ACCESS TO FOREIGN EXCHANGE IN NIGERIA FOR IMPORTED GOODS- REVERSAL OF BAN

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BY SEUN TIMI-KOLEOLU AND QASIM OGUNJIMI

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Introduction

“Importers of all the 43 items previously restricted by the 2015 Circular referenced TED/FEM/FPC/GEN/01/010 and its addendums are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market.” –

CBN Press Release

In its pursuit of bolstering liquidity and stability within the foreign exchange (“Forex“) market, the Central Bank of Nigeria (CBN), on October 12, 2023, released a press statement. A prominent feature of this press statement is the decision of the CBN to lift the Forex restrictions on 43 commodities that had previously been barred from accessing foreign exchange via official channels. In this newsletter, we seek to answer questions that will aid your understanding of the implications of this policy shift.

Q1: Why did the CBN previously place Forex restrictions on the 43 items?

A: These restrictions were previously implemented by the CBN with the aim of reducing the demand for foreign exchange for products that could be produced locally. This policy was driven by the goals of boosting employment opportunities, promoting domestic production, and conserving foreign reserves.

The restricted items included a range of products such as Rice, Cement, Margarine, Palm kernel, Palm oil products, Vegetable oils, Meat and processed meat products, Vegetables and processed vegetable products, Poultry and processed poultry products, Private Airplanes/Jets, Indian Incense, Tinned fish in sauce (Geisha)/sardine, Cold rolled steel sheets, Galvanized steel sheets, Wheelbarrows, Head pans, and more.

It is worthy of note that this previous forex restriction was not an outright import ban on these items. The restriction was2 limited to buying Forex in the official market to import these items.

Q2: Why did the CBN lift the forex restriction?

A: As stated in the press statement, the primary aim of this policy shift is to bolster liquidity and stability within the foreign exchange market. The initial restriction forced importers to turn to the parallel market, resulting in surplus demand for Forex. This, in turn, had the effect of weakening the parallel-market exchange rate, ultimately leading to upward price pressures.

Q3: What are some of the implications of the lifting of the previous ban on the 43 items2?

A: With the restriction lifted, importers, especially those dealing with the 43 listed items, can now access foreign exchange more freely, which can boost Forex flexibility and liquidity. They can also take advantage of differences in exchange rates between the parallel and official Forex market. Furthermore, foreign manufacturers have an opportunity to appoint exclusive brand distributors or engage in local manufacturing and assembly outsourcing. This shift could lead to new business prospects and potential collaborations, attracting foreign capital.

Q4: What criticisms have been raised regarding the policy shift?

A: Some experts have criticized the policy, arguing that it has contributed to higher prices for imported food items and food inflation. They also express concerns that the policy may harm Nigeria’s manufacturing sector by promoting the importation of goods that could be manufactured domestically.

Q5: What strategies can businesses adopt to navigate the Forex market’s volatility and policy shifts?

A: Businesses can consider strategies like maintaining a cash reserve, using hedging instruments to manage exchange rate risk, adopting dynamic business planning and scenario management, and staying informed about regulatory changes issued by the CBN.

CONCLUSION

In conclusion, the recent policy shift by the Central Bank of Nigeria to lift Forex restrictions on 43 previously prohibited items ushers in a transformative period in the country’s foreign exchange market. While offering new opportunities for businesses and investors, it also presents some challenges. For businesses that rely on forex, it would be helpful to explore the strategies in Q5.

INTELLECTUAL PROPERTY LICENSING IN NIGERIA

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BY ADERONKE ALEX ADEDIPE AND OLAWALE ATANDA

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Introduction
In the dynamic landscape of intellectual property (IP) law, licensing plays a pivotal role in enabling businesses to leverage their creations for commercial gain. There are several types of IP licensing such as technology licensing, trademark licensing, copyright licensing, and franchising. This article sheds light on their benefits and the crucial considerations IP owners should be aware of in licensing their IP.

1. Copyright Licensing
Copyright ownership prevents third parties from duplicating or copying, distributing copies, performing, showcasing or otherwise publishing the work of the owner, without the owner’s consent, either for financial gain or otherwise . Conversely, copyright owners (licensors) have the right to grant individuals or entities (licensees) the right to use, reproduce, distribute, and display their copyrighted works. In Nigeria, the right of copyright owners is governed by the Copyright Act which provides a framework for creators to protect their original literary, artistic, and musical works.

Copyright licenses can take various forms, including:

a. Sole License – A sole license gives the licensee the sole and exclusive right to use the copyright. This right does not apply to other third parties, however, the licensor is still able to utilize the copyright for its own purposes.
b. Exclusive License – Exclusive licenses bestow upon the licensee the authority to use the copyright, completely excluding all individuals, including the licensor. The difference between a sole and exclusive license is the right of the licensor to utilize the copyright.
c. Non-Exclusive License – Non-exclusive or standard licenses grant the licensee permission to utilize the copyright without imposing any limitations on the rights of the licensor or any other parties. Essentially, this means that the licensor maintains the prerogative to license the work to third parties and also to utilize the licensed rights concurrently. In addition to the above, it is important for a licensor to specify particular uses of the
license due to the expensive scope of a copyright license. For instance, a photographer may license their pictures for artistic transformations or album covers whilst retaining the right to utilize it for magazine features.

2. Trademark Licensing
Trademark licensing is a strategic arrangement where the owner grants permission for others to use their trademark in connection with specific goods or services. In Nigeria, trademarks enjoy protection under the Trademarks Act.

Section 33 of the Trademarks Acts particularly addresses licensing arrangements and outlines the conditions under which a person who is not the original owner of a trademark can be officially recognized as a registered user (or licensee) of that trademark. This recognition can cover all or specific categories of goods for which the trademark is registered, and it may come with certain conditions or restrictions.
Trademark licenses can be categorized into sole, exclusive and non-exclusive licensees (as explained under copyright licensing).

Important Considerations for Trademark Owners
• Quality Control: The trademark owner must maintain quality control over the goods or
services offered under the licensed mark to protect the brand’s integrity.
• Scope of Use: The licensing agreement should clearly define the scope of use,
specifying the products or services covered.

3. Franchising
Franchising combines elements of trademark, copyright, patents, industrial designs, and trade secrets licensing. It involves an arrangement where the owner of the IP rights (franchisor) grants another party (franchisee) the right to use the franchisor’s business model, brand, and support in exchange for fees or royalties.

Benefits of IP Licensing:
• Revenue Generation: Licensing offers a revenue stream for licensors, enabling them to monetize their IP.
• Market Expansion: Licensors can expand the reach of their IP through licensees by leveraging established markets and distribution networks.
• Brand Exposure: For licensors seeking more brand exposure, IP licensing can bring visibility and recognition through the introduction of products or services to new audiences.
• Legal Protections: Licensing agreements typically outline the terms of use and provide legal protection for the IP. This ensures that it is used appropriately and according to the owner’s specifications.
• Easier Market Entry for Startups: Startups can leverage established brands or technologies through licensing, allowing them to gain a competitive edge and reduce the barriers to market entry.

Conclusion
Licensing of IP rights is a powerful tool for creators and businesses alike. In Nigeria, understanding the nuances of copyright, trademark, and franchising licensing is crucial for maximizing the potential of these valuable IP. Through IP licensing, stakeholders can forge mutually beneficial partnerships that drive innovation and commercial success.

UNSECURED LENDING IN NIGERIA: WAYS TO PROTECT AGAINST DEFAULT

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BY SEUN TIMI-KOLEOLU AND SHARON OKPO

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INTRODUCTION

In spite of the rapid growth in the financial sector in Nigeria with various Fintechs providing more accessible and efficient services, the credit system in Nigeria is still very under-developed. Nigeria’s poor credit system adversely affects the growth of the economy and the people’s standard of living.

Credit cards and loans (to a certain value) are made easily available to citizens of many developed countries including Britain and the United States once these citizens have good credit ratings. Nigeria, however, does not have a credit rating system strong enough to: guide lenders on who to grant unsecured loans to; and deter borrowers from defaulting on loans. Notwithstanding this, certain local and international lenders are setting up digital unsecured lending services in Nigeria to solve the credit issue (“Lenders”). They are, however, faced with the challenge of frequent defaults in repayment of loans by borrowers on the one hand; and poor systems in place to recover debts and deter borrowers from defaulting on the other hand.

In view of the foregoing, this newsletter aims to guide digital Lenders and non-digital Lenders offering unsecured loans on steps that can be taken in Nigeria to reduce the defaults and recover the debts more easily.

The following steps may be taken to protect against default:

1. Domiciliation of proceeds– A Lender may request that the borrower should pledge or mortgage his income or funds inflow in its favour, thereby making the Lender the first beneficiary of any cash inflow on such domiciliated account. The cash inflow could be income and sales proceeds from business activities or salaries due to such borrowers from his employment, etc.

In order for this to be effective, the borrower will be required to present an undertaking signed by the source of income (e.g the borrower’s employer or purchaser) to pay in favour of the Lender, to the full amount of the loan granted.

2. Retention of Title– Where the facility is being given for the procurement of goods for use by the borrower, the Lender may retain the title in such goods until such time that the borrower repays the loan facility.

A retention of title clause should be inserted in the loan agreement to preserve the Lender’s ownership rights in the goods, and its priority over other creditors with regard to the goods. This clause will also give the Lender the right to repossess (and resell) the goods upon default in repayment by the borrower. In addition to a retention of title clause, the Lender may go a step further to have its name clearly stated as the owner of the goods on the receipt for the purchase of the goods.

3. Guarantees– Lenders may request that borrowers provide guarantors prior to granting the loan. The guarantor will be required to sign an undertaking, guaranteeing the repayment of the loan amount by the borrower where the borrower defaults on repaying the loan. It is important to ensure that where the guarantee is issued by a corporate entity, such entity is permitted by its articles of association to issue such guarantees and to such value as stated on it.

Prior to granting loans, Lenders may also consider taking the following steps:

1. Alternative Data and Credit Scoring- Lenders can rely on technology and big data analytics, to access a broader range of information beyond traditional credit reports. This includes alternative data sources like utility payments, rent payments, social media activity, education and employment history, information on phone usage, and even online behavior.

2. Proper assessment of the borrower’s credit-worthiness– although they are not prevalent in Nigeria, there are a few credit rating institutions in Nigeria who Lenders can liaise with to ensure easy and quick access to the borrower’s reports when necessary. This will aid the Lender in assessing the borrower’s credit worthiness, and the probability of the loan becoming a delinquent loan.

3. Conducting identity verifications and due diligence- Lenders may also use identity verification tools to confirm certain details provided by the borrower (and Guarantor where applicable), such as name, address, date of birth and other personal information supplied; employment information; existence and location of assets used as security; confirmation of any existing legal encumbrance on assets used as security; etc. Startups such as Prembly provide such verification services.

CONCLUSION

While the above measures and strategies are not failproof in ensuring that all loans facilities are repaid, it would help to reduce the number of delinquent loans recorded by a Lender when properly applied. We also encourage regulators such as the Federal Competition and Consumers Protection Commission (FCCPC) and others to work towards balancing the need to protect the borrowers and a need to protect the interest of Lenders so as to ensure the credit system flourishes in Nigeria.

OPTIMIZING GROWTH: EXPLORING FINANCING OPTIONS AND COMBINING METHODS FOR SME SUCCESS

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BY ADERONKE ALEX-ADEDIPE AND QASIM OGUNJIMI

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INTRODUCTION

Financing is a key tool for the sustainability and growth of any Small and Medium-sized Enterprises (SMEs) and accessing the right kind of financing tailored to the SME’s needs is of vital importance. In today’s competitive business landscape, one size does not fit all when it comes to financial solutions. The key lies in the art of amalgamation—knowing how to blend and tailor various financing methods to suit your specific business needs and aspirations. This newsletter aims to empower SME owners, entrepreneurs, and financial decision-makers with the knowledge and insights to craft a financing mix that optimizes their potential for success. In the following sections, we will discuss a few financing options, and provide valuable insights and strategies to empower SMEs in their pursuit of growth and financial sustainability.

POTENTIAL SOURCES OF FINANCING FOR SMES
Over time, various financing practices and techniques have been developed and utilized by businesses deriving from the two most fundamental sources of financing – debt and equity. Some of these financing practices include:

1. Bootstrapping:
Bootstrapping, often considered the first step in an entrepreneur’s journey, involves utilizing personal savings and revenue generated by the business for funding. Entrepreneurs fund their venture without seeking external financing. While it demands financial discipline and a longer path to growth, bootstrapping allows SMEs to retain complete control over their business and all generated profits.

2. Angel Investors:
Angel investors mostly constitute family and friends. They are early-stage investors who provide capital to startups in exchange for ownership equity or convertible debt. They not only offer financial backing but also bring valuable experience and insights to the table. Angel investors play a crucial role in supporting early-stage SMEs, often stepping in where traditional financing might be challenging to secure.

3. Venture Capital:
Venture capital (VC) involves investment from specialized firms into startups and small businesses with high growth potential. VC firms purchase equity, and in return, they actively contribute to business strategy and growth. This injection of capital at critical stages can propel SMEs into new markets and technological advancements, but it often requires giving up a portion of ownership and control as well as having to adhere to certain VC requirements.

4. Business Incubators and Accelerators:
Business incubators and accelerators are programs designed to nurture startups and early-stage SMEs. They provide funding, mentorship, and resources in exchange for equity or participation in the program. These initiatives are ideal for SMEs looking to accelerate growth, access industry networks, and refine their business strategies.

5. Crowdfunding:
Crowdfunding is a popular financing method where SMEs raise funds from a large pool of contributors, typically through online platforms like Kickstarter. It offers two main models: reward-based crowdfunding, where backers receive non-financial rewards or early access to products, and equity crowdfunding, where investors receive ownership shares in the SME. Crowdfunding is effective for product launches, creative projects, and validating market interest. It allows SMEs to access capital while engaging with their community and potential customers.

COMBINING FINANCING METHODS: BENEFITS AND STRATEGIES
As noted above, combining various financing methods can be a powerful approach, providing SMEs with flexibility, resilience, and the ability to optimize their financial structure. Some of the potential benefits include:

  1. Risk Mitigation: By blending financing methods, SMEs can achieve risk diversification. Relying on a single source of funding can expose a business to vulnerabilities in the face of economic fluctuations or changes in the financial landscape. Combining sources spreads risk, enhancing the SME’s resilience to unforeseen challenges.
  2. Enhanced Flexibility: Each financing method comes with its terms, conditions, and repayment structures. The flexibility that arises from combining these methods allows SMEs to manage cash flows and obligations more effectively. It affords them the ability and agility to adapt to changing circumstances, whether it be seizing opportunities for growth or navigating short-term financial setbacks.
  3. Access to a Wider Pool of Resources: Different financing methods open doors to unique resources and networks. Combining these methods can provide access to a broader pool of investors, mentors, and strategic partners who can contribute to your SME’s growth and success.
  4. Optimal Capital Allocation: Crafting a blend of financing methods enables SMEs to optimize their capital structure. Equity-based financing may be suited for long-term strategic investments, while debt-based financing can fulfill working capital needs or support short-term projects. This strategic allocation of capital contributes to a healthier financial foundation.

To take advantage of these benefits, strategic blending of financing methods is essential for SMEs. Some effective strategies that may empower SMEs to combine diverse financing avenues include:

  1. Understanding Business Needs: The foundation of successful blending is a profound understanding of a business’s financial requirements and goals. SMEs should embark on a comprehensive assessment to identify areas where each financing method can best serve their unique needs.
  2. Strategic Mix and Match: Consider a combination of financing methods that align with your SME’s objectives. For instance, long-term projects might be best funded through equity or long-term loans, while short-term cash flow gaps can be managed with lines of credit or invoice factoring.
  3. Leveraging Strengths: Capitalize on the strengths of each financing method. For instance, use venture capital for scaling, bank loans for stability, and invoice factoring for improving short-term cash flow.
  4. Financial Planning and Budgeting: Detailed financial planning and budgeting are indispensable when combining financing methods. Create a clear roadmap that outlines how each source of finance will be utilized and managed. Be prepared with contingency plans to address any unforeseen challenges along the way.
  5. Professional Guidance: Seek advice from legal and financial experts who can help you navigate the complexities of combining financing methods. These experts can provide valuable insights based on your SME’s unique circumstances.

CONCLUSION
In conclusion, SMEs have a wealth of financing options, each with unique advantages. By strategically combining these methods, SMEs can unlock their growth potential, navigate challenges, and position themselves for long-term success.