Lenders battle against fraudsters; a case for an industry blacklist

Blacklists offer a tool for deterring loan defaulters in Nigeria, fostering better credit behavior, and potentially lowering loan costs, although adoption among lenders remains tepid. We definitely need one.

In Kenya, an estimated 3.2 million people – 6% of the population – have been blacklisted on Kenya’s TransUnion credit reference bureau for non-repayment of digital credit loans. Being placed on a blacklist like this means that you won’t take loans from any other lender.

It would also mean that you will be ineligible for post-paid services like pay TV. While there’s a lot of debate as to whether blacklists promote financial exclusion, I believe that it is a useful tool in shaping people’s credit behavior.

Take Nigeria, for instance, where it is taken for granted by prospective lenders that there are no real consequences when you don’t repay a loan. You can draw a straight line from that thought process to why Nigerians often think they don’t have to repay loans. 

Yet, it’s not only that people simply don’t repay loans; the rot goes deeper than an industrial borehole, with people formulating complex schemes to defraud lenders. Even as banks and fintech startups make their security processes and RAC more complex, bad actors are usually a few steps ahead. 

The scale of the problem is massive. In 2018 alone, the Nigeria Deposit Insurance Commission (NDIC) stated that Nigerian banks lost over ₦15.5 billion ($41.6 million)* to fraud. Most companies choose not to publicize these incidents to scare the investing public or even embarrass themselves. The Nigeria Inter-Bank Settlement System (NIBSS) also reported that the banking industry lost ₦2 billion ($5.5 million) to electronic fraud in 2018.

It is not unusual to hear of customers who take loans from 3 to 5 lenders simultaneously and then disappear into thin air. Recently, we all heard about fraudsters who use stolen identities to get phones with the details of their victims. 

The victims often remained blissfully unaware until they were contacted by the lender to repay those bad loans. While we’re still guessing badly hit banks are, it’s difficult to know how much the alternative and fintech lenders also have to contend with.

But here’s something to speak to just how ingenious bad actors are; this report from WeeTracker shows how a small shadowy organization fleeced money from thousands of people using what seemed to be a legitimate Paystack storefront. 

These sorts of audacious schemes and a general unwillingness of customers to pay loans have drawn the attention of regulators. 

Global Standing Instruction tightens the noose on bad actors. 

On July 13, 2020, Nigeria’s Central Bank published the guidelines for Global Standing Instructions (GSI). 

In a nutshell, the Global Standing Instruction (GSI) creates a contractual mandate from an individual borrower, in favor of a creditor bank, to apply funds standing to the credit of the borrower in a third-party financial institution or electronic wallet to offset the debt obligations of the borrower.

In Nigeria, the GSI can be easily executed because every bank user has a unique Bank Verification Number (BVN), which is linked to all your accounts. Default on loan will mean that the bank can take the amount owed from any of your other accounts. 

While GSI is an important step in introducing real consequences to people who don’t pay loans, there’s no doubt that introducing blacklists is also a necessary second step. It is more important when you consider the amount of non-performing loans lenders have to deal with. 

In 2018, the NDIC reported that commercial banks gave out ₦15.29 trillion ($44.16 billion)* in loans to the domestic economy, and by the year’s end, non-performing loans stood at ₦1.79 trillion ($4.9 billion)*.

In spite of the pros of GSI, it has not exactly addressed the problems. For one, GSI is only available to banks, leaving out the digital lenders who also give large loan volumes. This means that while the banks are afforded some protection, digital lenders are not.

Yet, even the banks aren’t falling over themselves to use GSI because to use the mechanism; you must first prove that the loan has gone bad. That caveat has reporting implications for the banks, and we already know that banks and provisions are like oil and water. 

It’s time to consider a blacklist.

How blacklists could work

In Kenya, for instance, a credit information sharing (CIS) mechanism helps lenders share information about lenders with each other. When defaults happen, the names of those lenders are shared with the Credit reference bureaus (CRBs).

But this process is tied to credit history and could become somewhat complex. Blacklists are more straightforward because they block bad actors who have committed acts of fraud or identity theft.  When this happens, it becomes impossible for the blacklisted person to take a loan from other lenders. 

This distinction is important because while credit bureaus have their uses, they don’t exactly provide consequences for bad behavior. In Nigeria, there are only three national credit bureaus licensed by the Central Bank of Nigeria: CreditRegistry, FirstCentral Credit Bureau, and CRC Credit Bureau.
These bureaus check for lending history and calculate credit scores using their proprietary scoring algorithms, which lenders then use to determine the customer’s capacity to take loans and willingness to repay. While it is useful, it creates no disincentives and consequences for people who deliberately game the system.

The issue with credit bureaus is an unfortunate one for Nigeria, though. The reason is that over 90% of individual borrowers don’t have a credit history. You would then ask why the lenders don’t give their data to the credit bureaus. The biggest drag has always been that credit bureaus collect data from lenders for free and turn around to sell it to them as rates not sustainable for micro and nano loans. In the end, everyone loses, Nigerians being the biggest loser of all as most of us never get access to affordable credit when we need it.

These attempts to game the system through illegal can, at best, make lenders wary of giving loans to customers and, at worst, can put some lenders out of business. So the primary argument for blacklists is that they can help shape behavior by showing that illegal behavior will not be rewarded. 

Changing the mindset around repaying loans is important. When you consider that there have been no significant consequences for failing to repay for years, it is clear that it will take a while as well as disincentives to get defaulters and bad actors to fall in line. 

One other big advantage to blacklists is that they will lead to cheaper loans because lenders will no longer have a need to factor in expensive risk premiums in their risk models for the increased risk levels. All of these benefits from a simple solution feel like a bargain. Furthermore, we can see lenders tweaking their Risk Acceptance Criteria (RAC) to be less onerous.

There are already existing frameworks for blacklists, such as Karma.ng from Lendsqr, and it will help keep the bad guys out. But so far, the willingness of lenders to embrace these means of protection has been lukewarm at best. However, as the market evolves, blacklists will provide more competitive advantages to lenders than even the best of algorithms; while guess, no matter how sophisticated it is, when you can use actual data to bar the bad actors.

Why Nigerian banks will never win the consumer credit game

Consumer lending in Nigeria faces challenges due to low credit access, legacy risk aversion, and institutional barriers, leaving room for alternative lenders to dominate retail lending.

Consumer lending is basically loans to  individuals, like me and you, to purchase goods and services. Of the forms of consumer lending, credit cards are perhaps the most popular. 

Yet, if you’re a Nigerian reading this, that last sentence is not very relatable, mostly because not only is consumer lending uncommon in Nigeria, credit card penetration is so low you have probably never seen a Nigerian with a credit card before. Given the massive size of the Nigerian economy, our stats on personal loans and credit cards is very shocking. 

There are even more. In 2020, lending to consumers fell by 11% over two months, primarily driven by the pressure to curtail bad loans.  While this can be explained away by the COVID-19 pandemic, there is a lot we can draw from this. 

The first is that banks’ legacy credit risk approach has made it averse to improving consumer lending for years even though the CBN is forcing them to lend more. There’s also the fact that for the banks, there are easier ways to make money than consumer credit. 

Consumer credit is a tough bull to ride 

Today, trying to buy a phone or any accessory in Nigeria will require you to put down the full payment in cash. It is difficult to find deals that help you spread the payments in installments. And if you could find one, they will scalp you with an ungodly interest rate.

In 2017, a CBN report showed that only 5.4% of Nigeria’s adult population had access to credit. Despite the financial inclusion strategy the CBN is implementing, that number has grown at such a slow pace it makes a crawling snail look like a speeding demon. 

In 2018, it was 5.5% and in 2019, that figure was 6.2%; the credit gap in the country is astounding and it is at odds with the fact that Nigeria has big banks with impressive coverage. 

For banks with millions of customers, solving this problem seems like a low-hanging fruit. They have a massive heap of  transaction data, it should theoretically mean that banks can partner with Original Equipment Manufacturers (OEMs) to provide payment deals on phones for instance. 

That hasn’t happened yet and it is not for lack of trying in some quarters. While a few banks have attempted to provide consumer credit, the pricing and interest rates often discourage people. To be fair to them, these banks take risk of default into consideration before they give these loans. 

Where the rates are reasonable, the problem may then become access. For instance, one of the reasons credit card penetration is low is because the banks don’t provide access to it. For years, credit cards were only available to certain classes of working people. 

To be fair to the banks, their reluctance to ride the bull that is consumer credit is based on the fear of bad loans. Yet, their reluctance has real economic consequences. When consumer credit isn’t growing, it impacts economic growth because consumption reduces. Infact, there’s a direct correlation between consumer credit and gross domestic product (GDP). 

Now that we know how important consumer credit is and why it is an important problem, why are banks ill-qualified to solve the problem? 

Institutional barriers to lending

Like everywhere else in the world, there are a lot of institutional rails that guide retail lending. One of those rails is using credit history to determine credit worthiness. In Nigeria where credit bureaus were first set up in 2003, there is still a paucity of data that means that banks cannot make lending decisions, effectively shutting millions of people out. 

According to Tunde Popoola, CEO at CRC Credit Bureau Limited, “From just over 1000 customer base in 2009, repository records show that it has grown to about 17 million in Nigeria.”

17 million records means that the majority of the population can not hope to get a bank loan in the near future. Another institutional barrier borne out of the need to manage risk is our supposedly tough Know Your Customer (KYC) procedures as well as the need to collateralize loans. 

The truth remains that only a handful of Nigerians can put up the kind of collateral that will give them access to bank loans. The banks will insist that they cannot take away these requirements because they are already dealing with fairly high non performing loans. 

But that refusal to make changes is symptomatic of the inflexible structure of the banks and is a pointer to why they cannot solve the consumer credit problem. 

Legacy structure of banks make innovation difficult 

Nigerian banks report huge profits every year and most of this is down to the fact that they’ve become pretty good at doing a narrow set of things very well: They lend to mostly large corporates and commercial companies. If you are rich, they could throw you some loans as well. But if you are the average man on the street, then .

A few years ago, they took advantage of high interest rates and focused on buying treasury bills. Yet what they have not done in all those years is figure out how to crack the riddle of consumer lending.

Despite the fact that the Central Bank of Nigeria has increased the lending to deposit ratio to 65%, innovation hasn’t come easily to the lending efforts of many banks. While digital lenders are constantly trying to improve the data that underpins their lending decisions, banks sit on large troves of data that they arguably could use better. 

One of the reasons why digital innovation has been so difficult for banks is their structure. A rule change by the CBN forced banks to focus on risk management thanks to the 2009 financial crisis. 

The institutional response to the crisis was to ask banks to narrow their focus. Although they are now breaking out of that mould by forming holding companies, their thinking hasn’t changed much. 

They still retain many of the old rules with stringent conditions for loans that favor elite customers, ignoring the vast size of Nigeria’s informal market. Without recognising the huge size of the informal market, the banks are not only leaving money on the table, they are showing they don’t understand the problem. 

Alternative lenders show that banks don’t care about retail lending

Despite the excuses banks give, the approach of digital lenders show that the banks are simply taking the easy way out. Their lending to corporates as well as their large loan sizes to companies they think are too big to fail reflects their thinking. 

They also lean heavily on tactile lending which is pretty difficult to scale. If you need to meet everyone you want to lend to, you cannot realistically fill the massive gap in the Nigerian market. 

Instead, leaning on machine learning and algorithms like the digital lenders are doing is what will make the difference. In fact, lenders like Migos are selling products to banks to help them make better lending decisions. 

That’s just how much of a headstart that the lenders have, with many of them having their own proprietary algorithms and being at a point where they make dizzyingly fast lending decisions. 

For instance, in the same year 2020 when consumer lending by Nigerian banks fell, digital lenders like Fair Money and Carbon reported their highest ever loan disbursements. Basically, while banks and digital lenders faced the same problem – a pandemic – only the digital players were nimble enough to still work around that challenge. 

The digital players are also talking a lot about providing access to informal markets, proving that they understand where huge markets lie. This is not to say that digital players are also without their own struggles.

But they are in a better position than the banks because they have been iterating their solutions for the last five years. Realistically, it could take another 5-10 years for even the smartest of banks to catch up. 

Until they change their core DNA, which is inflexible, they will keep playing catch up even if they launch shiny new products every year.

Banks will lose the retail lending space to fintech lenders

Despite all of this, one thing is clear, that lending will continue to grow massively, because more alternative lenders will join the fray and innovation will force players deeper into the market. Some of these lenders will be powered by cloud platforms such as Lendsqr which removes the technology barrier to lending at scale. 

So here is how it is all likely to play out; banks would own the corporate and large commercial loans while alternative lenders will grow the retail lending space. 

This bifurcation will result in a larger retail lending space and in a few years, the banks may start to feel green with envy about the big chance they missed with retail lending. 

It will be interesting to see if the CBN, which has historically protected the banks, would produce some regulation to help them when it happens but one thing is clear, banks have lost the retail lending game and not even regulations can change the trajectory of the market.

Nigeria’s problems will be solved by access to credit

Access to credit in Nigeria has historically favored large corporations and the wealthy, leaving millions excluded. Credit access is crucial for economic growth, especially in times of high inflation and rising living costs. While digital lenders have made strides, there’s still a long way to go.

Access to credit has historically been difficult in Nigeria. This is because, for years, big banks were the sole providers of financial services and those banks didn’t care too much for retail banking. 

Between thinking about the risk profile of individuals and smaller business players and the absence of real disincentives against failing to repay loans, banks mainly provided credit facilities to large companies and the rich. It has robbed Nigeria of a unique opportunity to grow its middle class or lift over 100 million of us out of chronic and crushing poverty. 

Credit is a global conversation because it has the potential to be a growth driver for economies. Credit is how people can fund their small business idea, deal with the economic shocks of job losses, or acquire assets. 

In Nigeria where the inflation rate is at a record high of 16.47%, credit maybe even more than a means to grow businesses; it is a tool to manage daily challenges. Food prices are up, fuel prices are up and civil servants who are often routinely owed salaries for months always need to borrow money. 

Many cannot access small loans from the banks they use mainly because the process of getting a bank loan can be complex. Know Your Customer (KYC) procedures and the need to fill numerous forms often means that people do not consider banks as a source of credit.

Instead, many rely on shylock money lenders in their network who charge high-interest rates, so high they are just a shade better than armed robbers. It puts many ordinary people in bad spots. Thankfully, digital lenders are changing situations like this, by giving people access to quick and easy unsecured loans. 

In 2020, FairMoney said it lent $93 million in loans to Nigerians while Carbon said it disbursed N25 billion. Those are impressive figures when you consider that many of those loans are likely under N200,000 ($484). 

Yet, despite the strides, digital lenders are making and the Central Bank of Nigeria’s loan to deposit ratio which is forcing banks to give more loans, we still have some way to go. A few people contend that less than 2% of Nigerians still have access to any type of credit. 

The majority of the world’s 1.7 billion unbanked people live in just five countries; Bangladesh, China, India, Mexico, Nigeria, and Pakistan. How can credit change the lives of people in these countries?

Personal loans for the vulnerable 

In a country like Nigeria where unemployment and underemployment are high, people often need personal loans to feed their families. According to SBM Intelligence, a consulting company in Nigeria, at least 63% of people spend the majority of their income on food. 

Those stark figures explain why people often say that every product in Nigeria competes against food. But it also shows something more important; that a large percentage of people will not be able to meet other needs like rent, healthcare, and entertainment. 

Most of these people who are often underbanked and financially underserved often have no recourse to credit facilities. Many of these people do not even have functional identification so there’s no hope that they can scale the stringent Know Your Customer (KYC) requirements of financial institutions. 

According to the Director-General of the NIMC, Aliyu Aziz, only 38% of Nigerians have any form of identification. It shows you the scale of the problem and it lets you know that despite the big amounts digital lenders are disbursing every year, there’s still a huge unaddressed market. 

Beyond this, when people meet their immediate needs, there’s still a need for credit, but for a different kind; small and medium business financing. 

The SME financing gap

Small and medium businesses account for 96% of businesses and 84% of employment. There are different types of small business owners in Nigeria but a good part of those are people whose businesses often need steady cashflow. 

Many are traders who need working loans to restock their goods or to buy items in anticipation of festive periods. Their loan requirements range from daily loans which they can pay back by the end of the business day to short-term loans.

Right now, there are not a lot of credit options for the informal small or medium business owner save for loans from family, friends or cooperatives of some sort. This is one reason why it is difficult for small businesses to scale in Nigeria; working capital is hard to come by. 

As we move further up the socioeconomic ladder, there are also all sorts of credit gaps that can need to be filled. 

Asset financing for the salaried worker 

Nigerians often need to pay in full whenever they need to buy phones, laptops, televisions, or any other type of asset. It’s often a strain on salaried workers who sometimes are doing just enough to get by.

Sometimes people need to buy some of these gadgets without planning such as when they lose their phones or when their laptops go bad unexpectedly. Asset financing can make situations like this easier.

There have been several attempts to solve this problem by financial institutions but many of the solutions have been criticized for having expensive markups. It has prevented buy now pay later companies from scaling in Nigeria. 

Whenever the financing for these sort of light assets is sorted, the problems get even bigger down the road. 

Car policies vs auto loans 

Nigeria has enacted several policies to encourage car manufacturers to manufacture cars within the country. Some of those policies, like the ban introduced on the import of second-hand cars older than 10 years into the country did not produce the desired results. 

Instead of spurring production, the ban merely made smuggling more profitable and consequently, it drove up the prices of secondhand cars. There have been more auto policies, but nothing has significantly moved the needle. 

In discussing Nigeria’s Finance bill last year, Vice-President Osibanjo said that while Nigeria’s annual vehicle demand was around 720,000, local production currently stands at 14,000. The answer to the problem isn’t more auto-policies.

This is because only a handful of Nigerians can afford brand new cars. In fact, very few Nigerians can afford cars at all. According to 2017 data by the National Bureau of Statistics (NBS), “on the basis of private vehicles only, vehicles per 1000 Nigerians comes to about 24. It is also about 41 Nigerians to one private vehicle– one of the lowest among its emerging market peers.”

One way to look at this problem is that most Nigerians have to pay cash and pay in full for vehicles. Auto-loans and car financing are difficult to come by and where food is competing for people’s paychecks, it is difficult to ask them to put down millions to buy a car. 

It is pretty much the same situation when you look at homeownership and mortgages in Nigeria. These are sectors and situations where access to credit can provide the much-needed quick wins. 

Using credit to improve homeownership 

In developed countries, mortgages allow millions of people to buy and own homes with affordable payments stretched over several years. In Africa, the mortgage market remains thin. 

Here’s data from one publication; “In Uganda, there are an estimated 5,000 mortgages for a population of 41 million while in Tanzania, there are only 3,500 mortgages in a country with a population of 55 million.”

It’s not much better in Nigeria where even the wealthy do not often opt for mortgages. Jason Njoku’s famous thread about trying to secure a mortgage a few years ago is a stark reminder. It means that homeownership rates in Nigeria very low. 

While homeownership in Kenya is 75% and 56% in South Africa, in Nigeria, it is estimated to be around 25%. Ten more homeownership policies will not change this. 

In the end, across many sectors, Nigerians need a way to finance asset acquisition without putting down years of their savings. Why pay N40 million upfront for a house when you can spread the payments over 20 years while using the rest of your money to invest in other ventures?

Without credit, we’re going nowhere

The real game-changer for Nigeria won’t be more policies, but a more conscious drive towards expanding access to credit to every single Nigerian and creating a framework that makes eligibility a right instead of a privilege.

Nigeria is Africa’s open banking pioneer

In 2021, Nigeria’s banking sector witnessed the advent of Open Banking, aligning with a global shift towards sharing transaction data. This move holds promise for innovation and financial inclusion, particularly in credit access and streamlining KYC processes.

One of the predictions for Nigeria’s banking sector in 2021 was that Open Banking would finally make some headway. It was an important prediction when you consider that for years, quite a lot of global industry players have said that open banking is the future. 

Open banking is the idea that established banks should share the transaction data of customers with other financial service providers (FSPs), challenger banks and other third-parties recipients. For such a simple idea, its implications for banking are huge. 

One way to look at it is that some of Nigeria’s biggest banks have been around for years and have millions of customers. Despite their market dominance, they have often been criticised for not providing retail banking or innovative products. 

Most of that innovation has been left to the newer fintech players who have unbundled traditional banking services. PiggyVest and Cowrywise help you save money, Eversend helps you with cross-border transactions and over 30 digital lenders provide unsecured loans. Challenger banks like Sparkle, Kuda and Rubies also tout new ways of banking. 

While these startups have made significant progress, they still get smashed by banks. For instance, last year, Fairmoney, a digital lender in Nigeria, disbursed a total loan value of $93 million, a 128% increase compared to 2019. While that figure makes it one of the biggest digital lenders in Nigeria, when compared to traditional banks, it falls all the way to seventh place. 

Central Bank’s regulation on Open banking

One of the most important issues with the regulation of open banking is data and how the data of customers will be handled. According to the CBN, the open exchange of data and services through APIs will be divided into four categories. 

Each category contains a specific set of information with a particular risk level. For instance, Market Insight Transactions (moderate risk level), include statistical data aggregated on the basis of products, services and segments used by customers. But it will not be associated with any individual customer or account.

Access to these categories of information will be open to four participants as well; on one end are participants that do not need to have a regulatory licence. Participants like this will not be able to access information that is high risk.

The participants in CBN’s regulatory sandbox will have access to some low and high-risk data like Personal Information and Financial data (PIF). Only players with regulatory licences will have access to the most sensitive information like personal information and financial transactions or data. 

The participants that will access this kind of information are mostly deposit money banks. It is a sign that the CBN is aware of what the attendant risks are as it also goes on to state the requirements for every participant level. 

APIs and Common Standard 

One of the key issues in open banking is also the creation of a common standard for APIs and most of the work in this area has been led by private organizations like Open Banking Nigeria (OBN), which I founded with other stakeholders in June 2017. 

I founded OBN to drive the advocacy for open APIs, define an open set of APIs needed for a common API standard, as well as provide a sandbox and other testing tools for certification.

In 2018, we published our first set of API standards, and today it has members like Paystack, Interswitch, Flutterwave, Teamapt, Wallet Africa, among others. While this initiative is great, regulation is necessary for a space like this, and CBN’s regulations are a step in the right direction. 

What’s likely to happen next? The ball has been set in motion and the guidelines say that a common standard as well as an open banking registry will be created in the next 12 months.

Using Open banking to drive financial inclusion

By sharing customer data, fintechs can create products and services that work for financially underserved and excluded individuals. One of the areas where there’s a lot of promise is access to credit, which I’m extremely passionate about.

Although digital lenders are getting even more popular in Nigeria, only a handful of people have real access to credit. One limitation digital lenders face is access to data points that help them score credit risk for individuals. 

Many lenders use workarounds like giving small amounts to customers and gradually increasing the loan amounts. This strategy discourages people who want to afford bigger loan sums, and customer transaction data can solve this problem. 

There’s also the issue of how the need for extensive documentation excludes low-income customers from banking access. If open banking is expanded to telecoms for instance that registers customers for SIM cards, they can share these registration details with fintechs and eliminate the need for more KYC forms. 

When KYC is sorted, it will help the millions of gig workers in Nigeria. In Lagos for instance, it isn’t uncommon to meet carpenters and mechanics without bank accounts. Open banking can help workers like this access more personalised services and eliminate the obstacles to accessing financial services. 

It will get a mind-boggling level of integration to make this happen and this is where Application Programming Interfaces (API) come in. 

What have APIs Got To Do With It? 

One of the easiest ways to understand APIs according to one writer is that “it helps let companies leverage years of other companies’ work in seconds.” APIs let programs talk to each other and most times, we see them used extensively for internal purposes. 

Internal APIs are used to do complex things within a company while public APIs open up datasets so that other people can build on top of them. Consider the amount of integration that will be required for all of Nigeria’s banks to share information and you’ll start to see why APIs are the easiest way to make it happen.

Despite stringent regulations on crypto, the show will go on

Following the Central Bank’s ban on crypto exchanges, ironically, CBN policies has made crypto popular as a workaround for FX restrictions. The ban raises questions about its effectiveness and the missed opportunity for control and revenue.

This week, two Nigerian banks began blocking the accounts of individuals trading crypto and the accounts of cryptocurrency exchanges. It followed regulation from the Central Bank of Nigeria banning the activity of cryptocurrency exchanges in the country.

It sent crypto exchanges like BuyCoins, Luno, Quidax, etc., which have become immensely popular in Nigeria, into a frenzy; the task before them was to move their money from Nigerian banks before the freezes went into place. It was a curious move by CBN in a week where Bitcoin had hit record highs and coins like DOGE were gaining value.

Ironically, the CBN had some part to play in making crypto so popular. Whatever the intentions, the CBN’s persistence in maintaining an exchange rate for the Naira at N360 to the Dollar for years has led to confusing FX policies. There is a list of items for which importers cannot source FX, and in December, another policy on International Money Transfer Organisations (IMTO) sent Nigeria to the dark ages.

The Nigerian market and the numerous smart players in it are not strangers to the regulators’ heavy hand, and they have some experience working around it. For FX restrictions, importers simply turned to cryptocurrency to buy and pay for items.

The use of cryptos cut the CBN out of the process, and last year, Nigeria traded a little over 60,000 Bitcoins, the second-highest transaction volume globally. If there was any doubt about the veracity of those trades, exchanges like BuyCoins released their reports for 2020, showing massive trade volumes, up from a year before.

Yet, despite the rising popularity of crypto exchanges, the question of regulation remained the elephant in the room. To be fair, it is a conversation that is happening globally. A currency outside the government’s control and has shown such volatility will give regulators pause.

There are two initial questions around the regulation of crypto. The first is who should regulate cryptocurrencies? In Nigeria, the answer falls somewhere between the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). The SEC has long been skeptical, warning investors off cryptocurrencies in 2017.

Remarkably, the Commission made a turnaround in 2019, stating that it now considers crypto as a legitimate investment class.  The CBN, for its part, has always taken a less enthusiastic view. In January 2017, it issued a circular warning to banks against any transactions in virtual currencies. In 2018, the CBN doubled down and reiterated its warning against digital currencies.

What are the real issues with crypto?

One of the most significant issues around crypto is its semi-anonymous nature. By their very creation, they are designed to operate without an overlord, sovereign, or whatnot. While this is interesting in theory, in practice, it can become a powerful tool in the hands of bad actors; this is the CBN’s argument.

Another issue that builds from the anonymity of digital assets is that it makes it a domain for bad actors to commit fraud. Through fake crypto exchanges, pump and dump scams, Ponzi schemes, and malware attacks, prospective investors can lose money trying to invest in crypto.

In countries where crypto regulations are in place, such as the United States, one workaround reduces some of the anonymity around digital assets. In December 2020, the U.S proposed new regulations requiring crypto exchanges to report anyone’s personal information with transaction values of above $10,000 daily.

This sort of Know Your Customer (KYC) requirement, which some may argue defeats some of the purposes of digital assets, may make crypto exchanges function a bit like banks, which is anathema to the proponents of digital currencies. This could have been one approach that the CBN could have taken, given that it has hinged its concerns on fraudulent transactions and the possibility of using these semi-anonymous assets to finance terrorism.

There are also proposals for crypto assets crossing borders to be reported by exchanges. In some of the regulatory conversations in the U.S, the most significant change would be more KYC requirements. Some may argue that exchanges in Nigeria, some of whom have berated regulators, should have engaged them instead. Others argue that despite the ban, there is still some sense in engaging the regulator now that public opinion is on the side of the exchanges. 

Of course, the ready answer to this would be that when ride-hailing operators in Lagos state engaged the government and relevant regulators for over a year, it yielded no results. It may not be a perfect analogy, but a healthy fear of regulation is a feature of African markets.

How are other African governments approaching regulation?

In at least six African countries, cryptocurrencies are banned. There are bans on all digital assets in Algeria and Morocco with fines that break the existing rules. On the flip side, South Africa, Senegal, and four other African countries have shown progressing thinking in regulating crypto.

In 2016, Senegal launched the eCFA, a digital currency built on blockchain that can be stored on mobile wallets, while Sierra Leone is vocal about its plan to be Africa’s first “smart country.” In South Africa, while crypto is not recognized as a legal tender, the South African Revenue Service (SARS) considers it an asset.

It means that SARS will be open to collecting taxes on crypto, as evidenced by some recent reports that the tax authority asks individuals to disclose crypto purchases in their tax filings. It is an exciting approach that signifies that there will be more regulation.

Regardless of what the regulators in Africa do, crypto has become attractive for regulation to kill it off effectively. What is more likely to happen is that companies and individuals will circumvent these regulations.

A missed opportunity for real control and revenue?

This week, BuyCoins announced that it is back to taking deposits from customers, two days after the CBN threw the exchange an unexpected blow. Early observers pointed out quickly that the CBN’s policy was unlikely to stop crypto trading; instead, it would introduce friction.

If anything, Nigerian founders and companies are familiar with working around infrastructure and policy challenges. In this specific instance, peer to peer trading, which is harder to regulate or control, will become popular.

In the end, it appears that the CBN may have shot itself in the foot, missing a significant opportunity to collect tax revenues or implement KYC measures to have some measure of control. One thing is clear. This is a pyrrhic victory for the regulator, but for the crypto exchanges, the show will go on.