OVERVIEW OF THE NIGERIAN FINTECH MARKET
Author: O. M. Atoyebi S.A.N FCIArb. (U.K.)., Contributor: Romeo Pupu
Fintech, or financial technology, refers to any software that provides financial services, including internet banking, mobile payment apps, and even cryptocurrencies. Fintech is a broad category that includes a variety of technology, but its main goals are to alter how people and businesses access their finances and to compete with established financial institutions.[1] [1]
In Nigeria, there are about 200 FinTech businesses that provide financial inclusion and solutions for Africans in general. Between January and September 2021, FinTech firms in Africa raised $1.4 billion, with Nigeria notably accounting for over $800 million of that total.[2] [2]
Fintech made a significant contribution to Nigeria’s economy in 2021, with the inflow of capital reaching new heights and an influx of cutting-edge product features. Nigerian start-ups are said to have gotten a total of roughly USD 903,680,000 collectively, which is 501% more funding than the country obtained the year before when it ranked second, on the continent with a combined total of USD 150,358,000. 42.1% of the total financing secured in Africa in 2021 went to Nigeria[3] [3]. Fintech start-ups raised a total of USD536,655,000 in 2021, accounting for 59% of the total amount raised by all start-ups during the time under review in Nigeria (The African Tech Startups Funding Report by Disrupt Africa, 2021).
Regulations in The Nigerian Fintech Industry
- The Central Bank of Nigeria (CBN) published a Framework for QR Code Payments in Nigeria in early January 2021, marking the beginning of the regulatory advancements for the Nigerian fintech business in that year. The introduction of COVID-19 forced the closure of the majority of physical cash payment systems, and the new QR code legislation was intended to promote contactless payments as a safer method of payment within Nigeria.
- The Rules on Crowdfunding (the “Crowdfunding Rules”), published by the Securities and Exchange Commission (SEC) in January 2021, offer a formal regulatory and oversight framework for investment-based crowdfunding in Nigeria. The CBN released its Framework for Regulatory Sandbox Operations in January 2021 (the “CBN Sandbox Rules”), which is intended to support start-up ideas in the face of strict regulations.
- The CBN published the Regulatory Framework for Open Banking in Nigeria (the “Open Banking Framework”) in February 2021 to make it easier to access financial data. The Securities and Exchange Commission (SEC) published the Major Amendments to the Securities and Exchange Commission Rules and Regulations, 2013 (the “SEC Rules”) in April 2021, to make it mandatory for digital sub-brokers (i.e., entities that are not dealing with members of a Nigerian exchange, but act as an agent or in another capacity on behalf of a sponsoring broker/dealer to be registered with the SEC.
- The CBN introduced eNaira, a CBN’S digital currency initiative, in October 2021. The country’s fiat currency, the naira, is available in digital form as the eNaira, which is exchangeable for other digital currencies issued by other central banks. The eNaira is legal cash and a part of the current currency in circulation, much like the physical/paper naira. The CBN also released the “PAPSS Guidelines,” which describe how the Pan African Payments and Settlements System (a cross-border financial market infrastructure that permits payment transactions across Africa) should be operated.
FEATURES OF THE FINTECH INDUSTRY
- Payments
The Banks and Other Financial Institutions Act of 2020 (BOFIA) serves as the primary regulatory framework for payments, with the CBN periodically issuing additional rules that are applicable to both traditional companies and Fintechs. A CBN operating license is necessary for Fintechs that act as payment service providers (PSPs).
- Lending
This is likewise primarily governed by BOFIA, with different recommendations, including pertinent prudential norms, periodically released by the CBN that apply to both legacy companies and Fintechs. Fintechs must have any of the following in order to keep deposits and conduct lending activities in Nigeria:
- A commercial banking license (national or regional);
- A merchant banking licence;
- A specialized banking license, or a microfinance banking license (national or state or unit); or
- A finance company license from the CBN.
However, in accordance with the moneylender rules of the relevant state(s) they operate, Fintechs that are not focused on storing deposits or offering loan services nationwide may function with a moneylender’s license. Fintechs are drawn to the moneylender license application process because it is less onerous than the BOFIA process. Another option is for a fintech to collaborate with organizations that have the necessary lending licenses, and only offer the technological foundation on which the loans are made.
- Crowdfunding
The Crowdfunding Rules allow micro, small, and medium-sized businesses to raise capital through intermediaries, who will enable fundraising activities including an offer to sell securities or other financial instruments via crowdfunding websites. Retail investors are only permitted to spend a maximum of 10% of their net annual income in a calendar year in a crowdfunded investment by the SEC, in order to safeguard the investing public. However, high net worth persons are exempt from this restriction.
- Personal Finance
To accept payments from clients, Fintechs must get one of the CBN’s banking licenses listed under “Lending” in order to receive deposits from customers. However, in reality, Nigerian Fintechs that provide personal finance applications often run through collaborations with reputable DMBs or MFBs. Additionally, fintech companies have started to get licenses from microfinance banks to sell their goods. Fintechs are required to get from the CBN, any of the banking licenses listed under “Lending.” However, in reality, Nigerian Fintechs that provide personal finance applications often run through collaborations with reputable DMBs or MFBs. Additionally, fintech companies have started to get licenses from microfinance banks to sell their goods.
- The use of Telecommunication Structure to provide Financial Services
The Nigerian Communications Commission (NCC) oversees companies that provide financial services using mobile phones or other telecommunications infrastructure, in accordance with the License Framework for Value Added Services.
Compensation Scheme in The Fintech Industry
In Nigeria, the compensation structure for payment services is strictly regulated. Businesses in this industry make money by keeping a portion of the transaction fees that are generally charged when sending money. In this regard, the Electronic Payment Guidelines state that service providers, banks, and entities to whom the services are being given, must come to an agreement on fees and charges for web transactions. Additionally, they state that the CBN’s Circular on the Implementation of Interchange Fee provisions must be taken into consideration during negotiations between the merchant and the acquirer (the bank that manages the merchant bank’s account), regarding the maximum total fee that can be charged to a merchant for web transactions (the “Interchange Guidelines”).
For online lending, the moneylender laws of various states prescribe limitations on the interest on loans that may be imposed by moneylenders.
CONCLUSION
The Fintech industry is an industry that poses numerous benefits to both consumers and Fintech companies. However, each player must be well abreast with the relevant regulations, so that they can adequately protect their interests, comply with such regulations and avoid liability.
[1] Sean Peek, ‘What Is Fintech? Definition, Evolution and Examples’ 2022 US Chamber of Commerce < What Is Fintech? (uschamber.com) [4]> accessed 1 September 2022
[2] Partner, ‘Industry Experts discuss the growth and future of Fintech in Nigeria and India in symposium by CLI College, Nigeria and Christ University, India’ (2022) TechCabal <Industry Experts discuss the growth and future of Fintech in Nigeria and India in symposium by CLI College, Nigeria and Christ University, India | TechCabal [5]> accessed 1 September 2022
[3] Banwo & Igghodalo,’Nigeria: FinTech 2022’ (2022) Mondaq < FinTech 2022 – Fin Tech – Nigeria (mondaq.com) [6]> accessed 1 September 2022