Bank of Nigeria (CBN) has yet to officially define “digital lenders” in its regulatory framework. Such entities typically fall under the FinTech category, each adhering to specific regulations pertinent to their activities. To safeguard consumers and uphold the financial system’s integrity, the CBN requires lending companies to possess either a Microfinance Bank license or Money Lending License.

DeFi lending protocols, operating via blockchain technology and facilitating direct lending and borrowing without intermediaries, pose challenges to conventional regulatory norms due to their decentralized, global operations. The evolving and novel nature of DeFi implies that its classification within Nigeria’s financial regulatory system is uncertain and contingent on various factors, including protocol specifics, interaction with Nigerian citizens and financial systems, and the progress of local and international regulations.

The Potential Benefits of Nigerian DeFi Lending

The potential benefits of DeFi lending in addressing the challenges in Nigeria’s traditional lending sector are significant. DeFi lending platforms can provide access to finance for individuals and businesses that are underserved by traditional sources. These platforms can leverage blockchain technology and smart contracts to automate the lending process, reducing the need for intermediaries and lowering transaction costs.

One of the main advantages of DeFi lending is the ability to collateralize loans using digital assets. This eliminates the need for traditional collateral and credit history, making it easier for borrowers to access credit. Additionally, DeFi lending platforms can offer more competitive interest rates compared to traditional sources, as they operate on a peer-to-peer basis and do not have the same overhead costs as banks.

Furthermore, DeFi lending platforms can provide greater transparency and security compared to traditional lending. The use of blockchain technology ensures that all transactions are recorded on a public ledger, making it difficult to manipulate or falsify loan records. Smart contracts also automate the loan process, reducing the risk of fraud and ensuring that loans are executed according to the agreed-upon terms.

Real-Life Examples of Nigerian Credit Fintechs

There are already examples of successful DeFi lending platforms in Nigeria. For instance, the Nigerian-based platform CredPal offers instant credit to consumers and small businesses. The platform uses alternative data sources and machine learning algorithms to assess creditworthiness and provide loans within minutes. CredPal has partnered with banks and other financial institutions to provide the necessary funding for its loans.

Another example is the Nigerian platform Carbon, which offers digital credit and other financial services to individuals and businesses. Carbon uses artificial intelligence and machine learning algorithms to assess creditworthiness and provide instant loans. The platform has partnered with banks and other financial institutions to provide the necessary funding for its loans.

These examples demonstrate the potential of DeFi lending to address the challenges in Nigeria’s traditional lending sector. By leveraging blockchain technology and smart contracts, DeFi lending platforms can provide access to finance for individuals and businesses that are underserved by traditional sources. This can contribute to financial inclusion and economic growth in Nigeria.

Forecasting DeFi Lending’s Future in Nigeria

The Central Bank of Nigeria’s (CBN) stance on DeFi lending and real-world asset tokenization in the future will likely be influenced by a combination of factors, including existing cryptocurrency regulations, current monetary policies, and international trends.

Currently, the CBN has taken a cautious approach towards cryptocurrencies and has expressed concerns about their potential risks, such as money laundering, terrorism financing, and consumer protection. In 2021, the CBN banned commercial banks from engaging in cryptocurrency transactions, citing these risks. However, the ban does not explicitly criminalize the use of cryptocurrencies, and individuals and businesses are still able to trade cryptocurrencies on peer-to-peer platforms.

The CBN’s stance on DeFi lending and real-world asset tokenization will likely depend on how these activities are perceived in terms of their potential risks and benefits. If the CBN views DeFi lending and real-world asset tokenization as posing similar risks similar to cryptocurrencies, it may adopt a cautious approach and impose regulations to mitigate these risks.

On the other hand, if the CBN recognizes the potential benefits of DeFi lending and real-world asset tokenization, such as increased access to finance and economic growth, it may adopt a more supportive stance and develop regulations that promote innovation and consumer protection.

The CBN’s stance may also be influenced by current monetary policies and international trends. For example, if the CBN is pursuing policies that promote financial inclusion and economic growth, it may be more inclined to support DeFi lending and real-world asset tokenization as tools to achieve these objectives.

Similarly, if other countries or international organizations are adopting regulations or policies that support DeFi lending and real-world asset tokenization, the CBN may be more likely to follow suit to ensure that Nigeria remains competitive in the global financial landscape.

Overall, the CBN’s stance on DeFi lending and real-world asset tokenization in the future will depend on a range of factors, including existing cryptocurrency regulations, current monetary policies, and international trends. While it is difficult to predict the exact stance the CBN will take, it is likely that the regulatory framework will evolve to accommodate the growing demand for DeFi lending and real-world asset tokenization while addressing potential risks.

Read more here:

  1. Nigeria SEC will support asset-backed tokens: Bloomberg
  2. Lending and Taking Security in Nigeria: Overview
  3. What are Real World Assets in Crypto: Examples of Emerging RWA Tokens
  4. What Are Real-world Assets? DeFi’s Newest Yield
  5. Financial Inclusion In Nigeria: Issues And Challenges
  6. Funding woes: Why Nigerian SMEs struggle to access capital
  7. SMEDAN laments $158 billion MSMEs funding gap
  8. How Nigerian fintechs can leverage DeFi in the face of regulatory inconsistency
  9. The State of Crypto Regulation: Nigeria
  10. What Is DeFi Lending?
  11. What are DeFi loans?

About the Author

Robby Greenfield has over a decade of experience in blockchain and financial engineering. He has served as an industry leader in deploying decentralized applications in emerging markets, such as Sub-Saharan Africa, the Asia Pacific, and LATAM. Robby has worked with renowned blockchain firm ConsenSys, co-deploying innovative solutions and collaborating with organizations like the U.S. State Department, the World Bank, the UNOPS, Oxfam International, and Care International. Currently, he is the CEO of Umoja Labs, a Coinbase and Mercy Corps-backed Web3 fintech providing payments and credit infrastructure across Sub-Saharan Africa.

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Robert Greenfield IV
Umoja Protocol

CEO of Umoja Labs, Former Head of ConsenSys Social Impact, @Goldman Alum, @Cisco Alum, @TFA Alum, Activist, Intense Autodidact