BUSINESSES IN NIGERIA: LEGAL IMPACT OF FINANCIAL PAYMENT SYSTEMS
Author: O. M. Atoyebi S.A.N FCIArb. (U.K.)., Contributor: OBIORA.C. IFEDIORA
In the dynamic landscape of Nigeria’s business environment, the utilization of financial payment systems has become an integral component of daily transactions. The vast and diverse Nigerian economy, with its ever-growing network of businesses, has witnessed a significant transformation in recent years, largely influenced by advancements in technology and the adoption of modern financial payment systems. These innovations have not only enhanced the efficiency and convenience of financial transactions but have also raised numerous legal considerations that impact the business ecosystem.[1] [1] These legal considerations are backed by the legal framework governing financial payment systems in Nigeria, which is multifaceted and continually evolving to adapt to the rapid changes in the financial technology sector. This in turn plays a critical role in shaping the legal complexity of operations, compliance requirements, and security of businesses operating in Nigeria.[2] [2]
Furthermore, the purpose of this article is to provide an overview of the relevant laws and regulations, the benefits and challenges they present for businesses, and the evolving role of financial technology in determining the future of commerce in the country. It is essential for businesses, both domestic and foreign, to have a comprehensive understanding of these legal implications to navigate the regulatory landscape effectively and ensure compliance with the established norms.[3] [3]
THE EVOLUTION OF FINANCIAL PAYMENT SYSTEMS
The financial payment landscape in Nigeria has evolved significantly in recent years, with the introduction of various payment systems designed to enhance efficiency and reduce the reliance on traditional cash transactions.
Before attaining independence in 1960, Nigeria primarily operated as a cash-based economy with a limited banking infrastructure in place. Transactions heavily depended on the use of physical cash. The Central Bank of Nigeria (CBN) was established two years before achieving independence and played a pivotal role in shaping the financial landscape of the nation. To enhance the efficiency of payments and fund transfers, the Nigerian Interbank Settlement System (NIBSS) was established, automating the processing and settlement of interbank transactions. The introduction of ATMs and debit cards significantly improved accessibility to funds and facilitated electronic payments for Nigerians. In 1998, the Nigerian Payment System Act was enacted, providing a legal framework for electronic payment systems and establishing guidelines for electronic transactions within Nigeria.[4] [1]
In 2015, the CBN introduced a cashless policy aimed at reducing the amount of physical cash in circulation, promoting electronic payments, and enhancing the efficiency and transparency of financial transactions. In 2016 there was an introduction of mobile money services in Nigeria, such as MTN Mobile Money and Paga, which made it easier for individuals to send and receive money using their mobile phones.[5] [2]
The CBN further introduced the concept of Payment Service Banks (PSBs) in 2018 to extend financial services to unbanked and underbanked populations, promoting digital financial inclusion, in 2020 the CBN launched the Nigerian RTGS system, a modern payment system for large-value interbank transactions, enhancing the efficiency and safety of fund transfers.[6] [3] In 2021, in response to the growing interest in cryptocurrencies, the CBN issued regulations that restricted financial institutions from providing services related to cryptocurrencies.[7] [4] This move was met with mixed reactions from the public and the FinTech industry. Currently, Nigeria is exploring open banking, which allows third-party providers to access financial data and offer innovative financial services. This has the potential to drive further innovation in the payment space. In 2021, the CBN introduced the digital currency, E-Naira, as a way to further promote digital payments in the country. It is intended to coexist with physical cash and existing payment methods.[8] [5]
The evolution of financial payment systems in Nigeria reflects the country’s commitment to modernizing its financial infrastructure and promoting financial inclusion. As technology continues to advance, and regulatory frameworks adapt to changing needs, Nigeria’s payment ecosystem is likely to continue evolving, offering more options and convenience to consumers and businesses.
LEGAL FRAMEWORK AND REGULATION
The Central Bank of Nigeria (CBN) established by the Central Bank Act[9] [1] is the primary regulatory authority responsible for overseeing financial payment systems in Nigeria and has introduced a range of regulations and guidelines aimed at ensuring the stability and security of the financial payment ecosystem[10] [2] which businesses must adhere to these regulations to avoid legal consequences.
In Nigeria, there are key laws which must be taken into cognizance under financial payment systems and they include;
- The Nigerian Investment Promotion Commission Act 16 of 1995
- Value Added Tax Act Cap V1, LFN 2004
- Companies and Allied Matters Act, 2020 (as amended);
- Money Laundering (Prohibition) Act, 2011 (as amended);
- Corrupt Practices and Other Related Offences Act, 2000;
- Economic and Financial Crimes Commission (Establishment, Etc.) Act, 2004;
- Terrorism (Prevention) Act, 2011 (as amended);
- Cybercrimes (Prohibition, Prevention, Etc.) Act, 2015
- Nigerian Data Protection Regulations, 2019 (NDPR)
- Foreign Exchange (Monitoring and Miscellaneous Provisions) NO. 17. 1995 ACT CAP F34 LFN 2004.
These laws guide the legal aspects businesses must consider regarding financial payment systems, which include:
1. Licensing and Authorization: Any entity wishing to provide financial payment services, such as mobile money operators and payment service providers, must obtain the necessary licenses and authorizations from the CBN. Failure to do so can lead to legal actions and the suspension of operations.[11] [3]
2. Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations: Businesses must implement robust AML and KYC procedures to prevent money laundering and the financing of terrorism. Non-compliance can result in hefty fines and legal action.[12] [4]
3. Data Privacy and Protection: With the collection and storage of sensitive customer data, businesses are required to comply with data protection regulations. The Nigeria Data Protection Regulation (NDPR) sets standards for data privacy and security. Violations can lead to legal liabilities and reputational damage.[13] [5]
4. Cybersecurity: Given the rise of cyber threats and financial fraud, businesses must invest in cybersecurity measures to protect their payment systems. Breaches can result in both legal and financial penalties.
5. Consumer Protection: Businesses must adhere to consumer protection regulations to ensure fair treatment of customers and prevent deceptive practices. Failure to do so can result in legal actions, fines, and reputational damage.
6. Contractual Agreements: Businesses engaging in financial payment systems must ensure that their contractual agreements with payment service providers, banks, and customers are legally sound and enforceable.
BENEFITS AND CHALLENGES OF FINANCIAL PAYMENT SYSTEMS TO BUSINESSES IN NIGERIA
Financial payment systems have brought numerous benefits to businesses in Nigeria. These include enhanced operational efficiency, reduced cash handling costs, increased financial inclusion, and improved access to credit. Moreover, these systems have expanded the reach of businesses by facilitating online transactions and e-commerce, thereby enabling national and international trade.[14] [1]
However, challenges persist, especially for smaller businesses. Compliance with the complex regulatory framework can be resource intensive and cumbersome. The cost of implementing secure payment systems and ensuring compliance can be a burden for startups and small businesses. Infrastructure and Connectivity, Cybersecurity, Regulatory environment, Financial Literacy, and Transaction costs are all challenges of financial payment systems to businesses in Nigeria. Additionally, the digital divide in Nigeria remains an obstacle, as not all potential customers have access to these payment systems.[15] [2]
RECOMMENDATIONS
To enhance and encourage financial payment in Nigeria and boost business transactions, it is highly, recommended that businesses should offer a variety of payment options, including digital and cash, to cater to a broad customer base. This helps bridge the digital divide. Additionally, prioritization of cyber security is essential to protect sensitive financial and customer data. Offering guidance and resources to help customers understand and use digital payment methods effectively, negotiating favourable rates with payment service providers, especially for high-volume transactions, to minimize the impact of transaction costs and lastly, exploring partnerships with mobile banking platforms to reach a broader audience, especially in areas with limited access to traditional banking services.
CONCLUSION
Financial payment systems have undoubtedly revolutionized the way businesses operate in Nigeria. They have simplified transactions, improved access to financial services, and opened new avenues for growth and innovation. Nevertheless, the legal implications and regulatory requirements surrounding these payment systems are vital for businesses to navigate successfully.
Businesses must prioritize compliance with regulations set by the Central Bank of Nigeria and other relevant authorities to avoid legal consequences, financial penalties, and reputational damage. There is also a need for businesses to strike a balance between embracing the opportunities presented by financial payment systems and ensuring they meet the legal requirements designed to protect the integrity and security of the financial ecosystem in Nigeria.
[1] Topsy Kola, ‘Harnessing Nigeria’s fintech potential’ https://www.mckinsey.com/featured-insights/middle-east-and-africa/harnessing-nigerias-fintech-potential [6]
[2] Central Bank of Nigeria, ‘The Nigerian Payment System’ (June 27, 2023) https://www.cbn.gov.ng/out/2022/mpd/series%206.pdf [7]
[3] Okifo Joseph, Igbunu Richard, ‘Electronic Payment System in Nigeria: Its Economic Benefits and Challenges’ (2015) ISSN (Paper)2222-1735 ISSN (Online)2222-288X https://files.eric.ed.gov/fulltext/EJ1079942.pdf [8]
[4] Christain Uche, ‘Banking Developments in Nigeria’ https://etheses.lse.ac.uk/1470/1/U105686.pdf [9]
[5] Ibid
[6] Torsten Wezel, ‘Nigeria—Fostering Financial Inclusion through Digital Financial Services Nigeria’ https://www.imf.org/-/media/Files/Publications/Selected-Issues-Papers/2023/English/SIPEA2023020.ashx [10]
[7] Central Bank of Nigeria, ‘Banning of Cryptocurrency Trading’ https://www.cbn.gov.ng/out/2021/ccd/volume%203%20number%202%20cbn%20update%20february%202021.pdf [11]
[8] Central Bank of Nigeria, ‘eNaira’ https://www.cbn.gov.ng/currency/enaira.asp [12]
[9] Central Bank Act 2007
[10] Collins Okeke & Ayotomiwa Adebanjo, ‘Nigeria: Resolving The Legal And Regulatory Challenges Of Fintech In Nigeria’ (2021) Resolving The Legal And Regulatory Challenges Of Fintech In Nigeria – Fin Tech – Nigeria (mondaq.com) [13]
[11] Central Bank of Nigeria (CBN), ‘Regulatory Framework for Mobile Money’ https://www.cbn.gov.ng/Out/2021/CCD/Framework%20and%20Guidelines%20on%20Mobile%20Money%20Services%20in%20Nigeria%20-%20July%202021.pdf [14]
[12] Section 13 of the Anti-Mondering Act 2013.
[13] The Nigerian Data Protection Act, 2023, Preamble.
[14] Esosa Feyen, ‘Fintech and the Digitsl Transformation of Financial Services’ https://www.bis.org/publ/bppdf/bispap117.pdf [15]
[15] Ibid