Proliferation of unlicensed loan apps in Ghana: Hidden dangers, impact and solutions

Before putting pen to paper, I checked on the Bank of Ghana’s website to ascertain approved digital lending applications and I could count only one: Fido Micro Credit Limited. However, a little foray into Google Playstore and one could count several unlicensed loan applications. Indeed, in June 2023, the Bank of Ghana issued warning to the public and published names of about 97 lending applications operating illegally.

The rise of these unlicensed loan applications in Ghana has become a concerning trend, posing significant risks to both the financial system and the individuals who patronize these services. These apps, often operating outside the legal framework and sometimes outside the boundaries of Ghana, offer quick and easy access to loans but come with hidden dangers that can lead to financial ruin, data theft, and even money laundering. 

What drives the growth of unlicensed loan Apps?

High Demand for Quick Credit: A significant factor driving the proliferation of unlicensed loan apps is the high demand for quick and easy access to credit. Many Ghanaians, particularly those in the informal sector or those with limited access to traditional banking services, turn to these apps as a convenient solution for their financial needs. The appeal of obtaining loans without the lengthy processes associated with banks makes these apps attractive to a broad segment of the population.

Limited Access to Traditional Banking Services: In Ghana, a substantial portion of the population remains unbanked or underbanked. This financial exclusion has created a gap that unlicensed loan apps are eager to fill, offering services to those who may not qualify for traditional loans due to lack of collateral, credit history, or formal employment.

Ease of Setting Up Digital Platforms: The technological advancements and increased internet penetration in Ghana have made it easier for individuals or entities to set up digital lending platforms with minimal barriers to entry. Unlike traditional financial institutions, which require extensive licensing, capital, and regulatory approval, these digital platforms can be launched with relatively low upfront costs and minimal oversight, making it attractive for operators to enter the market quickly.

Weak Regulatory Oversight: The rapid growth of financial technology (fintech) in Ghana has outpaced the regulatory framework. While the Bank of Ghana (BoG) and other authorities have made strides in regulating digital financial services, the sheer number of new platforms emerging has made it difficult to keep up. This lag in regulatory enforcement has allowed many unlicensed apps to operate unchecked, exploiting loopholes and the lack of stringent supervision.

Economic Pressures: The economic challenges faced by many Ghanaians, including high unemployment rates, low wages, and rising living costs, have increased the need for short-term financial relief. Unlicensed loan apps, which promise instant cash with minimal requirements, have become an attractive option for those struggling to make ends meet.

THE IMPACTS ON USERS

Exorbitant Interest Rates and Hidden Fees: Many unlicensed loan apps charge extremely high interest rates, often far above what is permissible under Ghanaian law. These rates mostly charged per month and sometimes on weekly basis in direct contravention to section 55 (2) of the Borrowers and Lenders Act, 2020 (Act 1052), which states “banks and SDIs shall impose on a borrower an interest rate that is calculated on an Annual Basis only in all credit agreements”.  These exorbitant fees coupled with hidden fees, can trap borrowers in a cycle of debt that is difficult to escape. The lack of transparency in these transactions makes it easy for users to fall victim to predatory lending practices.

Data Theft and Privacy Concerns: One of the most alarming aspects of unregulated loan platforms is the risk of data theft. Many of these apps require access to personal information, including contacts, messages, and even social media accounts, under the guise of assessing creditworthiness. However, this data can be misused, sold, or even used for blackmail, compromising the privacy and security of users and contravening the Data Protection Act, 2012 (Act 843). 

Reputational Damage and Harassment: In cases where borrowers are unable to repay their loans, some unlicensed lenders resort to unethical practices such as public shaming and harassment. They may contact the borrower’s friends, family, and colleagues, causing significant reputational damage and emotional distress.

AVENUE FOR MONEY LAUNDERING?

Unlicensed loan apps can also serve as a conduit for money laundering. Due to the lack of regulation and oversight, these platforms can be used to move illicit funds under the radar of financial authorities. Criminals may exploit these unregulated channels to launder money by cycling illicit funds through loan disbursements and repayments, making it difficult for authorities to trace the origins of the money.

This not only undermines the integrity of the financial system but also facilitates other forms of criminal activity, such as terrorism financing, drug trafficking, and corruption. By allowing these illegal financial flows to go unchecked, unlicensed loan apps contribute to a broader ecosystem of crime and corruption, weakening the overall stability of the economy and eroding public trust in financial institutions.

WHAT CITIZENS SHOULD KNOW

Verify Legitimacy: Before using any loan app, citizens should verify its legitimacy. This can be done by checking if the app is registered with the Bank of Ghana (BoG) or other relevant authorities. Licensed institutions are more likely to adhere to ethical lending practices and provide avenues for dispute resolution.

Read the Terms and Conditions: It is crucial to carefully read and understand the terms and conditions of any loan agreement. Pay particular attention to interest rates, fees, and the app’s data privacy policy.

Be Cautious with Personal Data: Users should be wary of apps that request excessive access to personal data. Only share information that is absolutely necessary, and be mindful of the potential risks associated with granting access to contacts, messages, and other sensitive information.

Report Suspicious Activities: If you suspect that a loan app is operating illegally or engaging in unethical practices, report it to the BoG or the Cybersecurity Authority for further investigation.

WHAT THE REGULATOR SHOULD DO

Strengthen Monitoring and Enforcement: The BoG and other regulatory bodies must intensify their efforts to monitor and enforce regulations governing digital lending platforms. This includes conducting regular audits of registered apps and cracking down on unlicensed operators.

Public Awareness Campaigns: To protect consumers, regulators should launch public awareness campaigns that educate citizens about the risks associated with unlicensed loan apps. These campaigns should also promote financial literacy and inform people about how to identify and avoid predatory lending practices.

Collaboration with Tech Companies: Regulators should collaborate with app stores, such as Google Play and the Apple App Store, to ensure that only licensed and compliant loan apps are available for download in Ghana. This could involve implementing stricter vetting processes and promptly removing unlicensed apps.

Develop a Comprehensive Regulatory Framework: As digital lending continues to evolve; it is essential for regulators to develop a comprehensive framework that addresses the unique challenges posed by online and mobile lending. This framework should include guidelines for data privacy, interest rate caps, and transparent disclosure of loan terms.

CONCLUSION

The proliferation of unlicensed loan apps in Ghana presents significant risks to both individual users and the broader financial system. While these platforms may offer quick and easy access to funds, the potential for financial loss, data theft, and other negative consequences cannot be ignored. Citizens must exercise caution when using these services, and regulators must take proactive steps to protect the public from the dangers of unregulated lending. By working together, we can ensure that the digital lending landscape in Ghana remains safe, fair, and conducive to economic growth.

Dickson Assan, CA, MSc, BSc (First Class)
Accountant & Compliance Manager
Lantini Limited, Accra.
+233242771314