Fintechs in Nigeria now have a lot more on their “compliance” plate. Between 2020 & 2021, the Central Bank of Nigeria (CBN) made significant changes to the legal and regulatory framework around the establishment and operation of Fintech companies in Nigeria. While a wave of reactions have trailed the recent changes by the CBN, we think it is equally important to pay some attention to the regulatory priorities of the CBN and not to view the changes solely from the point of view of a “crackdown” by the CBN on Fintechs. Nigerian Fintechs have, no doubt, evolved to become systemically important stakeholders in Nigeria’s financial system. It is therefore prudent, in our view, for the CBN, being the entity primarily responsible for monetary policy and banking supervision, to bring Fintechs under its regulatory purview and to take steps to clarify the regulatory framework for Fintechs. If you do a review of the changes, you would also find that the CBN is also increasingly concerned about the activities of Fintechs and wants to be sure that Fintechs in Nigeria have adequate capital base and are operating in a manner that protects and prioritises the welfare of customers and the general public. In our view, the level of certainty and predictability which these changes deliver, provides the much-needed direction for the Fintech industry and is great for Fintech investments, in general. For venture capital investors, this means that, more than previously, a thorough legal and regulatory due diligence is now more important for tech companies, especially Fintech firms. We fully expect investors to drive and encourage compliance in their respective portfolio companies.
Here is a quick summary of some of those key changes
1. Banking Business
Fintechs in Nigeria, that conduct “banking business” are required to obtain a banking license to operate in Nigeria. Banking business is defined primary in terms of acceptance of deposits and Fintechs would be deemed to conducting banking business if they (a) accept or solicit deposits from the general public through any means including, electronically (b) not being a public solicitation, receive fixed amounts of money as deposits, with a promise to repay interest, dividend, profit or fees, at specified intervals.
2. Fintechs now Financial Institutions
Fintechs that provide payment services, investment management services, international remittance companies, lending, factoring services, purchase order financing, are now classified as a type of financial institution and must obtain the relevant license from the CBN before they commence business. Fintech companies that are already in existence as of November 2020,( the date, the law became effective) were given a deadline of February 2021 to regularise and obtain licensing. As part of the changes, the CBN has also now specified the share capital requirement for each category of Fintech operating in Nigeria
3. A Fintech’s Business Name or Trademark must be Compliant
A Fintech cannot use the word “Bank” or any of the derivatives of the word “Bank”,( in English or in any other language) as part of its legal/business name, except that Fintech is licensed by the CBN as a bank. This means Fintechs that have the word “bank” as part of their legal name run the risk of regulatory action. In our view, the continued use of business names such as “Bankify”, “bankme” “youbank”, is a potential compliance risk.
4. Banking Supervision
Like banks, Fintechs are now subject to routine, special and target examinations of the CBN, if the Governor of the CBN considers same necessary in the interest of the public. The CBN may also sack and replace the directors and management of any Fintech company and transfer any part of a Fintech’s business to a third party buyer. However, these powers can only be exercised by the CBN where the CBN is satisfied that a Fintech is in a grave financial situation.
5. Power to Freeze Bank Accounts
If the Governor of the CBN reasonably believes that transactions conducted in an account domiciled in a Fintech ( or any bank) are such as may may involve the commission of a criminal offence under any law, the CBN governor can make an ex-parte application for an order of the Federal High Court to freeze such accounts. Such application must be supported by an affidavit showing the reasons for the Governor’s belief. This means that the powers of the CBN Governor is not without limit and courts are mandated by law to conduct a reasonability check on account “freezing” decisions of the CBN Governor.
6. Adherence to Monetary Policy Directives
Fintechs in Nigeria must now comply with monetary policy directives and guidelines of the CBN, file standard returns and keep proper books of account and policies. Directors, shareholders & officers of Fintechs who fail to comply with this requirement, are deemed to have committed an offence and liable to fines and imprisonment.
7. Annual Contribution to the Banking Sector Resolution Fund
Fintechs in Nigeria now have an obligation to contribute an annual levy in an amount equivalent to 10 basis points of their total assets, as of the date of their audited financial statements, for the immediately preceding financial year on or before April 30th every year. This levy is to be paid into a resolution fund to be domiciled at the CBN and is tax deductible. The resolution fund is essentially an emergency fund which the CBN can call upon to support failing or distressed banks or Fintechs. It is useful to note that banks & fintechs that fail to make this contribution are prohibited by law from paying any dividends or other similar distribution to shareholders and also prohibited from paying bonuses to any director or employee until the levy has been paid.
8. Payment Service Holding Companies
Payment companies operating in more than one license category are now required to establish payment service holding companies (PSHC). Such PSHC would be a non-operating parent company and would be licensed by the CBN for that purpose.
9. Approval for Strategic Partnerships
Strategic partnerships between payment service providers and banks and other financial institutions must now be pre-approved by the CBN.
10. The Prosecutory powers of the CBN
With the new changes, there is now a clear legal basis to prosecute, fine & imprison founders of fintechs in Nigeria, who carry on business as a Fintech, without obtaining the relevant licenses or in breach of applicable central banking regulations. Penalties range from imprisonment, to fines and possibly, a takeover.
For comments, clarifications or feedback on this topic, please reach out to your usual Balogun Harold contact or via support@balogunharold.com
