What moneylender means
A moneylender is a person who carries on the business of lending money.
That definition turns on carrying on a business. Someone who lends a friend money once is not a moneylender. Someone who lends regularly, to multiple borrowers, at interest, as a way of earning income, is.
Nigerian states have moneylenders laws requiring such a person to hold a licence, issued by the relevant authority in that state, and to comply with conditions attached to it. The regime predates modern financial regulation and it sits alongside rather than inside it.
Banks and other institutions licensed under banking legislation are outside it, because they are regulated under their own framework. Cooperative societies operate under state cooperative laws. The moneylenders regime is aimed at the individual or company lending commercially outside those frameworks.
The consequences of lending without a licence, where one is required, can reach the enforceability of the loan itself, which is what makes this worth knowing.
How it is used
The question arises for three kinds of Nigerian lender.
The individual who lends regularly at interest. Somebody with capital who has made lending a source of income, often to small traders, is carrying on a business and should look at the position in their state.
The company that lends outside its main business. A trading company that regularly advances money at interest to customers or third parties may be lending as a business, and it should take advice on whether it is within the regime.
The informal lender in a market or community, lending short term at high rates. This is the most common Nigerian version and it is almost entirely unlicensed.
For a borrower, the practical points are to know who you are dealing with, to insist on a written agreement stating the rate, the period and the basis, and to be cautious about arrangements requiring you to surrender documents such as a certificate of occupancy or a vehicle registration as informal security.
For a lender, the practical point is that the licensing question affects enforceability, and it is worth resolving before building a lending business rather than at the first default.
Key features
- A person carrying on the business of lending money
- A one off loan to a friend does not make somebody a moneylender
- State moneylenders laws require a licence and impose conditions
- Banks and licensed institutions are outside the regime
- Lending without a required licence can affect enforceability
- Written agreements protect both sides regardless of licensing
How this works in Nigeria
Informal lending is enormous and almost entirely undocumented, and both sides suffer for it.
The lender's problem is enforceability. A lender who cannot produce a written agreement, and who may also be lending as an unlicensed business, is in a weak position when a borrower defaults. Courts have declined to assist unlicensed moneylenders in appropriate cases, and a lender who assumed the loan was straightforward finds the licensing question raised as a defence.
The borrower's problem is terms. Rates are frequently expressed ambiguously, security is taken informally by holding documents, and there is no record of what was actually agreed. Where a dispute arises, everything is contested.
The growth of digital lending has added a further layer. Some lending apps operate under licences and some do not, and unlicensed operators have faced regulatory action over collection practices including harassment of borrowers and misuse of their phone contacts. A borrower should check what an app actually is before installing it.
For anybody lending seriously in Nigeria, the sensible order is: check the licensing position in the relevant state, use written loan agreements stating the rate and basis clearly, take proper security rather than holding documents informally, and keep records of every disbursement and repayment.
For a one off loan to a friend or family member, the licensing question does not arise, and a one page written agreement still does more good than anything else available.
Moneylender vs bank vs cooperative vs one off lender
Four sources of a loan in Nigeria, under four different frameworks.
A bank is licensed under banking legislation and supervised by the Central Bank of Nigeria, with prudential rules and deposit insurance for its depositors.
A moneylender carries on lending as a business outside the banking framework and is subject to the moneylenders law of the state, which requires a licence.
A cooperative society is registered under state cooperative law and lends to its own members from pooled savings. It is member owned rather than commercial.
A one off lender is a person lending occasionally, typically to somebody they know. They are not carrying on a business and the licensing regime does not apply, though the loan should still be documented.
A borrower should know which they are dealing with, because the protections, the rates and the enforcement options differ completely.
Limits and risks
The moneylenders framework is state based, so the requirements and the consequences of non compliance vary between states and must be checked locally.
It is also an older regime that sits awkwardly alongside modern digital lending, and its application to app based lenders is not always straightforward.
Enforcement of the licensing requirement is limited in practice, which means the vast informal lending market operates outside it.
And the consequences for an unlicensed lender depend on the facts and on the applicable state law, so a lender should take advice rather than assume either that they are safe or that the loan is void.
Worth knowing
If you are lending regularly at interest as a source of income, check the moneylenders law in your state before you build the business. A lender who discovers the licensing question at the first default has raised a defence for the borrower that a licence would have removed.
Questions people ask
Who is a moneylender in Nigeria?
A person carrying on the business of lending money. Somebody who lends occasionally to a friend is not; somebody lending regularly at interest to multiple borrowers as a source of income is.
Do I need a licence to lend money?
State moneylenders laws require a licence where lending is carried on as a business. Requirements and consequences vary between states, so check the position in the relevant state.
What happens if an unlicensed moneylender sues?
The licensing question can be raised as a defence, and courts have declined to assist unlicensed moneylenders in appropriate cases. The outcome depends on the facts and the applicable state law.
Does this apply to a one off loan to a friend?
No. The regime targets lending as a business. A one off loan should still be documented in writing, but the licensing requirement does not arise.
Are lending apps moneylenders?
Some operate under licences and some do not. Unlicensed operators have faced regulatory action over collection practices including harassment and misuse of borrowers' phone contacts, so check what an app is before installing it.
What should a borrower insist on?
A written agreement stating the rate, the period and whether interest is flat or on the reducing balance, receipts for every repayment, and caution about surrendering title documents or vehicle papers as informal security.