Nigeria’s Central Bank (CBN) has finalised plans to introduce a regulatory sandbox for Financial Technology companies (Fintechs) in Nigeria. With the newly proposed Fintech sandbox (CBN Fintech Sandbox/Sandbox), qualifying Fintech companies will be able to apply to be accepted into a yearly cohort-structured Sandbox. The CBN hopes that the Sandbox will help to facilitate innovation, protect customers, promote competition and reduce time-to-market for Fintech products.
We have reviewed the proposed regulatory framework for the CBN Sandbox operations (Sandbox Regulations) and now share a high-level summary. Here are a few things that you need to know now if you are investing in Fintech.
- It is Still a Draft Regulation
An exposure draft of the Sandbox Regulations was issued on June 23rd, 2020 calling for industry to submit comments. If you have proposals for the CBN on this topic, please send such ideas directly to sandbox@cbn.gov.ng.
2. Admission into the CBN Fintech Sandbox is not Automatic
This means that not all Fintech companies/products will qualify for admission into the CBN Fintech Sandbox. To qualify for admission into the Sandbox, a Fintech product/service must have one or more of the following potentials,:
a] to improve accessibility, customer choices, efficiency, security and quality in the provision of financial services;
b] to help financial institutions in Nigeria to management of risks better;
c] to address gaps in or open up new opportunities for financial benefits or investments in the Nigerian economy;
d] An applicant must show that it knows its products and that it understands all the risks that are related to its operations. This is a compulsory requirement;
e] An applicant must have resources and the expertise to match the risks and losses that the testing of its product can create. This is a compulsory requirement;
f] An applicant must have a “realistic” business plan. It appears that the CBN would solely determine what business plans are realistic. We think that this standard very subjective and will be asking the CBN to consider specifying objective standards for determining what Fintech businesses are realistic, especially seeing that the CBN can shutdown a Fintech company on this account;
g] An applicant must be able to identify the risk that its products may cause to financial institutions and to consumers. Applicants must also propose appropriate safeguards for these risks. This is a compulsory requirement;
h] Applicants must be limited liability companies and must also submit a copy of Applicant’s AML/CFT KYC Policy. This is a compulsory requirement.
3. Other types of Businesses Can Apply
CBN Fintech Sandbox will also accept applications from banks, telecoms operators, or other technology companies. The Sandbox will also accept applications from “non-regulated technology” companies. The CBN defines “non-regulated technology companies” as companies who own financial technology not covered under existing CBN regulations. These provisions suggest that the CBN will accept applications from bitcoin or cryptocurrency business. However, this conclusion, would essentially, be a departure from CBN’s earlier prohibition on Nigerian banks from dealing with cryptocurrency businesses. It would be important for the CBN to re-affirm its position on cryptocurrency businesses.
4. Limited Transaction Volumes
One of the risk control mechanisms that the CBN intends to adopt for the CBN Fintech Sandbox is to restrict the operations of applicant Fintech companies to a comfortable transaction price and volume band. Applicants are required to submit reasonable volume and pricing bands for CBN’s approval, during the application process.
5. Tenor
Successful applicants will spend a minimum of 6 (Six) months testing their products in the Sandbox, although extensions may be granted where necessary.
6. You Have to Keep More Records
The CBN would be requesting for a lot more information from Participants. Participants are required to maintain proper records of activities during the testing period. They are also required to submit regular reports of their activities to the CBN.
6. The CBN has Shut Down Powers
The Sandbox Regulations can shutdown a Fintech company at the end of the Tenor where the CBN takes the view that the product will harm the financial system. It is important for applicants to bear this possibility in mind because the language of the Sandbox Regulations suggest that the CBN will solely determine what amounts to “harm” in all situations.
We are a Fintech Start-up. Should We Apply to the CBN Fintech Sandbox?
Here are a few reasons, you should consider:
- If you are not clear on the applicability of CBN’s existing regulations to your Fintech product
- If there is no CBN regulation that applies to your Fintech product because of its innovative/breakthrough nature. This is often the case in the local tech sector
- If there are regulations, but these existing regulations don’t make sense anymore and you can prove that
- If there are regulations, but these existing regulations are unclear or bear regulatory burdens that are “anti-innovation”
- If you can cut transaction costs to the barest minimum or provide more convenience or financial access to consumers
- If the existing framework is overly stringent and there is a justifiable need to ease the existing regulatory requirements
- If you are looking to raise money for your Fintech, you could use the Fintech Sandbox as a tool to derisk your company
- If you need access to the APIs of a financial institution and you have not been able to get it
In applying, Fintechs need to recognise that applying to the CBN Fintech Sandbox is a strategic decision. Fintechs are advised to have a clear sense of what they want to achieve with the CBN Sandbox as there could be strategic benefits for fintech companies and their investors. For Fintech companies that have raised angel or venture capital investments, this kind of “Sandbox” application would require board approval. Investors may also require a Full Disclosure opinion before approving this kind of corporate decision. We fully expect that the CBN would make provisions for data privacy protection in the Sandbox Regulations and also enable a framework that would drive open banking initiatives and allow seamless access to Bank APIs, as is reasonably possible.
For board-level Full Disclosure Opinions on regulatory issues and other enquiries, please send us a request here: support@balogunharold.com
