AGENCY BANKING IN NIGERIA; IMPACT OF THE REVISED CENTRAL BANK OF NIGERIA CIRCULAR ON CASH WITHDRAWAL IN NIGERIA

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By Aderonke Alex-Adedipe and Qasim Ogunjimi

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INTRODUCTION

On the 21st of December 2022, the Central Bank of Nigeria (“CBN’) issued a circular titled “Re: Naira Redesigned Policy – Revised Cash Withdrawal Limits” (the “Circular”) which seeks to limit cash withdrawal to a maximum of N500,000 (Five Hundred Thousand Naira) per week for individuals and N5,000,000 (Five Million Naira) per week for companies. The rationale of this policy is to accelerate the cash-less policy of the CBN. With this policy, the CBN intends to stimulate economic growth through the redirection of payments and exchange of value via the Nigerian electronic payment systems. The CBN has indicated that the policy will ultimately improve the effectiveness of the monetary system.

Although, the impact of the circular on the overall financial landscape is apparent, the effect on Agency Banking in Nigeria is more pronounced. This newsletter provides an overview of the circular with the aim of appraising its effect on Agency Banking in Nigeria.

THE CIRCULAR

For the avoidance of prolixity, we have reproduced the part of the circular which is the focus of this newsletter in extenso;

(1) The maximum weekly limit for cash withdrawal across all channels by individuals and corporate organizations shall be N500,000 and N5,000,000 respectively.

(2) In compelling circumstances, where cash withdrawal above the limits in (1) above is required for legitimate purposes, such requests shall be subject to a processing fee of 3% and 5% for individuals and corporate organizations respectively.

The circular was addressed to Deposit Money Banks (DMBs) and other financial institutions, Payment Service Banks (PSBs), Primary Mortgage Banks (PMBs), Microfinance Banks (MFBs), Mobile Money Operators (MMOs) and Agents. Financial institutions are required to implement a withdrawal limit on the amount of cash withdrawable over-the-counter (OTC), via automated teller machines (ATM) and point-of-sale devices (POS) deployed by them. While we recognize the intention of the CBN to improve the effectiveness of the monetary system through this policy, it is imperative to consider its effects on the financial ecosystem, particularly Agency Banking.

THE SIGNIFICANCE OF AGENCY BANKING

Agency Banking is a remote banking model through which a licensed financial institution in Nigeria provides financial services to its customers through a third party (an agent). Agency banking and agent relations in Nigeria are regulated by the Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria (the “Guidelines”). Under the Guidelines, deposit-taking financial institutions and mobile money operators in Nigeria may provide agency banking services as the “principal” through a third party, who acts as an agent of the principal.

In 2021, key findings published by EFInA, a financial sector development organization, in its Access to Financial Services in Nigeria 2020 Survey revealed that more than forty-two million adults live in rural areas of Nigeria and lack access to basic banking services. Clearly, there is a use case for agency banking in Nigeria as evidenced by the growth recorded in recent years. Many financial institutions including banks and licensed financial technology companies now partner with agents all across the country to provide banking services in underserved areas. This penetration has activated access to banking services through a range of channels, including POS terminals, mobile devices, and other digital platforms.

In Nigeria, the Agency Banking model has recorded remarkable success as a strategy to increase financial inclusion. It serves the unbanked and underbanked population, including low-income population, small and medium enterprises, farmers, people living in rural areas and so on who generally rely on cash as their primary exchange of value. Contextually, agency banking allows Amina, who resides in an undeserved village in Gombe State, to have access to banking services like withdrawal, deposit and transfer of money without having to travel several miles to the nearest bank or even owning a bank account.

EFFECT OF THE CIRCULAR ON AGENCY BANKING

As highlighted above, Agency Banking plays a pivotal role in ensuring that financial services are enjoyed by the underbanked and low-income population as the primary means of exchange for persons in this category is cash. It is therefore imperative to examine the effect of the circular on the operation of Agency banking in Nigeria. Whilst it may be premature to quantify the effects of the circular, the following outcomes are reasonably predictable:

(1) The withdrawal limits mean that customers who transact above the limit will incur more charges;

(2) Customers may have to make multiple trips, spread over a longer period of time to withdraw cash without triggering more processing fees;

(3) Adoption levels by customers may drop drastically;

(4) Participants in the Agency Banking sector may begin to record lesser revenues due to lower adoption;

(5) Customers may be forced to keep cash in their custody thereby increasing the probability of theft and fraud; and

(6) We may experience reduced investments in companies operating in the Agency Banking sector.

CONCLUSION

The crippling effect of the Circular on Agency Banking is discernable. It is worthy of note however that the CBN indicated in the Circular that it recognizes the vital role that cash plays in supporting underserved and rural communities and that it will ensure an inclusive approach as it implements the transition to a more cash-less society. In view of this, it is expected that there may potentially be flexibility in the implementation of the circular to accommodate the needs of those in the underserved areas.

REGULATORY UPDATE: CBN GUIDANCE ON ULTIMATE BENEFICIAL OWNERSHIP OF LEGAL PERSONS

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By Seun Timi-Koleolu and Sharon Okpo

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Introduction

The Central Bank of Nigeria (“CBN”) in 2022 issued the CBN (Anti-Money Laundering, Combating the Financing of Terrorism and Countering Proliferation Financing of Weapons of Mass Destruction in Financial Institutions) Regulations, 2022 (the “Regulations”). The Regulations which were directed to banks and other financial institutions required them to understand the structure of legal persons and legal arrangements; and to implement customer due diligence measures to mitigate the risk of money laundering, financing terrorism, and financing of weapons of mass destruction.
Building on this, the CBN has now issued the Guidance on Ultimate Beneficial Ownership of Legal Persona and Legal Arrangements (the “Guidelines”) with the main objective of assisting banks and other financial institutions in identifying and verifying the beneficial owners of legal entities and legal arrangements. We believe this was necessitated following the imminent threat of Nigeria being grey-listed for not properly combating money laundering and terrorist financing. The Guidelines is a response to the demand by the Financial Action Task Force1 (FATF) that countries “ensure that adequate, accurate and timely information on beneficial ownership is made accessible to check corporate vehicles from being abused in the financial system”.

In this article, we have set out some of the salient points contained in the Guidelines.

1. Who does the Guidelines Apply to?

The Guidelines apply to financial institutions (“FIs”) under the purview of the CBN.

2. Who is a Beneficial Owner under the Guidelines?

Under the Guidelines, a beneficial owner (“BO”) is an individual who owns or has effective control over a customer (that is, the legal entity seeking to initiate a transaction with any financial institution), and/or the individual on whose behalf the transaction is being conducted. The Guidelines further points out that in line with the FATF, consideration should be given to those individuals “who have ultimate (actual) ownership and effective control over the corporate vehicle, not necessarily the legal owner not necessarily the legal owner”.
In determining who a beneficial owner is, FIs are expected to rely on the following:

  1. the customer’s (company) incorporation documents, minutes of meetings, resolutions, partnership agreements, annual returns/financial statements, and bye-laws;
  2. BO information obtained from a public register e.g. the Corporate Affairs Commission; and
  3. an understanding of the customer’s corporate governance and management structure.

FIs are also required to pay attention to relevant relationships within the company which includes senior management, authorized signatories, nominee directors, partners, trustees and beneficiaries, persons having power of attorney over the entity, etc. It is also important to state at this point that the fact that a person is acting in a transaction or in any way on behalf of, or as a representative of the company, does not mean that such person has control over the affairs of the company.

3. How is a Beneficial Owner Identified and Verified?

The Guidelines provide a three-step cascade approach that should be adopted by FIs in identifying and verifying legal entities:

  1. identify and verify the natural persons (if any) that have ultimate controlling ownership interest in a legal person;
  2. where there are no natural persons controlling the legal entity through ownership interest, or there is a doubt as to who has controlling ownership interests, then the FI shall identify and verify natural persons (if any) who exercise control of the legal entity indirectly;
  3. where no such natural person is identified, then the FI shall identify and take reasonable measures to verify those who occupy senior management positions in the legal entity.

Where it is a legal arrangement, the FI shall identify and verify the identity of the settlor, trustee, protector (if any), the beneficiaries, and any other natural person exercising control over such legal arrangement.

4. What are the Obligations and Responsibilities Imposed on FIs while Identifying and Verifying BOs?

FIs are required to:

  1. adopt a risk-based approach in identifying and verifying BOs. The measures to be taken under this approach should be on the risk-sensitive basis sets out in the FIs AML/CFT/CPF framework;
  2. conduct enhanced customer due diligence for BOs that pose a higher risk, and a report of any suspicious transaction should be filed with the Nigerian Financial Intelligence Unit (NFIU) by the FI where it suspects that there may be money laundering or terrorism financing activities;
  3. put systems in place to determine if a BO is a politically exposed person (PEP) or related to a PEP. Where this exists, the FI must take additional measures to manage the risk, like obtaining senior management approval before establishing or continuing with the customer relationship; establishing the BO’s source of funds and wealth, and conducting enhanced ongoing monitoring of the customer relationship;
  4. maintain a BO register of its customers and endeavor to review and update this register annually or when there are changes;
  5. flag and report any inconsistency or discrepancy between the BO information in the public register and the BO information in their records to the Corporate Affairs Commission;
  6. provide, upon request, such information on BOs to the CBN and other competent authorities as required.

CONCLUSION
With the introduction of this Guideline, Financial institutions are required to go beyond their usual know-your-customer process to ensure it unveils those who ultimately control companies carrying out transactions with it. It is expected that these measures will reduce money laundering and also address the imminent threat of Nigeria being grey-listed.

NIGERIA: FINTECH REGULATORY ROUNDUP 2022

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By Aderonke Alex-Adedipe and Arisoyin Adedolapo

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Introduction

Nigeria is one of the major players in the financial services industry and has consistently experienced rapid growth in the financial technology (“Fintech”) subsector. This has necessitated the development of regulation of the growing sub-sector.

The year 2022 was an eventful year for the Fintech space in Nigeria, and various regulators released legislation and operational guidelines to provide security and protection for consumers who continuously embrace innovation in the ecosystem.

In this article, we highlight some salient regulations issued in 2022 in connection with the Nigerian fintech terrain.

Highlights

1. Cryptocurrency: The Securities and Exchange Commission (“SEC”) issued rules to regulate companies doing crypto-related businesses in Nigeria. This regulation is applicable to companies which issue, trade, and facilitate the exchange, transfer, or sale of digital assets. The regulation of cryptocurrency in Nigeria has been long overdue owing to the growing acceptance of cryptocurrency in Nigeria. We, however, anticipate SEC’s implementation of the Rules and the reception of its implementation. In addition, we anticipate that the implementation of the Rules will provide clarity on how the CBN intends to approach cryptocurrency in the immediate future[1].

2. Open Banking: In May 2022, the CBN published a draft Operational Guidelines for Open Banking in Nigeria (the “Proposed Guidelines”) pursuant to the Framework for Open Banking issued by the CBN in 2021. The Proposed Guidelines provide guidance to participants of the open banking ecosystem (i.e organizations that possess customers’ data which may be exchanged with other entities to provide innovative financial services within Nigeria). Fintechs that provide services leveraging application programme interfaces (i.e APIs) are to ensure that they execute a data access agreement with the service users [2].

3. Contactless Payments: The CBN issued an Exposure Draft of the Guidelines for Contactless Payments in Nigeria (“Draft Guidelines”). The Draft Guidelines sets out a framework for contactless payments transactions in Nigeria and stipulates the minimum standards to be set by stakeholders. It also specifies the roles and responsibilities of stakeholders involved in contactless payments in Nigeria. Stakeholders in contactless payments transactions as highlighted by the Draft Guidelines include: acquirers; issuers; payment schemes; switching companies; Payment Terminal Service Providers; Payment Terminal Service Aggregators amongst others[3].

4. Digital Lending: The Federal Competition and Consumer Protection Commission (FCCPC) issued a compliance guide for digital lenders. This framework stipulated the requirement of registration of digital lenders with the FCCPC to enable such companies carry on business as digital lenders. We believe this is the first of many directives by the FCCPC in a bid to regulate the digital lending space[4].

5. Fundraising for Startups:  In December 2022, SEC approved the Nigerian Exchange Limited’s (the “Exchange”) proposed Rules for Listing on the Technology Board of Nigerian Exchange Limited (“Rules”). The Rules create a platform for technology companies to raise capital. Through this medium, technology companies in Nigeria can raise capital from qualified institutional investors, retail investors, and high-net-worth investors by listing their securities (such as shares) on the Exchange[5].

6. Data Protection: The Nigeria Data Protection Bureau (“NDPB”) in 2022 replaced the National Information Technology Development Agency (NITDA) as the apex regulatory data protection body in Nigeria. The NDPB in October issued a compliance notice to data controllers and processors with a deadline for January 20, 2023, to be included on the NDPB’s whitelist. The notice requires data processors and controllers to develop and implement a privacy policy that is consistent with the NDPR; undergo an audit of their data protection practices; designate one or two persons as its data protection contacts to the NDPB, who will be trained on data protection, amongst other requirements[6].

 

CONCLUSION

The regulations issued in 2022 indicate that Nigeria’s relevant regulators are willing to accommodate new technologies and are keen on ensuring these technologies are met with adequate guidelines for their operations. We look forward to the innovations and interesting developments 2023 has to offer, and the approach of regulators to the demand of these innovations in the Fintech ecosystem.

 

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[1] Please read our article on digital asset regulation here.

[2] Please read more about the Proposed Guidelines here.

[3] Please read our article here.

[4] Read more about it here.

[5] Read more about it in our article here

[6] Read more about it in our article here.

FUNDRAISING OPPORTUNITY FOR NIGERIAN TECHNOLOGY COMPANIES: LISTING ON THE TECHNOLOGY BOARD OF NXG

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Introduction

On December 15, 2022, the Securities and Exchange Commission (“SEC”) approved Nigerian Exchange Limited’s (the “Exchange”) proposed Rules for Listing on the Technology Board of Nigerian Exchange Limited (“Rules”), which creates a platform for technology companies to raise capital by listing their securities (such as shares) on the Exchange. Through the Exchange’s Technology Board (“Technology Board”), indigenous technology companies can raise capital from qualified institutional investors, retail investors, and high-net-worth investors.

We have highlighted in this article the eligibility criteria and other relevant information for technology companies that wish to be listed on the Technology Board.

1. How can Technology Companies be Listed on the Technology Board?

Technology companies that wish to raise capital through the Exchange are required to be listed on either the Start-Up Tech or Big Tech Segment.

To qualify for listing under the Start-Up Tech Segment, the company requires a market capitalization of a minimum of US$1 million and a maximum of US$100 million while the Big Tech Segment requires a market capitalization of over US$100 million to US$1 Billion Dollars at the equivalent Central Bank of Nigeria rate.

2. What are the Eligibility Criteria for Listing under the Start-Up Tech and Big Tech Segments?

To be listed on either of the segments, such technology companies (“Applicants”) must comply with the criteria highlighted below.

a. Type of Company: the Applicant must either be a public company limited by shares or incorporate a Special Purpose Vehicle or holding company which will be the public limited liability company to be listed.

b. Minimum Capitalisation: Applicants are required to possess a minimum market capitalization (valuation) in accordance with 1 above.;

c. Minimum Number of Shareholders: a company applying to be listed on the Start-Up Tech Segment is required to have at least 2 shareholders, while a company applying to be listed on the Big Tech segment is required to have a minimum of 5 shareholders.

d.  Period of Operation: the Applicant is required to have been in operation for a minimum of 12 months before the date of application.

e. Lock-up Period: the promoters or directors of the Applicant must retain a minimum of 50% of their issued shares in the company for a minimum of six months from the date of listing.

f. Minimum Float Requirement: where the Applicant intends to raise capital at the time of listing, a minimum of:

i. 5% (for the Start-Up Tech Segment) or 10% (for the Big Tech Segment) of its issued share capital; or

ii. shares valued at USD 50,000 (for the Start-Up Tech Segment) or USD5,000,000 (for the Big Tech Segment) at the prevailing Central Bank of Nigeria exchange rate,

must be reserved for the public.

3.Can a Company Listed on the Technology Board Move from One Segment to Another?

Yes, companies listed on the Technology Board are permitted to move from one segment to the other provided that they meet the relevant eligibility criteria

4. What are the Reporting Requirements for Companies Listed on the Technology Board?

To remain listed on the Technology Board, a listed company is required to:

a. file its quarterly accounts with the Exchange;

b. submit its audited annual financial reports and statements to the Exchange;

c. maintain the minimum float requirement of the relevant segment;

d. maintain the minimum corporate governance standards as prescribed by the Exchange; and

e. comply with other listing obligations as are required by the Exchange.

 

Conclusion

The creation of a specialized board on the Exchange for technology companies is truly commendable as it provides an avenue for the provision of visibility and the creation of fundraising opportunities for technology companies in Nigeria.