NIGERIA: An Introduction to FinTech Legal

FINTECH IN NIGERIA – A GENERAL OVERVIEW 

Nigeria is home to over 200 Fintech startups, not counting the Fintech solutions launched by traditional banks and mobile network operators. Nigeria is also home to over 200 million with 40% of the population estimated to be underserved or cut off from the conventional banking system.

FINTECH BUSINESS MODELS IN NIGERIA AND THEIR SPECIFIC REGULATORY FRAMEWORK

Fintech business models in Nigeria span across a wide range of activities, including payment solutions, online lending, cryptocurrency, Buy Now Pay Later (BNPL) and crowdfunding.

Variation Between the Regulation of Fintech and Legacy Players

Traditional Banks and Fintech Companies are primarily regulated by the Central Bank of Nigeria (CBN), pursuant to the Banks and Other Financial Institutions Act, 2020. Since the Fintech sector is still evolving, the CBN launched a Regulatory Sandbox initiative to allow Fintechs to test their products which may not fall squarely under a regulated sector, within a controlled environment.

Payments 

Payment Fintechs are focused on facilitating payment for goods and services within and outside Nigeria.

The regulatory framework for payment services in Nigeria include:

a. New Licence Categorisations for the Nigerian Payments System;

b. Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) in Nigeria;

c. Guidelines for Licensing and Regulation of Payments Service Holding Companies in Nigeria.

Buy Now Pay Later (BNPL) 

The regulatory framework depends on the structuring/offering of the BNPL. Specifically, depending on the advancement of loan credit or sale credit, different regulatory frameworks will be applicable.

Nevertheless, the legal and regulatory framework for BNPL includes, but is not limited to:

a. The Hire Purchase Act;

b. Moneylenders' Law of various states;

Online Lending 

Online lending involves various consumer credit solutions, most of which do not require documentation or collateral.

While there is currently no specific law on online lending, the following laws are generally applicable:

a. Moneylenders’ Law of various states;

b. CBN’s licensing frameworks for relevant financial institutions and other financial institutions; and

c. FCCPC’s Limited Interim Regulatory/ Registration Framework and Guidelines for Digital Lending, 2022.

Cryptocurrency 

Cryptocurrencies as a Fintech business model in Nigeria typically operate through peer-to-peer mechanisms to avoid the harsh penalties prescribed in the extant regulatory framework.

Applicable laws/directives are:

a. CBN’s “Circular on virtual currency operations”;

b. CBN’s “Press release on virtual currencies”;

c. CBN’s “Letter to Banks on Crypto”;

d. SEC’s “SEC Statement on Digital Assets and their Classification and Treatment of 11 September 2020”;

e. SEC’s “Press Release on Cryptocurrencies”; and

f. SEC Rules on Issuance, Offering and Custody of Digital Assets (“SEC Digital Assets Rules”).

Robo-advisory 

Robo-advisers have capitalised on many consumers' scepticism of large banking corporations and are thus offering simpler ways to invest, usually by smartphone or through their websites, providing their customers with services accessible 24/7 at a low operational cost.

The current applicable legal framework is the SEC Rules on Robo Advisory Services.

Crowdfunding  

Crowdfunding has been recording a steady increase in adoption. While crowdfunding is roughly divided into six types, namely peer-to-peer lending, equity crowdfunding, reward-based crowdfunding, donation-based crowdfunding, profit-sharing crowdfunding and hybrid models, only equity-based crowdfunding (investment-based crowdfunding) is regulated in Nigeria.

The applicable law is the SEC Rules on Crowdfunding.

PAYMENT SERVICES 

Regulatory Framework and Categories 

The payment category of Nigerian Fintech ecosystem is one of the most vibrant subsectors, accounting for 15% of banking revenue pools in the country. When broken down per customer segment, it accounts for 17% of consumer-facing Fintechs, after lending Fintechs. In the SME and Corporate/FSP segment, it is the predominant solution, accounting for 19% and 3% respectively.

The payment subsector is also the most extensively regulated (the primary regulator being the CBN), which has issued several guidelines over the past few years, categorising payment services in different categories.

To clarify the scope of the licences, the CBN released the “New Licence Categorisations for the Nigerian Payments System (the New Licensing Framework)” in December 2020. It sets out payment system licensing in four broad categories, namely:

a. Switching and Processing

b. Mobile Money Operations (MMOs)

c. Payment Solution Services (PSSs)

i. Payment Solution Service Providers (PSSPs)

ii. Payment Terminal Service Providers (PTSPs)

iii. Super-Agents d. Regulatory Sandbox

A payment solution provider in Nigeria can seek a licence to operate as any of the above, each with its own unique role and functions in Nigeria’s payment ecosystem. Payment solution providers are not allowed to hold customer funds, except MMOs and Payment Service Banks (PSBs). Companies in the PSS category can hold one or more of the sub-licence categories. Any licensee, seeking an additional licence in any category must first obtain a no-objection from the Payments System Management Department of the CBN.

Besides the payment service categories set out in the New Licensing Framework, the “Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) in Nigeria (PSB Guidelines)” issued in August 2020 also introduces a new category of payment providers, known as Payment Service Banks (PSBs). These PSBs are meant to provide deposit products, payment/remittance services to small businesses, low-income households, and other financially excluded entities, targeting high-volume low-value transactions in a secured technology-driven environment.

The permissible activities for each licence category and minimum capital are set out below:

Regulatory Sandbox 

This is aimed at stimulating innovation and deepening financial inclusion. Exact activities are determined on a case-by-case basis, but it is open to licensed institutions, Fintechs, innovators and researchers, to test products and solutions.

There is no minimum capital requirement.

Super-Agents 

Super-agents carry out agent recruitment and management. There is a minimum capital requirement of N50 million.

Payment Terminal Service Providers (PTSPs) 

Permissible activities for PTSPs are Point of Sales (POS) terminal deployment and services, POS terminal ownership, Payment Terminal and Application Deployment (PTAD), Merchant training and support. There is a minimum capital requirement of N100 million.

Payment Solutions Service Provider (PSSPs) 

Permissible activities for PSSPs are payment processing gateway and portal, payment solution/application deployment, merchant service aggregation and collections.

There is a minimum capital requirement of N100 million.

Mobile Money Operators (MMOs) 

Permissible activities for MMOs are e-money issuing, wallet creation and management, pool account management and activities permissible for super-agents. There is a minimum capital requirement of N2 billion.

Switching and Processing 

Permissible activities for switching and processing licence holders are switching, card processing, transaction clearing and settlement agents' services, non-bank acquiring services and activities permissible for super-agents, PTSPs and PSSPs. There is a minimum capital requirement of N2 billion.

Payment Service Banks (PPSBs) 

Permissible activities for PSBs include, but are not limited to, entering into direct partnership with card scheme operators to issue debit and prepaid cards (such cards cannot be used for foreign currency transactions), deploying ATMs and POS devices, operating and rolling out agent banking and networks, accepting deposits from individuals and small businesses, and operating e-wallets. There is a minimum capital requirement of N5 billion.

Impact of Forex Availability and Card Issuer Limitations on Cross-border Payments

While Fintechs may be far removed from the oil and gas industry in Nigeria, it is not locally immune from its vagaries, especially for Fintechs that offer cross-border payment products. As the major foreign exchange earner, ups and downs in the global price of oil and disruptions in local production have real impact on the local availability of US dollars at official rates to settle customer transactions.

Nigeria earns 90% of its foreign exchange from oil sales. The COVID-19 pandemic induced a sharp drop in oil prices which Nigeria is yet to recover due to local production challenges. In May 2020 the Director of the Budget Office reported in May 2020 that the country had lost 80% of its oil revenue and that foreign portfolio investment, another significant source of foreign exchange, had crashed by 75%.

As customer demand for US dollars to settle international transactions outstripped supply, financial institutions in Nigeria (traditional banks and Fintechs alike) have responded by reducing the spending limits on Naira-denominated cards for cross-border transactions. In some cases, they have completely scrapped it.

United Bank for Africa (UBA) and Zenith Bank respectively reduced their limits to $20 in March 2022, while First Bank reduced it to $50. Furthermore, customers could usually spend up to $100 on their Naira cards for international transactions. However, by September 2022 First Bank completely suspended international transactions on Naira cards. Other traditional banks have also followed suit since then. Subsequently, customers who require higher spending limits have been advised to request for foreign currency debit or prepaid cards from their banks which have limits of up to $10,000 in some cases.

Fintechs that offer virtual dollar cards have also not been immune to this. As a result, Flutterwave suspended its virtual dollar card, Barter. Chipper Cash also stopped offering virtual dollar cards to its customers.

Because of these changes, some customers have reportedly been unable to pay for international subscription services, like Netflix. Businesses that rely on foreign software providers like cloud infrastructure, web hosting, and online design resources have found themselves stranded and unable to pay for the needed services.

Any improvement in this situation is contingent on macro-economic reforms that boost local oil production, inspire confidence in foreign portfolio investors, and diversify Nigeria’s export base beyond oil.

ONLINE LENDING IN NIGERIA  

Regulatory Framework 

Generally, there are two categories of entities in Nigeria that are permitted to carry out the business of online lending in Nigeria. They include:

i. Banks and other financial institutions licensed by the CBN;

ii. Moneylending institutions licensed by the moneylending authorities of the various states in Nigeria.

Additionally, the FCCPC in August issued the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending (the “Guidelines”).

Following increased reports of predatory interest rates on loans and privacy right contraventions by digital lenders, Nigeria’s primary competition regulator, the FCCPC, issued the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending (the “Guidelines”) in August 2022. The Guidelines direct intending and existing digital lenders to register and obtain authorisation from the FCCPC.

Methods for Loan Enforcement 

Asides from the traditional methods of loan enforcement, ie, the enforcement of security, most digital lending platforms do not require security or a legal action for the recovery of the loan. Furthermore, the moneylenders’ laws of the various states do not provide for other viable methods of loan enforcement.

As a result, digital money lenders have resorted to illegal debt recovery methods such as unlawfully locking mobile devices of defaulters through ransomware, sending defamatory messages to tarnish the defaulters’ images, cyberbullying, and data privacy breaches.

While the moneylenders’ laws have not addressed this illegality yet, the Federal Government through the Central Bank of Nigeria, the National Information Technology Development Agency, and the Federal Competition and Consumer Protection Agency have begun taking active steps to clamp down on these illegal debt recovery methods of digital lending entities.

CRYPTOCURRENCIES AND BLOCKCHAIN  

CBN Directive Restricting Processing of Crypto-related Transactions

By a letter dated 5 February 2021, the Central Bank of Nigeria (“CBN”) reminded regulated institutions (ie, Deposit Money Banks, Non-Bank Financial Institutions and Other Financial Institutions) that dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges is prohibited. Regulated institutions were also directed to identify and close the account of persons/entities transacting in or operating cryptocurrency exchanges.

The above directive is in line with the CBN’s increasingly hostile attitude towards cryptocurrencies. Indeed, as far back as 2017, the CBN warned that virtual currencies (cryptocurrencies) are not legal tenders and banks/institutions transacting in such currencies do so at their own risks. Similarly, in 2018 the CBN warned “all and sundry” on the risks inherent in dealing with cryptocurrencies.

Update on SEC Rule on Digital Assets 

In May 2022, SEC published the SEC Rules on Issuance, Offering and Custody of Digital Assets (the “Digital Assets Rules”). The Digital Assets Rules contained provisions concerning the issuance of digital assets as securities and the registration/operation of digital assets offering platforms, digital assets custodians, digital assets exchange platforms and virtual assets service providers.

Although not yet operational, the general understanding is that the Digital Assets Rules will apply to cryptocurrencies, that cryptocurrencies will be treated as either digital assets (defined to mean a digital token that represents assets such as a debt or equity claim on the issuer).

However, unconfirmed news reports from Bloomberg on 25 November 2022 suggest that SEC will not be considering cryptocurrencies in its push for digital assets, at least until regulators agree on standards that protect investors. The reports state that SEC will rather promote investments in “sensible digital assets” with investment protection.

FINTECH FUNDING IN NIGERIA  

Legal Framework for Capital Importation and Repatriation of Profits in Nigeria

Foreign investors looking to set up businesses or invest in the Nigerian market can do so freely by importing capital into Nigeria. Capital to be imported can be cash (equity or debt) or assets such as equipment or raw materials. There are two methods of importing capital into the Nigerian economy, namely through a debt-equity scheme and through an authorised dealer.

Capital Importation through a Debt-equity Scheme

This method of capital importation allows an investor to purchase a Nigerian debt instrument at a discount from any stock exchange anywhere in the world and convert it to the Naira value of the instrument in Nigeria. These funds can then be applied to any investment within Nigeria. The Debt Conversion Committee of the Central Bank of Nigeria oversees this scheme.

Capital Importation through Authorised Dealers 

Investors looking to invest in Nigeria may do so through authorised dealers. Authorised dealers are banks licensed under Banks and Other Financial Institutions Act and other specialised banks who have a licence to deal in foreign exchange.

The authorised dealers will issue a certificate of capital importation (CCI) within 24 hours of the application and make returns to the CBN within 48 hours of the issuance.

A CCI guarantees the holder unconditional repatriation of funds through an authorised dealer.

PROJECTIONS FOR THE NEXT YEAR IN FINTECH  

Potential Impact of the Nigeria Startup Act 

Following in the footsteps of other countries that have enacted startup-specific laws, Nigeria enacted the Nigeria Startup Act on 19th October 2022. While not Fintech-specific, the Act holds great promise for Fintech startups (which dominate the Nigerian startup ecosystem) once implementation and state-level domestication kicks off.

One issue that has plagued the Nigerian startup ecosystem is poor consultation leading up to regulations that impact their businesses. If faithfully implemented, robust consultations are likely to take precedence before future Fintech-related regulations are issued, as the Act establishes the National Council for Digital Innovation and Entrepreneurship (‘the Council’). The Council is headed by the President, while the Governor of the CBN is a statutory member, amongst other heads of government agencies. It also draws membership from the Startup Consultative Forum (‘the Forum’), a consultative body made up of industry stakeholders and representatives of labelled startups, venture capitalists, angel investors, incubators, accelerators, innovation hubs, and tech-focused civil society groups. The Act also specifically provides that the CBN and SEC will collaborate with the Council in ensuring that Fintech startups are duly notified before new rules and regulations that affect their operations are issued.

The Act also introduces a startup labelling process. Labelled startups will be eligible for the benefits. A startup must have been in existence for a period of not more than ten years since incorporation, amongst other requirements, to be eligible. The most valuable and popular Fintech startups in Nigeria, Paystack and Flutterwave, were founded in 2015 and 2016 respectively. As such, most Fintech startups in Nigeria are eligible for labelling.

Labelled Fintech startups would be eligible for several benefits under the Act, including (a) early-stage financing from the Startup Investment Seed Fund; (b) Pioneer Status Incentive under the Industrial Development (Income Tax Relief) Act, etc.

It is widely believed that if the provisions of the Act are implemented and domesticated across all Nigerian states, the effects can trigger a new spurt of growth in the Nigerian startup ecosystem from 2023 onwards, whilst putting an end to the regulatory uncertainty that has affected funding to the space.

The SEC Digital Assets Rules to Become Operational

It is expected that the SEC Digital Assets Rules will become operational in 2023. As earlier referenced, it was generally understood that the rules will apply to cryptocurrencies as either digital assets or virtual assets.

Following the unconfirmed reports that the SEC has no intention of regulating cryptocurrencies even under the rules, it is uncertain what the position will be in 2023.

A NASDAQ-style Bourse for Tech Companies 

Nigerian Exchange Limited (“NGX”) announced its intentions to introduce a new listing category to be called the Technology Board, modelled after the US NASDAQ, to attract more listing from the tech sector.

The proposed rules for listing on the Tech Board have been published since 2021, approved by SEC on 15 December 2022 and will soon become operational.