Country Focus: Nigeria
There has been sustained growth in the adoption of Fintech in Nigeria with the payment space being the most active segment. Other segments such as mobile lending and wealth management are also developing at a rapid pace. This growth can largely be attributed to innovative ideas emanating from Nigeria’s sizable population of young “techpreneurs”, increased penetration of smart mobile devices as well as the government’s efforts to drive adoption of cashless payment channels and financial inclusion in Nigeria.
It is important to mention here that there is no special regulatory framework for Fintech in Nigeria. However, regulatory bodies such as the Central Bank of Nigeria (CBN) continue to play a very active role by providing guidelines and regulations that have an impact on the operations of Fintech companies (especially those in the electronic payments and mobile money space). For instance, the CBN has released several circulars and guidelines in 2018, which seek to regulate activities of electronic payment providers. The two (2) most significant are the Guidelines for Licensing and Regulating Payment Service Banks 1 and the Exposure Draft of the proposed Licencing Regime (Licensing Tiering) for Payment System Providers. The guidelines for Payment Service Banks will allow telecommunications companies (that had previously been prevented from providing financial services) to set up subsidiaries that can leverage on mobile and digital technology to provide financial services in rural areas. On the other hand, the proposed Licencing Regime (Licensing Tiering) for Payment System Providers, if it becomes law, will consolidate some of the licences that Fintech companies operating in the payment space currently hold. This will reduce the burden of having to apply and maintain multiple licences.
In addition to the above, the CBN in 2018 partnered with the Nigeria Inter-Bank Settlement System to create a “Regulatory Sandbox” similar to that of the UK FCA in order to allow fintechs test their solutions in a controlled environment 2. The CBN, in its bid to increase financial inclusion, is also partnering with some regulated private companies to rollout a network of 500, 000 agents who will offer basic financial services in rural (and under-served) areas that will largely be driven by financial technology 3. Furthermore, the CBN and the Securities and Exchange Commission have respectively set up committees to look into the deployment of blockchain technology in the payment industry 4 and develop a regulatory framework for crowdfunding, which is currently not regulated in Nigeria.
In addition to the CBN guidelines and regulations, there are other laws and regulations that apply to Fintechs in Nigeria. For example, Fintechs are required to comply with legislation and regulations that deal with the collection, use and storage of Data in Nigeria 5. A significant amount of Nigerian Fintechs are also finding that they have to comply with the EU’s General Data Protection Regulation, which imposes strict rules on entities that control and process personal data of EU nationals.
Furthermore, the National Information Technology Development Agency issued draft Data Protection Guidelines in 2017. The Guidelines, though not yet in force, seek to regulate the collection, storage, processing, management, operation and technical control of information. The Guidelines, when they come into force, will apply to private entities based in Nigeria and foreign entities outside Nigeria that process personal data of Nigerian residents and citizens. Also, Fintechs operating in the payment space in Nigeria are required to comply with several anti-money laundering laws and regulations. They are required to adopt policies and procedures that prevent money laundering and terrorism financing.
In addition to the above, Fintechs that have innovative ideas and inventions can protect their work under existing legislation that deal with literary works (including computer programmes), inventions and trademarks. However, it is important to mention that patenting an invention in Nigeria does not guarantee that it is protected as the Registrar of Patent and Design merely accepts the documents filed for record purposes rather than to examine the invention to determine its novelty within and outside Nigeria.
Although there has been significant adoption of Fintech in Nigeria, it is important to mention that regulators in Nigeria have not been very receptive to the use of bitcoin and virtual currencies. For instance, the CBN issued a circular reiterating its position that virtual currencies are not legal tender in Nigeria and that it is the only authority empowered by law to issue any form of currency in Nigeria. Also, the process of obtaining the necessary regulatory approvals for Fintech companies in the payment space is slow and more expensive compared to other jurisdictions and the regulators generally tend to adopt a very cautious approach to certain innovative Fintech ideas.
Incentives and Raising Finance
There is no special investment incentive scheme for Fintechs in Nigeria. However, Fintech companies can access the general incentives such as the Pioneer Incentive Scheme available to most companies under Nigerian law 6. With regards to raising finance, the most popular sources of finance for Fintechs in Nigeria are equity and convertible debt (raised from self, family, friends, angel investors, Venture Capital or Private Equity).
In addition to the above, Fintechs are beginning to have access to grants to support their innovation. For instance, Enhancing Financial Innovation & Access (EFInA) recently announced a US$2M challenge fund for fintech to enhance financial inclusion in Nigeria 7. Also, the Federal Government of Nigeria is working with the Africa Development Bank to establish a US$500m Fintech fund to grow the country’s financial services sector and economy 8.
The Incumbents and Fintech
In line with global trends, Fintechs in Nigeria continue to pose a significant threat to traditional financial institutions as well as insurance companies (the “Incumbents”). Most of the Incumbents have also embraced Fintech by building or developing their own technologies to meet the demands of their customers. They are also beginning to work with Fintechs by entering into integration agreements, which give their customers alternative channels for accessing their offerings.
For the Fintechs, some who are unable to fund their ideas or do not have the market reach are beginning to work closely with the Incumbents by leveraging on the Incumbents’ infrastructure to offer their products and services.
Challenges to Fintech and Possible Solutions
One of the key challenges for Fintechs especially in the payment space is the existence of a multiplicity of regulations that they have to comply with. Quite often, they are compelled to obtain more than one licence to provide their offerings. In addition, there are frequent changes and amendments to the regulations. In view of this, Fintech entrepreneurs must stay up to date with the changes in policies and regulations and engage the regulators when they are unsure of any regulations that they are required to comply with.
In addition to the above, a large percentage of Fintechs still find it difficult to access seed capital to support their ideas. To address this challenge, Fintechs must develop a realistic road map for accessing financing as early as possible and form strategic partnerships with key players that can support their ideas or innovation. These partnerships can provide Fintechs with access to the customer base and infrastructure of such key players.
Regulators tend to be reactive (rather than proactive) in creating regulations or guidelines for Fintechs. In view of this, there is a need to always engage the regulators to obtain further insight and guidance. Also, Fintechs can take advantage of the Regulatory Sandbox to test their ideas and make necessary adjustments before accessing the market.
As Nigeria continues to experience and enjoy the benefit of Fintech, it must create the enabling environment for Fintech’s to thrive in order to sustain the growth. It must adopt the right and effective regulations that will not undermine the gains made so far and also promote Fintech outside the payment space.
1 Central Bank of Nigeria, 5th October 2018: Exposure Draft on The Guidelines for Licencing and Regulating Payment Service Banks. Available at https://www.cbn.gov.ng/Out/2018/FPRD/OCTOBER%202018%20EXPOSURE%20PAYMENT%20BANK.pdf accessed on 14th November 2018.
2 Central Bank of Nigeria, 6th July 2018: Exposure Draft of the National Financial Inclusion Strategy Refresh. Available https://www.cbn.gov.ng/Out/2018/CCD/Exposure%20Draft%20of%20the%20National%20Financial%20Inclusion%20Strategy%20Refresh_July%206%202018.pdf accessed on 15th October 2018
4 Nigerian Investment Promotion Commission: CBN Sets Up Industry Committee to Develop Policies and Guidelines for Blockchain Tech Regulations. Available at: https://www.nipc.gov.ng/cbn-sets-industry-committee-develop-policies-guidelines-blockchain-tech-regulations/ accessed on 15th Novemeber 2018,
5 Cyber Crime (Prohibition, Prevention) Act 2018, NCC’s Consumer Code of Practice Regulations 2007
6 Pioneer Incentive is a form of tax holidays given to qualified companies for a specific duration.
7 Okafor, E: EFInA launches US$2M Fintech Challenge fund to enhance Financial Inclusion in Nigeria 4 September 2018. Available at https://www.businessdayonline.com/financial-inclusion/article/efina-launches-us2m-fintech-challenge-fund-enhance-financial-inclusion-nigeria/ accessed on 15th November 2018.
8 Egene, FG, AfDB Plan $500m Fund for Fintech available at < https://www.thisdaylive.com/index.php/2018/11/27/fg-afdb-plan-500m-fund-for-fintechs/> accessed on 27th November 2018.