NIGERIA: An Introduction to FinTech Legal

Introduction

The fintech industry in Nigeria has rapidly evolved into a key driver of economic growth and financial transformation, making the country one of Africa’s leading fintech hubs. Over the past decade, Nigerian fintechs have revolutionised traditional banking and payment systems, offering digital solutions that enhance accessibility, efficiency and convenience.

With over 200 active fintech companies, the industry continues to drive financial inclusion, bridging the gap between traditional finance and under-served populations and fuelling Nigeria’s growth as a regional leader in digital finance.

Economic Conditions

In 2023, Nigeria witnessed a change of administration. The new administration has implemented several reforms to restore macroeconomic stability, including removing the petrol subsidy, unifying and significantly liberalising the exchange rate and instituting a proposed tax reform. In the long term, these reforms are expected to reduce fiscal pressures and unwind the critical macroeconomic distortions that held back growth in the past.

In the short term, however, these reforms have exacerbated inflation, which stood at 33.88% as at October 2024; and led to a massive devaluation of the naira, losing about 70% of its value to the US dollar since the exchange rate liberalisation.

These reforms have also triggered heightened regulatory scrutiny in the fintech sector. Some fintechs were accused of promoting currency speculation and having weak anti-money laundering (AML) controls, and thus contributing to the Naira's sharp decline. Consequently, the Central Bank of Nigeria (CBN) ordered certain fintechs to suspend onboarding new customers. Additionally, the federal government initiated legal action against executives of Binance, a global cryptocurrency company, for alleged non-compliance with AML and tax laws.

Notwithstanding this, the Nigerian fintech industry has demonstrated resilience and continued to thrive amidst the challenging economic conditions, including the milestone achievement of the emergence of another unicorn, Moniepoint Group, in 2024. As Africa's most populous country, Nigeria is poised for significant fintech growth, driven by factors such as a youthful population, rising smartphone penetration and increased regulatory emphasis on promoting financial inclusion. These elements create a fertile ground for fintech innovation and investment opportunities.

Level of Activity, Trends and Developments

Nigeria’s fintech sector continues to thrive as a key driver of innovation and financial inclusion. The ecosystem is characterised by the adoption of advanced technologies, strategic partnerships and active regulatory oversight/support.

Shift in approach to cryptocurrency regulation

There has been a notable shift in the approach to cryptocurrency regulation, by the relevant regulators in Nigeria over the past year. Initially, the CBN prohibited licensed entities from facilitating cryptocurrency transactions, while the Securities and Exchange Commission (SEC) refrained from fully implementing its rules designed to regulate cryptocurrency businesses.

However, the regulatory landscape has evolved and, SEC has now provided a path to licensing for cryptocurrency businesses through a regulatory incubation programme, while the CBN enacted a framework to ensure that licensed cryptocurrency businesses are able to open and operate bank accounts in Nigeria. The expectation is that this shift and synergy between the regulators will further propel the already impressive cryptocurrency adoption rate in Nigeria. 

New requirements and rules for remittance businesses

As part of its effort to effectively regulate the flow of foreign currencies to Nigeria, the CBN released the Reviewed Guidelines of International Money Transfer Services in Nigeria in January 2024. The Reviewed Guidelines provide a new framework for the licensing and operations of international money transfer operators (IMTOs) in Nigeria. Key changes include an increase in the capital requirements for IMTOs and a prohibition on outbound transactions by IMTOs.

In line with the Reviewed Guidelines and as part of its efforts to boost the flow of foreign currencies into Nigeria, the CBN licensed more than a dozen IMTOs between May and November 2024, increasing competition within the sector. 

Adoption of artificial intelligence and machine learning

Nigerian fintech companies are increasingly leveraging artificial intelligence and machine learning for customer analytics, fraud detection and personalised financial services. This is expected to reduce costs, enhance operational efficiency and generally improve the user experience.

Strengthening of the payments ecosystem

The payments sub-sector has consistently been a key pillar of Nigeria's fintech industry, driven by effective regulation and the presence of strong market participants. In line with efforts to further enhance this sector, the CBN has taken steps to bolster the payments ecosystem by licensing a second payment terminal service aggregator (PTSA). This additional PTSA is expected to foster continued growth in payment services across the country and address challenges related to system downtime, ultimately contributing to a more robust and efficient payments infrastructure.

The Nigerian fintech landscape is vibrant, with a clear trajectory towards deeper integration of technology, increased collaboration, enhanced regulatory oversight and sustained focus on financial inclusion. This underscores the sector’s role in shaping Nigeria’s broader economic transformation.

New Legislation

The following new legislative and regulatory measures, which impact the rapidly evolving fintech sector in Nigeria, were recently introduced.

CBN Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers

The CBN released the Guidelines in December 2023, signalling a major shift in its approach to cryptocurrency businesses. Notably, the Guidelines permit banks to open and operate bank accounts on behalf of licensed cryptocurrency businesses, thereby enabling and facilitating their business operations.

SEC Framework on Accelerated Regulatory Incubation Programme for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

In 2024, the SEC introduced a new Framework following the non-operationalisation of its Rules released in 2022. This Framework establishes a pathway for cryptocurrency businesses to participate in its regulatory incubation programme and subsequently obtain licensing for their operations in Nigeria.

CBN Reviewed Guidelines on International Money Transfer Services in Nigeria

The CBN revised its earlier Guidelines issued in 2014 and imposed more stringent requirements on IMTOs. This move has been linked to the need to effectively regulate and significantly increase the flow of foreign currencies to Nigeria.

Potential Hurdles

Nigerian fintechs face some challenges that could impact their growth and sustainability, including the following.

Funding constraints

Although there has been significant fundraising in the fintech sector, as noted above, the global economic downturn has limited access to venture capital, impacting the ability of some Nigerian fintechs to raise funds. The increasing cost of capital and reduced investor appetite for high-risk sectors may also impact growth potential.​

Foreign exchange volatility and economic instability

Nigeria’s currency challenges, including the depreciation of the naira and foreign exchange liquidity issues, affect fintechs’ cross-border operations and profitability. In addition, high inflation and weak economic growth could reduce consumer spending power, impacting on the demand for fintech services. Also, fintech start-ups may face higher operating costs due to rising inflation​. ​

Regulatory uncertainty

While the regulatory environment is evolving, inconsistencies and abrupt policy changes may disrupt fintech operations. The enforcement of new rules, such as those governing cryptocurrency businesses, could introduce compliance burdens that smaller start-ups may struggle to meet​.

Infrastructure deficiencies

Limited access to reliable electricity and internet connectivity in some regions hampers the scalability of digital services, particularly in rural areas where financial inclusion efforts are targeted​.

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Despite these challenges, Nigerian fintech companies continue to demonstrate remarkable resilience and capacity for innovation. This is exemplified by the emergence of a new unicorn in October 2024, achieved despite unfavourable economic conditions. Furthermore, the economic reforms introduced by the new administration are anticipated to yield positive outcomes, creating an environment conducive to further growth and development in the near future.