Securities and Exchange Commission’s Regulatory Incubation Program for FinTechs in Nigeria

/in /by

By Seun Timi-Koleolu and Praise Adetunmibi

DOWNLOAD PUBLICATION

Introduction

In April 2021, the Nigerian Securities and Exchange Commission (“SEC”) issued a directive prohibiting unregistered Financial Technology (“Fintech”) companies from offering, selling or dealing in foreign listed securities[1]. This directive raised concerns that SEC might be stifling the development of innovation in Nigeria.

Recently, SEC has taken some positive steps that should address these concerns. One of which is the issuance of the first digital stock trading licence to Chaka Technologies Limited; another is the establishment of a Regulatory Incubation Program (“RI Program”) aimed at encouraging innovation by Fintechs within limits that ensure investor protection.

In this article, we examine the scope of the RI program, eligibility requirements for Fintechs and the stages of the RI Program.

What is the RI Program?

The RI Program is a program established by SEC to enable Fintech innovators (whose activities may or may not be subject to existing regulations) to carry out capital market activities for a limited period of time without prior registration with SEC. It is the SEC’s version of a sandbox.

The RI Program creates an avenue for SEC to guide Fintech innovators on regulatory approvals to be obtained upon completion of the RI Program.

What is the duration of the RI Program?

The RI Program will be launched in the third quarter of 2021 and will admit eligible Fintech businesses in cohorts for a period of 1 (one) year. The commencement date for each cohort would be communicated by SEC  to the entities belonging to that cohort, prior to the take-off date of the RI  Program.

Who is eligible to participate in the RI Program?

To be eligible to participate in the RI Program, applicants are required to satisfy certain conditions which include:

  1. using innovative technology to offer a new type of product or service, or applying innovation to an existing financial product or service;
  2. readiness to take off with live customers and operate within the purview of the SEC regulatory framework;
  3. offering a product or service that addresses a problem (compliance or supervision) or brings potential benefits to its consumers or the Nigerian capital market;
  4. ensuring that the product is safe for investors; and
  5. capacity to onboard a maximum of 100 clients. Where the entity is already in existence, it is to maintain its existing clients and not onboard new ones during the program.

What are the stages of the RI Program?

Participation in the RI Program involves the 2 (two) broad stages highlighted below.

 a. The Initial Assessment Phase

At this stage, the applicant is required to fill and submit a Fintech Initial Assessment form. Upon submission, SEC would carry out an assessment of the proposed product or service to determine whether it falls under the purview of an existing regulatory framework. Where a framework exists which regulates the product or service, SEC provides guidance to the applicant on steps to be taken to comply with the regulatory framework. On the other hand, where there is no regulatory framework for the product or service, but the product or service is regarded as eligible for further consideration by SEC, the applicant would be directed to fill and submit the Regulatory Incubation form in order to move to the Regulatory Incubation phase.

b.  The Regulatory Incubation Phase

This stage commences with the issuance of a letter admitting an applicant to the RI Program. During the period of the program, the entity would receive quarterly feedback from the RI team on its product or service. By the 10th (tenth) month, SEC would provide the entity with guidance on regulatory requirements applicable to its product or service. Upon the completion of the RI Program, the entity is required to fully commence operations as an entity registered with SEC using the guidance provided during the RI Program; or to terminate its activities where the registration requirements issued by SEC for the relevant product or service are not complied with.

Conclusion

The recent actions of the Central Bank of Nigeria (“CBN”) in establishing the Regulatory Sandbox Operations Framework[2]  and SEC in introducing the RI Program, shows a willingness by the apex regulators of the financial sector in Nigeria to encourage Fintech innovation. The effectiveness of these programs would, however, largely depend on how well they are implemented by these regulators.

[1] https://pavestoneslegal.com/trading-of-foreign-listed-securities-in-nigeria-regulatory-update/

[2] Click on https://pavestoneslegal.com/the-central-bank-of-nigerias-regulatory-sandbox-operations-framework/ to read our article on CBN”s Regulatory Sandbox Operations Framework.

 

FINTECH REGULATION IN NIGERIA; NON-BANK MERCHANT ACQUIRERS

/in /by

By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

DOWNLOAD PUBLICATION

Introduction

On the 25th May 2021, the Central Bank of Nigeria (CBN) issued a circular to financial institutions notifying them of the release of the Regulatory Framework for Non-Bank Acquiring in Nigeria (the “Framework”). The Framework identifies companies that can be licensed to carry out acquiring activities as well as the requirements for obtaining CBN approval. It also sets out the minimum standard of operations for Non-Bank Acquiring in Nigeria.

The Framework is designed to complement the CBN Guidelines on Operations of Electronic Payment Channels in Nigeria (Guidelines) as the roles of participants in the provision of non-bank acquiring services are prescribed in the Guidelines. This article describes in summary, requirements for non-bank merchant acquiring as well as the Framework’s requirements for the approval of companies to conduct non-bank merchant acquiring activities in Nigeria.

Who is a Merchant Acquirer?

A Merchant Acquirer is an institution responsible for processing and settling credit and debit card transactions on behalf of a merchant or a business. Merchant Acquirers play an integral role in electronic payment transactions processing as they enable merchants to accept card payments by acting as a link between merchants and card schemes such as Visa, Verve, MasterCard e.t.c. Merchant Acquirers typically perform functions such as transactions authorization, processing and settlement of electronic payment transactions.

Who can perform Non- Bank Acquiring Services?

The Framework permits only companies operating with Switching and Processing Licenses issued by the CBN or any other company as approved by the CBN to carry out merchant acquiring services on behalf of merchants. Non-Bank Merchant Acquirers are also required to execute agreements with their proposed merchants and payment schemes whose transactions they wish to acquire, prior to commencement of business.

What are the Requirements for Regulatory Approval of Non-Bank Merchant Acquirers?

To obtain approval from the CBN to carry out non-bank merchant acquiring services, an applicant must submit the following to the CBN.
i. Evidence of engagement with a card scheme;
ii. Evidence of due diligence and merchant onboarding process;
iii. A merchant risk monitoring framework;
iv. A sponsorship letter from a settlement bank;
v. A draft Merchant Agreement;
vi. Details of its settlement arrangements;
vii. Service Level Agreement with a settlement bank;
viii. A Business Continuity Plan; and
ix. Any other documents required by the CBN.

In addition, the CBN is empowered to terminate the Non-Bank Acquirer’s approval in any of the following instances (i) upon failure of the company to meet the conditions for the renewal of its operating license as a switching and processing company (ii) termination of its agreement with payment schemes; (iii) inability to maintain its relationship with at least 2 payment schemes; (iv) operational failure leading to significant losses or fraud; and (v) other reasons as may be determined by the CBN from time to time.

What are the Settlement Arrangement Obligations of Non-Bank Merchant Acquirers?

The Framework expressly precludes Non-Bank Acquirers from directly accessing or holding merchant’s funds whether from or for settlement reversals or any other reason. Non-Bank Acquirers are required to stipulate their responsibilities to merchants with respect to the security and settlement of transaction amounts to merchants’ accounts. They are also required to ensure that merchants’ accounts are credited in respect of acquired transactions, as agreed in executed Service Level Agreements (SLAs). Non-Bank Acquirers are also required to comply with respective card scheme rules in the performance of their obligations.

Please note that Non-Bank Acquirers are required to comply with all applicable security standards and are to ensure that all merchants who store, transmit and use sensitive card data are Payment Card Industry Data Security Standard (PCI DSS) certified. Also, Non-Bank Acquirers are prohibited from acquiring transactions of merchants that are not registered in Nigeria.

Conclusion
The introduction of the Framework that regulates Non-Bank Acquirers is a commendable effort by the CBN to facilitate the development of electronic payment systems in Nigeria. It is expected that this framework will ensure the protection of merchants and help to guarantee secure and seamless electronic payment transactions in Nigeria.

 

 

INTRODUCTION OF SOCIAL BONDS IN NIGERIA: PROPOSED SEC RULE

/in /by

By Seun Timi-Koleolu and Baraebibai L. Ekpebu

DOWNLOAD PUBLICATION

Introduction

For a nation seeking emancipation from the long-time classification of “Third-World Country”, it is important that we not only intensify our focus on infrastructural development but also devise innovative means of ensuring that our social problems are addressed promptly.

The Securities and Exchange Commission (SEC), on the 7th of June 2021, published its “Proposed New Rule on Social Bonds–June 4, 2021.” (the “Rule”). Social bonds are a relatively new type of financial security that creates funding for public sector projects primarily aimed at achieving better social outcomes within the society.
Since the first social impact bond in 2010 by a UK-based Social Finance company, Social Bonds have continued to grow in their application and utility globally and with the proposed Rules, will soon be introduced to the Nigerian capital market.
We have set out below, some key provisions in the proposed Rule and made recommendations for its practical application in Nigeria.

What is a Social Bond?

It is a type of debt instrument, where the proceeds would be exclusively applied to finance or refinance new and/or existing eligible projects with clear and identifiable social objective(s) and which are dedicated to an identified population.”

Who is to issue a Social Bond under the Rule?

Though not explicitly mentioned in the proposed Rule, the public sector would typically issue Social Bonds, however, nothing precludes private sector organisations from issuing them.

How is a Social Bond issued under the Rule?

SEC General Rules and Regulations for debt issuance are to be followed for the issuance of a Social Bond. In addition, certain other conditions are required to be satisfied for approval including; (i). A letter committing to invest proceeds for the bond in social projects; and (ii). Feasibility stating the benefits of the project.

What are the eligible Social Projects under the Rule?

These include (i) Affordable basic infrastructure; (ii) Access to basic services; (iii) Affordable housing; (iv) Job creation including through the potential effect of small and medium-sized enterprises; (v) financing and microfinance; (vi) food security; and any other social project as may be approved by the SEC from time to time.”

Who is the target population for Social Projects?

Social Projects should be dedicated to one or more of the following identified target populations: (i). people living below the poverty line; (ii). excluded and/or marginalised populations and/or communities; (iii). vulnerable groups; (iv). people with disabilities; (v). migrants and/or displaced persons; (vi). undereducated population; and (vii). underserved population, due to lack of access to essential goods and services and (viii) unemployed persons.

How are proceeds to be utilized?

Proceeds of Social Bonds are to be used solely for purposes set out in the offer document and domiciled with a custodian in an escrow account. Unallocated proceeds are to be invested by trustees in the money market instruments aimed at positive social outcomes but not exclusively for the target population.

Conclusion

Social Bonds are a great opportunity for private and public sector partnership, and this is particularly welcome in Nigeria to deal with social issues which have been a barrier to economic development. For the proposed Rule to however have the intended impact, it would need to be improved upon to clarify ambiguities, for instance, the Rule does not state; (i). what sort of returns are to be received by investors; and (ii) Rule 4 (d) despite stating how unallocated proceeds will be invested in the money market, does not state who would benefit from the returns on the investment.

Lastly, foreign models sometimes do not apply locally. The practicality of implementing Social Bonds in Nigeria requires that they be modeled to add value to the Nigerian social fabric, and also yield profits for investors (as an incentive for such investments). One way to achieve this is by the issuance of Social Bonds that create jobs and at the same time generate revenue for investors and the government alike. For example, Social Projects that are tied to the agricultural sector.

ESTABLISHING A FINANCE COMPANY IN NIGERIA

/in /by

By Aderonke Alex-Adedipe and Praise Adetunmibi

DOWNLOAD PUBLICATION

Introduction

Micro, Small and Medium Enterprises (MSMEs) play a significant role in the development of the economy of many countries. According to the World Bank[1], MSMEs represent about 90% of businesses worldwide. The growth of MSMEs in many countries, however, is often stifled by limited access to finance, as financial institutions are less likely to provide funding to MSMEs due to the high-risk nature of their businesses.

In Nigeria, the finance company licence was established by the Central Bank of Nigeria (“CBN”) to focus on meeting the financial needs of MSMEs. The CBN regulates finance companies through its Revised Guidelines for Finance Companies in Nigeria (the “Guidelines”) issued in 2014.

In this article, we examine the procedure for acquiring a finance company licence under the Guidelines.

What is a Finance Company?

A finance company is a company licensed by the CBN to provide financial services to individual consumers, and industrial, commercial or agricultural enterprises. These services include providing consumer loans, funds management, asset finance, project finance, local and international trade finance, debt factoring, debt securitization, debt administration, financial consultancy, loan syndication, warehouse receipt finance, covered bonds and issuing vouchers, coupons, cards and token stamps.

It is important to note that finance companies in Nigeria are required to operate on a “stand alone” basis. Therefore, unlike other financial institutions, the Guidelines specifically preclude finance companies from rendering services such as deposit-taking, stockbroking, foreign exchange transactions and non-financial activities including trading, construction and project management.

What is the procedure for the acquisition of a Finance Company Licence in Nigeria?

The procedure for the acquisition of a finance company licence is in two stages as summarised below;

Stage 1

An application for the acquisition of a finance company licence is made in writing to the CBN accompanied by the following documents:

  1. a non-refundable application fee of N100,000 (One Hundred Thousand Naira) payable to the CBN;
  2. deposit of the minimum capital of N100,000,000 (One Hundred Million Naira) with the CBN;
  3. evidence of payment of the minimum capital of N100,000,000 (One Hundred Million Naira by the proposed shareholders;
  4. a detailed business plan/feasibility study;
  5. a copy of the draft memorandum and articles of association of the finance company;
  6. a copy of the letter of intent to subscribe to the company signed by each subscriber;
  7. a copy of the list of proposed shareholders in tabular form showing their businesses, residential addresses and the names and addresses of their bankers;
  8. a signed and dated curriculum vitae of the proposed directors of the finance company;
  9. a copy of the draft manual of operations such as the enterprise management framework, credit policy etc.

Upon submission of the above, the CBN may, where satisfied, grant an Approval in Principle. It is only after the approval is granted that the finance company can be incorporated at the Corporate Affairs Commission (CAC).

Stage 2

Upon incorporation at the CAC and prior to commencement of business, the finance company is required to submit the following documents to the CBN.

  1. A certified true copy of the certificate of incorporation and other incorporation documents of the finance company.
  2. A copy of the shareholders’ register in which the equity interest of each shareholder is properly reflected (together with the original for sighting) and a copy of the share certificate issued to each shareholder.
  3. A copy of the opening statement of affairs audited by an approved firm of accountants practising in Nigeria.
  4. A copy of the letters of offer and acceptance of employment by each management staff and a written confirmation that the management team approved by the CBN has been put in place.
  5. A letter of undertaking to comply with all the rules and regulations guiding the operations of finance companies.
  6. Evidence of registration with the Finance Company’s association umbrella body.
  7. Evidence of payment of licensing fee of N250,000 (Two Hundred and Fifty Thousand Naira).

Upon receipt of the above, the CBN will conduct a physical inspection on the premises of the finance company and where it is satisfied that all requirements have been fulfilled, a finance company licence may be issued.

Conclusion

Companies interested in providing financial services to individual consumers and MSMEs involved in agricultural, industrial or commercial businesses on a large scale may obtain a finance company licence provided that the services they seek to provide conform with the provisions of the Guidelines.

[1] https://www.worldbank.org/en/topic/smefinance