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Compliance considerations for Fintech start-ups in Nigeria

By Omoruyi Edoigiawerie Esq
The Financial technology (“Fintech”) industry in Nigeria is one to watch. It has remained very active especially post-COVID with many start-ups offering diverse services geared towards increasing financial inclusion.

At the very minimum, there are at least 154 financial technology start-ups in Nigeria, these innovation-driven businesses are focused on providing bespoke payment solutions in Nigeria.

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For proper context, the Fintech ecosystem in Nigeria is predominantly comprised of businesses focused on payment and lending solutions, digital banking, merchant banking, personal finance management, and planning. It has often been argued that the financial technology industry is a product of Nigeria’s embrace of the cashless policy.

With a population of 200 million people, Nigeria has experienced a surge of start-ups delving into the Fintech ecosystem delivering products and services that make financial services more accessible and relatable.

The Nigeria Inter-Bank Settlement System (NIBSS), reported that over NGN241.7trn was the transaction value of instant payments between January and November 2021. This is a significant increase from previous years and a pointer to the fact that the Fintech industry has impacted significantly our economy.

Indigenous Fintech start-ups such as Flutterwave, Opay, and Andela have attained unicorn status having been valued at over a billion dollars, while Fintech companies like Opay and Paga are constantly bridging the unemployment gaps through their agency banking models that indirectly provide jobs for half a million people across the country.

As commendable and fascinating as the above may seem, Nigeria still does not have enough Fintech companies to match its growing and consuming population compared to other jurisdictions.

The implication of this gap is simple; the future of our Fintech ecosystem is promising and as it grows, it will continue to be financially rewarding for those who seek to invest in it. However, this viability brings with it increased exposure and the heightened importance of regulation and compliance stipulations.

For starters, the preliminary consideration for any start-up that chooses to play in the Fintech space should revolve around an understanding of the statutory and compliance regime. This is important because, alongside its unimpeachable benefits, the growth of Fintech businesses has also created unique risks and challenges that must be addressed decisively by bringing them within the purview of legal regulation and statutory compliance.

Without delving into the adequacy or otherwise of these regulations, let us analyse the statutory framework in place for the regulation of Fintech operations in Nigeria, while highlighting the need for start-ups to understand them before venturing into the Fintech space.

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The starting point when discussing Fintech regulation is the Central Bank of Nigeria (CBN) the statutory body legally empowered through The Banks and Other Financial Institutions Act (BOFIA) 2020 to regulate the financial services sector, mitigate consumer risk and ensure a clean financial system in Nigeria. It is within this scope that the apex bank brings the Fintech ecosystem into its regulatory domain.

Before 2020 when the BOFIA 2020 was enacted, there was no clear statutory provision for the regulation of Fintechs, and the CBN had to rely on its guidelines and oversight functions over businesses termed as “Other Financial Institutions” (OFIs) to provide some semblance of licensing and regulation for Fintech businesses. However, with the advent of the 2020 Act, the CBN has been explicitly empowered as the sole licensing authority for Fintech businesses in Nigeria as well as empowered as the predominant supervisory authority over Fintech businesses in Nigeria.

Section 57 (1) of the Act prohibits any person from carrying on specialized banking or business of an OFI except it is a company duly incorporated in Nigeria and holds a valid license obtained from the CBN.

The act also defines other financial institutions (OFIs) in section 131 as: “… means any individual, body, association or group of persons; whether corporate or unincorporated other than the banks licensed under this Act, which carry on the business of a discount house, bureau de change, finance company, money brokerage, authorized buying of foreign exchange, International Money Transfer Services, mortgage refinance company, mortgage guarantee company, financial holding company or payment service providers regardless of whether such businesses are conducted digitally, virtually or electronically only and companies whose objects include factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, local purchases order financing, and such other business as the Bank may from time to time, designate regardless of whether such businesses are conducted digitally, virtually or electronically only.”

The implication of the above provision and more importantly BOFIA’s definition of OFIs is that the operations of Fintech businesses in Nigeria are now governed by an Act and regulated by the CBN. Fintech companies are therefore classified as a category of financial institutions and are obligated to obtain the relevant license from the Central Bank of Nigeria before they commence business. CBN has also stipulated specific share capital requirement for each category of Fintech operating in Nigeria and are equipped to make regulations that bind Fintech operations in Nigeria.

•Other regulatory considerations
Asides from the BOFIA that vests CBN with the primary regulatory oversight over Fintechs in Nigeria, there is no other specific authority established to regulate Fintech services in Nigeria. This implication of this is that additional Fintech regulations would largely depend on the services these companies seek to provide to the public.

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While CBN issues licenses and prescribes guidelines that regulate financial institutions, some other regulatory bodies also provide some tailored measures of oversight over Fintech companies in Nigeria.

These include:
•The Corporate Affairs Commission (CAC) provides legal registration and incorporation oversight over all companies including Fintech companies and they ensure that these companies meet the legal threshold for incorporation.
•The National Communication Commission (NCC) is vested with the power to regulate the telecommunications industry in Nigeria. Fintech companies that provide services that involve the use of mobile networks or mobile phones are under the supervisory oversight of the NCC subject to NCC’s regulatory purview and must obtain operating licences from the NCC.
•The Nigerian Deposit Insurance Corporation (NDIC) is empowered to regulate Fintech to ensure optimal mitigation of risks and protection of consumer deposits.
•The Securities and Exchange Commission (SEC) has the power to license and regulate the marketing of securities under the Investment and Securities Act and Fintech companies who intend to raise capital from the capital market or the public come under the regulatory control of SEC.
•The National Information Technology Development Agency (NITDA) is responsible for enforcing data protection, ensuring data privacy, and the safety of consumer data.
•The Federal Competition and Consumer Protection Commission (FCCPC) regulates competition to prohibit anti-competitive practices.
•The National Office of Technology and Acquisition Promotion (NOTAP) regulates technology transfer agreements.
•The Federal Inland Revenue Service (FIRS) regulates company tax and certain key remittances like Value Added Tax (VAT) and Stamp duties.

•Conclusion

The Fintech industry in Nigeria continues to grow and its evolution would naturally lead to the review of the different regulatory frameworks that presently subsist. At all times, the predominant consideration should be the need to position Nigerian Fintech companies to be attuned to contemporary realities and international best practice while ensuring ease of doing business and investor and consumer confidence.

To achieve the above, it is important to ensure that regulations and compliance stipulations do not constitute blocking points thereby becoming tools for stifling the creativity and innovative nature of Fintech start-ups. This is where the Start-up Bill is considered a welcome development as it seeks not just to provide an enabling business environment for start-ups but more importantly, as an Act, it will enable the pragmatic interaction between Fintech businesses and the bodies that regulate them while also creating an enabling environment for these businesses to understand the regulations that bind them, the intent and implication of these regulations and how they impact on their plans for growth and expansion.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at [email protected]

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