REGULATORY UPDATE: INTRODUCTION OF CREDIT GUARANTEE COMPANIES IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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On March 23, 2022, the Central Bank of Nigeria (“CBN”) issued Guidelines for the Regulation and Supervision of Credit Guarantee Companies (“CGC”) in Nigeria (the “Guidelines”). It is expected that the introduction of CGCs will encourage more financial institutions to lend money to micro, small and medium enterprises (“MSME”) in Nigeria. We have set out below useful information on CGCs and the Guidelines.

1. What are Credit Guarantee Companies?

A CGC is a company licensed by the CBN to guarantee loans issued to MSMEs by banks and other financial institutions (“Financial Institutions”) against a default.

2. Who is to engage a CGC?

Under the Guidelines, either the borrower or the lender (the Financial Institutions) of a loan transaction may apply to licensed CGCs for their credit guarantee services. It is, however, expected that the services of CGCs will be more often required by Financial Institutions as a form of security for loans granted to MSMEs.

3. What are the conditions to access the services of a CGC?

The services of a CGC are limited to loans issued to MSMEs by financial institutions licensed by the CBN. MSMEs are companies with less than 200 employees and less than 500 million naira in assets, excluding landed properties.

4. What are the permissible activities of a CGC?

In addition to providing the guarantee services, CGCs may also provide advisory and technical services for financial and business development to their clients.

5. Are there limitations to the guarantee services of CGCs?

A CGC cannot provide guarantee services in the following instances: (i) to related entities or entities within its holding company structure; (ii) to entities outside Nigeria; and (iii) where it is indebted to the entity.

6. What is the Consideration for the Guarantee Services?

Remuneration payable to the CGC for its guarantee services will be as negotiated between the Financial Institutions and the CGC.

7. How to apply for a CGC license?

A CGC license can be obtained by applying to the CBN with the following supporting documents:

  1. evidence of minimum paid-up capital of 10 billion naira and capital contribution of the proposed shareholders;
  2. detailed business plan;
  3. details of the proposed directors and shareholders;
  4. draft of the memorandum and articles of association;
  5. detailed manuals and policies;
  6. payment of the application fee; and
  7. other required documents.

Upon a successful assessment of the application, the CBN will issue an approval in principle. Within 6 months of the issuance of the approval in principle, an application is to be made to the CBN for the issuance of the final license, subject to a satisfactory physical inspection.

8. Conclusion

A challenge Financial Institutions have faced with lending to MSMEs in Nigeria over the years, is the lack of suitable security for loans. With an undeveloped credit rating system in Nigeria, Financial Institutions struggle to have sufficient comfort that loans will be repaid. The growth of CGCs in Nigeria is expected to help provide a level of comfort to concerned Financial Institutions and encourage lending to MSMEs. A major factor, however, that will determine how useful CGCs will be in encouraging lending to MSMEs is the fee charged for their services.

Notwithstanding the foregoing, it is imperative that the credit rating system is improved in Nigeria as this will provide more comfort for Financial Institutions and in turn, achieve the goal of stimulating lending to MSMEs.

DOING BUSINESS IN NIGERIA: THE RELEVANCE OF THE CERTIFICATE OF CAPITAL IMPORTATION TO FOREIGN INVESTORS IN NIGERIA

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By Aderonke Alex-Adedipe and Praise Adetunmibi

Introduction

While foreign investors often seek opportunities to invest in emerging markets, one major concern is whether there are any foreign exchange controls and the impact that such rules may have on the repatriation of their capital and earnings on their investments.

In recognition of the above and to encourage foreign investments in Nigeria, the federal government to a large extent[1], guarantees repatriation of capital, dividend and profits provided that the capital was imported by the investor by obtaining a Certificate of Capital Importation (“CCI”).

In this article, we have highlighted the relevance of a CCI to foreign investors and the procedure for obtaining it.

What is a CCI?

A CCI is a document issued by an authorised dealer (usually a commercial bank licensed by the Central Bank of Nigeria (“CBN”) to deal in foreign exchange) to an investor as evidence of inflow of foreign currency or goods such as plants, equipment, machinery or raw materials, into Nigeria for investment purposes.  Thus, where an investor imports capital through the official foreign exchange market, a CCI is usually issued in this case, within 24 of inflow of funds into Nigeria and in the case of equipment or raw materials, within 24 hours of submission of final shipping and other relevant documents.

In September 2017, the CBN introduced the electronic CCI (e-CCI) which replaced the paper CCI. The e-CCI has the same effect as the paper CCI and can be issued, managed and monitored via an electronic platform administered by the CBN, referred to as the Electronic Certificate of Capital Importation System (eCCIS).

Why is a CCI relevant to foreign investors?

The possession of a CCI confers certain benefits on the foreign investor which includes the following:

  1. the right to repatriate capital, dividends, and profits at the official foreign exchange market rates in a freely convertible currency subject to payment and deductions of all applicable taxes. This is particularly important to investors in a country like Nigeria where currency devaluation is a frequent occurrence;
  2. the right to operate a domiciliary account with any authorised dealer for investment purposes; and
  3. the right to invest in the securities of Nigerian companies.

How is a CCI obtained?

An application should be made to the authorised dealer, prior to the arrival of funds/equipment, requesting a CCI. The letter will be accompanied by supporting documents which the bank will request, depending on the nature of the capital being imported.

Conclusion

In summary, every foreign investor requires assurance that their investments can be returned to the source without hassle. To achieve this, it is important that investors are aware of the requirements for obtaining a CCI and whether there are any existing rules or legislation that may impact their ability to repatriate.

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[1] In 2016, due to the consistent paucity of foreign exchange in the Nigerian market, the Central Bank of Nigeria placed a restriction on 42 imported items that are ineligible for foreign exchange at the official market.

Setting Up International Money Transfer Services in Nigeria

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By Seun Timi-Koleolu and Olawale Atanda

 

Companies desirous of providing International Money Transfer Operator (IMTO) services in Nigeria are required to be licensed by the Central bank of Nigeria (CBN) as provided by the Guidelines for the Operation of International Money Transfer Services in Nigeria, 2014 (“IMTO Guidelines”).

 

What activities can IMTOs Provide?

IMTOs may accept monies for the purpose of transmitting to persons resident in Nigeria or another country. They may also carry out cross-border transfer services for personal purposes such as money transfer services towards family maintenance and money transfer services for foreign tourists visiting Nigeria.

However, IMTOs are not permitted to accept deposits or carry out money lending services (as there are separate licensing requirements for these services). They may also not buy foreign exchange from the domestic foreign exchange market for settlement purposes.

 

What are the requirements for an IMTO license?

The IMTO Guidelines provide requirements for both local and foreign companies wishing to acquire an IMTO license.

Local companies must have a minimum share capital of ₦2 billion and submit relevant document such as their incorporation documents and business plan. Foreign companies on the other hand, are required to show evidence of being licensed as IMTOs in their home country and have a minimum share capital of $1 million. They must also have authorized forex dealers (banks) to serve as local agents and pay an application fee of ₦500,000.

 

Is there any regulatory update concerning International Money Transfer?

The CBN issued two circulars (the “Circulars”) on November 30, 2020 announcing a new policy initiative on diaspora remittances through IMTOs. The Circulars clarified the CBN’s position on the operation of domiciliary accounts and the procedure for receipt of diaspora remittances.

 

What do the Circulars say?

The Circulars state that recipients of diaspora remittances through IMTOs shall now receive such inflows in foreign currency (US Dollars) through the agent bank of the IMTO.

The Circulars provide for recipients of remittances to have the option of receiving these funds over the counter in foreign currency cash (US Dollars) or have it transferred into their ordinary domiciliary accounts.

 

Conclusion

The CBN seeks to deepen the foreign exchange market by ensuring the availability of more foreign currency in the market and creating more transparency in the administration of diaspora remittances into Nigeria as provided in the Circulars.

The CBN has so far licensed about 60 IMTOs with many foreign based IMTOs looking to debut in the Nigerian market alongside local ones. It is important that these IMTOs understand the regulations around IMTO licensing and compliance.

Legal and Regulatory Considerations for Business Acquisitions in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

The main objective of every business is to make profit. Companies continually explore methods of increasing their bottom line and sometimes, that may mean acquiring companies in the same industry for several operational or economic reasons which ultimately would lead to increased revenue.

Recently, the fintech space in Nigeria was given a significant boost following the acquisition of Paystack by international payments company, Stripe in a record-breaking deal. For companies seeking to make similar acquisitions in Nigeria, there are certain legal and regulatory requirements to be considered when acquiring a business.

  1. General Applicable Legislations

Acquisitions in Nigeria are governed by key legislations. These are the Federal Competition and Consumer Protection Act (FCCPA) 2019 and the Companies and Allied Matters Act 2020 (CAMA).

Prior to the passage of the FCCPA in 2019, the Investment and Securities Act (ISA) 2007 and the Securities and Exchange Commission Rules and Regulations 2013 (SEC Rules) governed mergers and acquisitions in Nigeria. By the provisions of the FCCPA however, the Federal Competition and Consumer Protection Commission (“the Commission”) took over the regulation of mergers and acquisitions from SEC.

Under the FCCPA, all acquisitions are required to be approved by the Commission. However, acquisitions classified as “small mergers” are not required to be notified to the Commission except otherwise requested by the Commission. Small mergers are classified as such, where the combined assets and turnovers of the acquiring and target company fall below NGN1 billion.

It should be noted that acquisitions of shares qualify as “mergers” and fall under the regulation of the Commission whenever they result in an acquisition of controlling stake in the acquired company.

  1. Sector-Specific Legislations

There are other legislations that are specific to individual industries. Companies operating in these sectors are required to follow the rules of acquisitions specified in the legislations or required by regulators. These laws and regulatory requirements operate in addition to the primary legislations stated above.

In the banking sector for example, the Banks and Other Financial Institutions Act and the Central Bank of Nigeria’s Guidelines regulate acquisitions in the banking sector. Also, the Central Bank of Nigeria (“CBN”) generally requires other financial institutions which the CBN regulates to seek its consent prior to a change in the ownership structure of such institutions.

  1. Taxes

Acquisition transactions should not take place without the prior direction from the Federal Inland Revenue Service (FIRS) in connection with taxes/duties which may be applicable to such transaction. It is important that both the acquirer and target companies settle all outstanding tax obligations to the FIRS. Where the acquisition involves the sale of assets, capital gains tax will be payable. In situations where an acquisition results in the creation of more shares, stamp duties tax will be payable on the new shares.

Conclusion

Acquisition transactions are major deals which require several legal considerations. Acquiring companies should ensure that, in addition to the economic factors already considered, legal and regulatory requirements should be met when closing an acquisition deal to prevent regulatory sanctions and legal liability.

Establishing a Cooperative Society For Investment Purposes in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

Investment entities may take several forms in Nigeria. Investors may set up a Limited Liability Company (LLC) to buy shares or other investment vehicles. They may also set up a Limited Liability Partnership (LLP) or even a Cooperative Society depending on the needs of the investors, the advantage a particular entity for investment has over others, or the type of investments the entities intend to hold.

A Cooperative Society is one formed by a group of persons who share common goals relating to their social and economic advancement. Although, not as popular as LLCs or LLPs, Cooperative Societies afford certain advantages that investors may find favourable.

 

Applicable Law and Regulation

Cooperative Societies are governed by the Nigerian Cooperative Societies Act and are registered by the Director of Cooperatives in each state. In Lagos State, the Ministry of Commerce, Industry and Cooperatives oversees the registration and regulation of Cooperative Societies.

Cooperative Societies are also exempt from the provisions of the Companies and Allied Matters Act (CAMA). Consequently, obligations required of LLCs and LLPs by CAMA such as the filing of annual returns and registration of charges and debentures do not apply to Cooperative Societies.  However, returns are expected to be submitted to the Director of Cooperatives at intervals determined by the Director or such agency that regulates Cooperative Societies.

 

Benefits of Cooperative Societies

Similar to an LLC, Cooperative Societies are of limited liability and have a legal personality separate from that of its members. They also have the powers to hold movable and immovable property, enter into contracts, and perform such functions or actions as stated in their constitution.

Members can hold shares in Cooperative Societies, however, no individual member can hold more than 20% of the shares of the society.

 

Investment of Funds

Cooperative Societies may invest their funds in a bank, in federal government-backed securities, or in any other manner provided for in their constitution.

 

Taxes

Cooperative Societies are exempt from payment of company income tax on the profit or income generated from its activities including shares or interest held in other entities. Cooperative Societies are also exempt from the payment of stamp duties and registration fees payable in relation to the registration of instruments.

 

Registration

Cooperative Societies are to apply to the Director of Cooperatives for registration and such application must be signed by at least ten individuals qualified for membership of the society. The bye-laws of Cooperative Societies, which will govern its affairs, are to accompany the application.

 

Conclusion

Investors are constantly looking for opportunities to increase profits while reducing expenses such as operational costs and tax liabilities. Cooperative Societies provide for lower tax exposure and less regulatory oversight than LLCs and LLPs.

Setting Up a Venture Capital Company for Startup Investment in Nigeria

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By Seun Timi-Koleolu and Olawale Atanda

Startups require funding for their operations and to scale.[i] This is where venture capital companies (VCs) come in. VCs (as a subset of private equity) provide early or late stage financing to startups. VC funding is booming in Nigeria and has led to startups receiving increased financing year-on-year. Nigeria attracted $747 million in VC funding in 2019 with a majority of investments going to fintech companies. Although, a large number of these VCs are foreign, there is an increasing number of local VCs such as Ventures Platform, EchoVC, and Microtraction which invest in Nigerian startups. In this article, we list important points to consider when setting up a VC fund in Nigeria.

 

Company Structure

In Nigeria, VCs may be registered[ii] as a Limited Liability Partnership or a Limited Liability Company under the Companies and Allied Matters Act 2020.[iii] VCs may also register as limited partnerships under the Partnership Law of Lagos State but would however need to register as business names by the Corporate Affairs Commission to operate outside the state.

 

Regulation

The Securities and Exchange Commission (SEC) mandates private equity funds (such as VCs) to register with the commission where investor funds are above ₦1 billion. Registered VCs are prevented from soliciting funds from the public and may only privately source funds from qualified investors. They may also not invest more than 30% of their assets in a single investment. Under SEC regulations, the fund manager of a registered private equity fund must have a minimum paid-up capital of ₦20,000,000.00.

 

Raising Funds

VCs raise funds from a variety of sources which consist of banks and other financial institutions, insurance companies, pension funds, (“institutional investors”) high net worth individuals, etc. However, regulations that cover institutional investors may restrict the extent to which they may invest in VCs. For example, the Banks and Other Financial Institutions Act limits investments to the extent that such investment does not at any time exceed 10% of the bank’s shareholders funds and not more than 40% of the investee company’s paid up share capital. Foreign VCs who bring in funds into the country are guaranteed the transferability of interests on dividends and repatriation of investments in startups. Funds should be brought in through authorized dealers (usually banks) who then issue a Certificate of Capital Importation (CCI) as proof of the importation of capital. The CCI allows foreign VCs to repatriate funds without restriction.

Taxes

Taxes payable by VCs are dependent on the structure of the fund. Where a VC is registered as a Limited Liability Company, the company will be liable to pay income tax on its profits as provided under the Company Income Tax Act (CITA). Funds registered as business names will not subject to corporate income tax, instead, each partner would be taxed based on its individual income from the business. The investee company is however required by the CITA to withhold 10% of the interest on dividends due to investors. Where a VC is a resident of a country that Nigeria has a double tax agreement with, the withholding tax rate is pegged at 7.5%.

 

Conclusion

Nigeria is a profitable market for VC funds which is evidenced by the impressive growth of startups and tech companies over the years. VCs who intend to set up shop in Nigeria or as foreign VCs, invest in Nigerian startups must be conversant with the rules on investing in Nigeria. This is important to ensure adherence with regulatory rules and conformity to proper business and corporate governance procedures.

[i] You can access our article on startup funding here https://pavestoneslegal.com/startup-funding-raising-capital-as-a-startup-in-nigeria/

[ii] Although, the Companies and Allied Matters Act 2020 has been passed into law, the Corporate Affairs Commission is yet to begin the registration of Limited Liability Partnerships.

[iii] You can read our analysis on the Companies and Allied Matters Act 2020 here    https://pavestoneslegal.com/tag/cama-2020/

Doing Business Simplified: Significant Economic Presence and the Taxation of Non-Resident Companies in Nigeria

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On the 3rd of February 2020, the Minister of Finance, Budget and National Planning issued the Companies Income Tax (Significant Economic Presence) Order 2020 (the “Order”). The Order was published on the 29th of May 2020 in furtherance of the powers conferred upon the Minister by Section 13(4) of the Companies Income Tax Act (CITA), Cap C21 Laws of the Federation of Nigeria, 2004 (as amended).

The Finance Act, 2020 (“the Finance Act”) expanded the scope for taxation of Non-Resident Companies (NRCs) in Nigeria by amending certain sections of the CITA. Prior to the Finance Act, NRCs were taxed if they could be seen as having a fixed base (having facilities, carrying out business activities, or providing services in connection with business activities) in Nigeria; carrying out business through an agent who executes transactions on their behalf; executing a turnkey project; or engaging in transactions with affiliated companies in a manner not being one that is at arms-length.

The Finance Act included the concept of Significant Economic Presence (SEP) by which NRCs would be assessed for tax purposes. If found to have SEP in Nigeria, NRCs would be liable to pay tax in Nigeria. At the time the Finance Act came into force, the criteria for determining what constitutes SEP had not been established. The Order now states the various ways NRCs would be deemed to have SEP in Nigeria.

What Constitutes Significant Economic Presence in Nigeria?
The Order targets two broad categories of NRCs. These are companies carrying out digital services and companies involved in technical, professional, management, or consultancy services.

1. NRCs involved in digital services would have SEP in Nigeria if:
i. they derive a gross turnover of more than ₦25,000,000 (Twenty Five Million) or its equivalent in other currencies in a financial year from digital activities in Nigeria;
ii. they use a Nigerian domain name (.ng) or register a website in Nigeria; or
iii. have a purposeful and sustained interaction with persons in Nigeria by customizing their digital pages or platforms to target persons in Nigeria, including reflecting the prices of their products or services in Naira or charging fees for their products/services in Naira.

In addition, the Order identifies the nature of digital services which would be assessed for SEP. These services include streaming or downloading services, provision of goods and services through digital platforms, and services which link suppliers and buyers through a digital platform, amongst others.

The application of SEP to digital services is broad and captures a wide array of digital services that cater to Nigerians.

2. NRCs which provide technical, professional, management, or consulting services would be deemed to have SEP in Nigeria if they earn income or receive payment from:
i. a person resident in Nigeria; or
ii. a fixed base or agent of an NRC.

The Order defines a technical service as services of a specialized nature including advertising, training, and the provision of personnel (but not including professional, management, or consulting services. What constitutes these services was however not defined).

Conclusion
Including the digital economy in the now expanded tax net is the main thrust of the Order. It is evident that the government appreciates the economic value of taxing the digital economy which would result in a much-needed rise in its income.

It however remains to be seen how the Federal Inland Revenue Service (FIRS) will give effect to the Order by levying taxes against NRCs which have no physical presence in Nigeria coupled with the fact that transactions are performed digitally and may not be easily monitored by the tax authorities.

Doing Business Simplified: Building Trust in the Real Estate Sector in Lagos – Regulation of Agents

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In today’s times, companies are having to re-strategize and think of ways to reach consumers remotely by leveraging on technology and innovation. One sector in Nigeria where remote services has been a struggle is the real estate sector. This is largely due to practical challenges such as the need for buyers/tenants to view properties physically, on the one hand; and a lack of trust due to unscrupulous practices by agents, on the other hand.

Startups like PropTech Zone and Zillow have shown that the need to visit properties can be tackled with technology that allow for virtual viewing of properties.

With respect to the issue of trusting agents, the government has tried to bridge the trust gap in Lagos State, by creating the Lagos State Real Estate Transaction Department (the “Department”). The role of the Department in protecting buyers against fraudulent activities is, however, not widely known and therefore yet to be effectively adopted.

In view of the foregoing, we have set out below useful information about the Department to guide dealings with agents in property transactions in Lagos State and build trust.

  1. What law regulates property agents in Lagos State? – The Lagos State Real Estate Transactions Law, established the Lagos State Real Estate Transaction Department, which is tasked with securing the protection of property buyers/seekers from fraudulent real estate agents in Lagos state.

 

  1. How are agents regulated? The Department conducts due diligence on agents and maintains a register of suitable agents. Intending buyers of properties and prospective tenants are advised to only transact with agents who are registered with the Department.

 

  1. How can buyers or tenants confirm that an agent is registered with the Department? The list of registered agents can be accessed via the Department’s website. Buyers or tenants are advised to carry out a search on the Department’s website to confirm that an agent who offers a property for sale or rent is duly registered.

 

  1. What happens if a registered agent acts fraudulently? Where a registered agent transacts fraudulently, the affected party can report the matter to the Department who is empowered to investigate the matter and step in to recover lost funds.

 

  1. How does this affect a PropTech company? PropTech businesses that offer properties for sale or lease on a platform (similar to an agent), are advised to register with the Department. This should give buyers and tenants comfort that the platform can be trusted.

 

  1. What fee are Agents and Lawyers entitled to under the law? The Law clearly states the fee range payable to Agents and Lawyers on property transactions. Agency fees under the law are fixed at 10% of the total rent collected for a property. Where the transaction is a sale or lease, the fixed agency fee is 15% of the total proceeds of the transaction. Legal fees are not fixed, however, the fees should not exceed 12.5% of the value of the transaction. The Law goes a step further by prohibiting estate agents from preparing legal documents and vests such preparation exclusively in the hands of legal practitioners.
  1. Is there penalty for not registering as an agent with the Department? An agent who fails to apply to the Department for registration would be liable to conviction and monetary fines.

Conclusion

The establishment of the Department is a step in the right direction to resolve the issue of trust in the Real Estate sector. Proptech companies and agents should take advantage of this law to give potential buyers comfort and attract investors.

 

Pavestones Regulatory Update: The Draft Revised Guidelines for the Regulation and Supervision of Microfinance Banks

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The Central Bank of Nigeria (CBN) on March 3, released its revised Microfinance Bank (MFB) draft guidelines (the “Draft Revised Guidelines”). The Draft Revised Guidelines revises the increase in the minimum share capital for MFBs which was previously announced by the CBN in a notice released in October 2018; and expands the categories of MFBs, amongst other changes.

Although the guidelines are still in draft form, it is useful for MFBs and fintechs (who utilize MFB licenses) to take note of the changes proposed whilst assessing how it will affect their operations once it takes effect.

We have set out below, the major changes made to the Draft Revised Guidelines and how it differs from the Guidelines issued in 2012 (“2012 Guidelines”).

1.Categories of MFBs

Under the 2012 Guidelines, the CBN split MFBs into 3 (three) categories namely Unit MFBs, State MFBs, and National MFBs. The Draft Revised Guidelines splits the Unit MFBs to Tier 1 and Tier 2. This brings the categories of MFBs to 4 (four) namely: Tier 1 Unit MFBs; Tier 2 Unit MFBs; State MFBs, and National MFBs.

The benefit of this revision is that Unit MFBs would no longer be restricted to one location. Tier 1 Unit MFBs would be permitted to operate in urban areas and have up to 4 (four) branches in addition to the head office, within 5 (five) Local Governments Areas (LGA) in the state. Tier 2 Unit MFBs would be permitted to have a head office and a branch within the same LGA. Note that Tier 2 MFBs are to operate in rural and unbanked/underbanked areas.

It is also useful to note that the number of branches State and National MFBs may establish at commencement is capped at 10 under the Draft Revised Guidelines. In the 2012 Guidelines, this is not capped.

2.Financial Requirements

The capitalization requirement for each category of MFB in the Draft Revised Guidelines are as follows: Tier 1 Unit – 200 million Naira; Tier 2 Unit – 50 million Naira; State MFBs – 1 billion Naira; and National MFBs – 5 billion Naira.

With this revision, MFBs would have the option to apply for a Tier 2 Unit MFB license with a share capital requirement of 50 million Naira as opposed to the 200 million Naira minimum capital requirement for Unit MFBs stated in the MFB capitalization review notice earlier issued in October 2018.

3. Licensing Requirements.

Under the Draft Revised Guidelines, promoters and investors of MFBs  would be required to make presentations on the business case of the proposed MFBs before a formal application for an MFB licence. The CBN will also inspect the premises and facilities of MFBs prior to granting a final licence.

Conclusion

The tiered Unit MFB license would be a welcome development as it has the potential to include MFBs who are unable to meet the current 200 million Naira capital requirement. It would also allow MFBs reach more customers with the introduction of branches.

Notwithstanding this, it would be useful to see regulations that are tailored to the peculiar structure of digital banks and fintech businesses, as the regulation of this space is still subject to multiple interpretation by regulators of the available laws/regulations.

Foreign Investments in Nigeria: Managing the Risks

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In recent times, foreign investors, startups and larger technology companies have identified countries like Nigeria as providing good investment opportunities. Investors, however, hesitate to invest in the Nigerian market due to certain risk factors including uncertainty about the relevant regulations for their desired sectors, arbitrary government policies and difficulty in researching into the environment given the fragmented nature of laws and regulations.

The Nigerian government continues to emphasize its interest in attracting foreign investments into Nigeria evidenced by tax incentives, the Nigerian Investment Promotion Council One-Stop Shop, amongst other initiatives. However, acts such as the recent ban on the operations of commercial motorcycles and tricycles (including bike ride hailing startups such as Opay, Gokada and Max.ng) have amplified the fears of investors and probably reinforced their hesitation in coming into the Nigerian market.

The question that now arises is if Nigeria is too high-risk for foreign investments. Our response to this is NO because there are a lot of opportunities in Nigeria and the risks can be managed with the right advisers and partnerships.

We have set out below, certain steps that investors may take to manage the risks associated with investing in Nigeria.

 

How can investors better protect their interests?

1.Regulatory/Policy Due Diligence: It is important for any intending investor to conduct thorough due diligence on the applicable laws, policies, directives and regulations relevant to their sector of interest, including those that have not been enforced. Due to the fragmented nature of laws and regulations, the due diligence must go beyond online research and involve visits to regulators to seek clarity. Where possible, Letters of No Objection to the proposed business should be obtained.

2.Review the Government’s Masterplan and Seek Government Participation: To manage the risk of arbitrary government intervention, investors can study the government’s masterplan regarding the relevant industry and propose a  mutually beneficial partnership with the government. Such partnership may mean allocating some shares of the business to the government or partnering with government agencies to offer the services to the public. The inclusion of the government in the operations of the business makes them invested in its        success. This step was recently taken by Uber with the UberBOATS’ and Lagos State Waterways Authority collaboration. It is however important to note the risk of a change in government affecting the collaboration.

3.Building Practical Relationships with Government Agencies: It is always useful to build good relationships with government agencies whose activities will affect the business. A compliance personnel could be hired to liaise with the government and advise the business/investors as required.

4.Insurance Policy: Investors, especially foreigners seeking to do business in Nigeria, can consider protecting their investments against adverse government intervention through Political Risk Insurance.

 

Conclusion

Nigeria remains a good environment for investment. Our suggestions above are not exhaustive however, they should help investors manage the risk of government intervention. Like any other  investment decision, protections put in place against risks are never failproof but with high risk typically comes high returns.