Digital lending companies in Nigeria confronting increasing loan defaults, employ innovative strategies such as AI-based credit scoring and collaborations with credit bureaus.
The digital lending landscape in Nigeria has witnessed significant growth, with the industry now valued at an estimated $2.1 billion. This rapid expansion, marked by a 166.47% increase in approved digital lenders from April 2023 to August 2025, has brought both opportunities and challenges.
One of the main challenges has been the rise in loan defaults. This phenomenon can be attributed to the extension of credit to previously underserved or unbanked individuals who may lack a comprehensive credit history. To address this issue, several measures are being adopted.
Microfinance banks and digital lenders are strengthening their loan appraisal, monitoring, and borrower evaluation frameworks to avoid poor credit decisions. The Central Bank of Nigeria (CBN) has also approved and licensed credit bureau agencies to collect comprehensive credit histories, including repayment behavior, banking habits, and outstanding debts.
Digital and alternative credit scoring technologies are another area of focus. Digital lending platforms are increasingly incorporating AI, machine learning, and alternative data sources to enhance the precision of credit scoring. Studies demonstrate that combining traditional credit scores with digital footprints improves default prediction accuracy.
The CBN has also introduced the Global Standing Instruction (GSI) mechanism to facilitate more effective debt recovery, and established guarantee schemes to mitigate the impact of defaults for Micro, Small, and Medium Enterprises.
Technology-driven underwriting and faster loan approvals are key advantages of digital lending. Digital lenders leverage smartphone penetration and AI to provide faster, more convenient loans while using digital data to vet applicants more thoroughly.
However, challenges remain, including aggressive and sometimes unethical debt collection tactics by some lenders, the persistence of debt traps among borrowers, and privacy or data quality concerns tied to alternative data usage.
Trade Lenda, for instance, has now restricted loans to users integrated into its system who meet stricter criteria. Direct debits are helping reduce default risks, although some borrowers sidestep them by moving funds to wallets like Opay, PalmPay, or Moniepoint.
The Federal Government's plan to link loans to the National Identification Number (NIN) aims to make defaults traceable across banks, fintechs, and microfinance institutions. This move is expected to further improve credit risk management and reduce default rates.
The Money Lenders Association (MLA) president, Gbemi Adelekan, stated that people are turning to moneylenders because requirements are not as stringent as traditional banks and they are faster and more flexible. However, the FCCPC is battling to clean up the industry's image, especially around aggressive recovery tactics. It has delisted 47 loan apps and placed 88 on a watchlist for violating ethical standards.
The IMF has warned of potential risks to financial stability due to high Non-Performing Loans (NPLs) in several Non-Bank Financial Institutions (NBFIs), new mortgage and consumer lending schemes, and fast-growing fintech and crypto sectors in Nigeria. Despite these concerns, ongoing regulatory oversight and innovation in credit data analytics are key to improving credit risk management and reducing default rates as the digital lending market matures in Nigeria.
References: 1. TechCabal 2. Nairametrics 3. Financial Standard 4. BusinessDay
- The rise in loan defaults in Nigeria's digital lending industry is being addressed through strengthened loan appraisal and borrower evaluation frameworks, the approval of credit bureau agencies, and the adoption of digital and alternative credit scoring technologies.
- The Central Bank of Nigeria (CBN) has introduced the Global Standing Instruction (GSI) mechanism and established guarantee schemes to facilitate debt recovery and mitigate the impact of defaults, particularly for Micro, Small, and Medium Enterprises.
- Trade Lenda, like many digital lenders, is implementing stricter criteria for lending and using direct debits to reduce default risks, although some borrowers circumvent them by using wallet services.
- The Federal Government's plan to link loans to the National Identification Number (NIN) is expected to enhance credit risk management and reduce default rates by making defaults traceable across banks, fintechs, and microfinance institutions.
- The International Monetary Fund (IMF) has raised concerns about potential risks to financial stability in Nigeria, due to high Non-Performing Loans (NPLs) in several Non-Bank Financial Institutions, new mortgage and consumer lending schemes, and fast-growing fintech and crypto sectors, but maintains that ongoing regulatory oversight and innovation in credit data analytics are key to improving credit risk management and reducing default rates.
