THE REGULATORY FRAMEWORK AND GUIDELINES FOR MOBILE MONEY SERVICES IN NIGERIA

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

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Introduction

The Central Bank of Nigeria (CBN), on 9, July 2021, issued The Regulatory Framework and Guidelines for Mobile Money Services in Nigeria (“The Framework”) which is essentially a more robust framework in comparison to the Guidelines on Mobile Money Services in Nigeria (“The 2015 Guidelines”) issued in 2015. The purpose of the Framework, according to the CBN, is to promote financial inclusion within the country.

The emergence and dominance of mobile money operators (MMOs) in Nigeria has simplified financial transactions for the average citizen through the operation of mobile phones.  Therefore, walking into the banking hall is no longer necessary. These factors have made it necessary for the CBN to create an enabling environment for mobile money services in Nigeria, primarily geared towards achieving availability, acceptance, and usage of mobile payment services and systems nationwide.

Scope of the Framework

The Framework provides coverage of the entire mobile money ecosystem which includes the Regulators, MMOs, Infrastructure Providers, Other Service Providers, Consumers, and Mobile Money Agents. Notwithstanding, the Framework provides for two categories of Mobile Money Services for operation in Nigeria. These are;

a.The Bank-led Model: This model is characterised by a bank, either acting alone or with a consortium of banks, with or without other approved organizations, seeking to deliver banking services via a mobile payments system while acting as the lead initiator.

b.The Non-bank led Model: This model is characterised by the lead initiator being a corporate organization that has been specifically licensed by the CBN to deliver mobile money services to customers.

 

Notably, The Telco-led model, where a Mobile Network Operator is the lead initiator has not been sanctioned by the Framework. This is in contrast with the provisions of the Guidelines which give recognition to this model. This exclusion, according to the CBN, has been made to provide the apex bank with full control over monetary policy operations, minimise risks and ensure that the offerings of financial services are driven only by organizations within the CBN’s regulatory purview.

Notable Provisions

Savings Wallet: MMOs are permitted, subject to obtaining a no “objection letter” from the CBN to offer savings wallet services for unbanked citizens in Nigeria. The modalities for the operation of a savings wallet are clearly defined and these include; a requirement for a Savings Wallet Principal Pool Account, and a Savings Wallet Interest Pool Account. Other rules on the operation of mobile wallets include specifications on charges, minimum balance, savings periods, the procedure for determination of interest payable to subscribers, disclosure requirements for MMOs, automation of interest distribution, and the proportion to be retained by an MMO where applicable.

Permissible and Non-Permissible Activities: The Framework clearly spells out activities that are permissible and those which are prohibited for MMOs. Amongst permissible activities include; wallet creation and management, electronic money issuance, agent recruitment and management, pool account management, non-bank acquiring, and card acquiring. On the other hand, MMOs are prohibited from granting any form of loans, advances, and guarantees (directly or indirectly), issuing insurance, or accepting foreign deposits.

Transaction Limits: Know Your Customer (KYC) requirements have been incorporated into the Guidelines as there are now three types of transactions namely; customers at KYC tier 1 can transact to a daily limit of N50,000 with a daily cumulative transaction limit of N300,000 while customers with KYC tier 2 have a daily cumulative transaction limit of N200,000 and a cumulative balance limit of N500,000 and KYC tier 3 may transact daily to a limit of N5,000,000 with no applicable limits to their account balance.[1]

 

Consumer Protection and Sanctions: MMOs are required to resolve all customer complaints within 48 hours[2], ensure customers understand the transactions they enter and make adequate disclosures to customers[3], provide mechanisms to mitigate against a loss of service, fraud, and customer information, ensure proper communication channels are put in place, and the Nigeria Deposit Insurance Corporation (NDIC) is also mandated to provide insurance for mobile money deposit wallet subscribers.[4]  Where a Deposit Money Bank (DMB) acting as a settlement bank fails/defaults, customers of the MMO enjoy a maximum coverage of up to N500,000.

The CBN also bears the responsibility of facilitating the assumption of the deposit liability of a failed MMO, in which instance the subscriber’s funds in the pool account shall be transferred to the MMO appointed to assume liability. In addition, the CBN may impose financial penalties against an MMO, its board of directors, officers, or agents, withhold corporate approvals, suspend defaulters from mobile money operation or even revoke a defaulter’s mobile money operation license.

Conclusion: A robust mobile money system is an essential aspect of any modern economy. Over the years, mobile money has continued to play an important role in the promotion of financial inclusion in Nigeria. The standard of living of a significant number of previously unbanked citizens has been improved as more families are able to save and manage cash flows. Mobile money reduces the need to handle raw cash and promotes commercial transactions by a significant number of citizens in the “lower to the middle class”. The CBN’s formulation of policies and rules governing this sector is therefore a step in the right direction for financial inclusion in the Nigerian economy as a holistic application of the Framework will ensure a smoother operation of the Mobile Money Sector in Nigeria.

 

 

 

[1] See Central Bank of Nigeria three-tier Know Your Customer requirements https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf Accessed on the 14 July 2021

[2] Section 18 (f) of the Framework and Guidelines on Mobile Money Services in Nigeria

[3] Section 18.0 of the Framework and Guidelines on Mobile Money Services in Nigeria

[4] Section 10.1.1 of the Framework and Guidelines on Mobile Money Services in Nigeria

DOING BUSINESS IN NIGERIA: OPTIONS FOR REPATRIATION OF CAPITAL FOR FOREIGN INVESTORS IN NIGERIA

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Repatriation of capital and profits is an important area of consideration for foreign investors willing to invest in the Nigerian economy. Foreign investors need assurance that their capital and the profits gained can be transferred out of the country at any time without any hassle. In our previous article, we considered the relevance of a Certificate of Capital Importation (CCI) to foreign investors in Nigeria. In this article, we will consider the ways foreign investors can structure their capital inflow into Nigerian businesses to be eligible for repatriation and the options open to foreign investors for repatriation of funds.

Ways of structuring capital Inflow
An important factor to consider when a foreign investor intends to repatriate its funds is the structure of the capital inflow, as it may determine the investor’s repatriation options in the future. A foreign investor can structure its capital inflow into a Nigerian company as equity investment(through the purchase of shares), or debt investment(through a loan to the Nigerian Company).
Please note that the capital invested in the Nigerian company may take the form of funds, goods or services. Examples of goods are equipment, plants, machinery, raw materials, which will be used by the Nigerian company for its operations. Such goods will, however, have to undergo valuation to determine the monetary value of the goods.

Options open to foreign investors for repatriation of capital

1. Repatriation through a Certificate of Capital Importation: A CCI is a certificate issued by the Central Bank of Nigeria (CBN) through an authorized dealer (a commercial bank) to a foreign investor confirming the inflow of foreign currency or goods into Nigeria for investment purposes.
Capital inflowed either as debt or equity as stated above and the related profits can be outflowed (repatriated) out of Nigeria using a CCI, as shown in the diagram below.

Please note that foreign investors who do not have a CCI would be required to source for foreign currency for repatriation, from autonomous sources as they would not be granted access to the official Nigerian Foreign Exchange Market. This process is more expensive and may be fraught with practical difficulties including the risk of breaching anti-money laundering laws.

2. Repatriation of Payments for Technology Transfer Services: Asides from repatriation through CCIs, another way foreign investors can repatriate their funds from Nigeria is by structuring the agreements for technology transfer services rendered to the Nigerian company as Technology Transfer Agreements (TTA).

TTAs are agreements that provide for the transfer of foreign technology to Nigerian parties. They include:(i)Trademark License Agreement; (ii)Technical Know-How Agreement; (iii)Management Services Agreement; (iv)Technical Services Agreement; (v)Technical Services Agreement; (vi) Consultancy Services Agreement; (vi)Software License Agreement; (vii)Franchise Agreement; (viii) Research and Development Agreement; (ix) Hotel management Agreement e.t.c.

Where foreign investors enter into a TTA with the Nigerian company, they will be required to seek the approval of the National Office for Technology Acquisition and Promotion (NOTAP) by registering the TTA with NOTAP in accordance with the National Office for Technology Acquisition and Promotion Act (NOTAP Act). The fees payable for the provision of the technology transfer services must also be approved by NOTAP.

Registration of a TTA in accordance with the NOTAP Act will enable the foreign investor to repatriate in foreign currency, any payment due to it under the TTA. Please note that NOTAP will not approve the registration of a TTA, where it is observed that the technological interest and integrity of Nigeria is not given adequate consideration in the negotiation, drafting and implementation of the TTA, or where it does not fulfil the requirements provided in the NOTAP Act. Other requirements for the registration of a TTA include:(i) provision for capacity building of Nigerians with respect to the technology in the TTA; (ii) payment of applicable taxes by the foreign company; (iii) inclusion of methods for the domestication of the technology, local raw material development, skills acquisition etc in the TTA; and (iv) evidence of registration or pending registration of the intellectual property in Nigeria (where applicable) etc.

To find out more on CCIs; registration of TTAs with NOTAP; and managing the risks foreign investments, please click on the links below.
• https://pavestoneslegal.com/foreign-investments-in-nigeria-managing-the-risks/
• https://pavestoneslegal.com/insights-on-obtaining-the-national-office-for-technology-acquisition-and-promotion-notap-approval/ 
• https://pavestoneslegal.com/doing-business-in-nigeria-the-relevance-of-the-certificate-of-capital-importation-to-foreign-investors-in-nigeria/  

 

REGULATORY REQUIREMENTS FOR OBTAINING A DIGITAL SUB-BROKER LICENCE; SEC RULES & FINTECH IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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Over the last decade, technology has continued to disrupt the financial sector while regulators have struggled to keep up. The capital market sub-sector has not been spared as fintech companies facilitate transactions in Nigerian and foreign listed securities through digital platforms.

In a move to maintain oversight over all activities within the Nigerian capital market, the Securities and Exchange Commission (“SEC”) obtained an order from the Investment and Securities Tribunal directing Chaka Technologies Limited (a Fintech company that offers Nigerians the opportunity to purchase Nigerian and foreign quoted shares through a digital platform) to refrain from facilitating investment in securities. Consequently, on April 22, 2021, the SEC issued the Major Amendments (“Amendment”) to the Securities and Exchange Commission Rules and Regulations, 2013 (“Rules”), making significant changes to the provisions relating to Sub-Brokers.

Who is a Sub-Broker?
The Rules define a Sub-Broker as a person or company who is not a member of an Exchange but acts as an agent of a sponsoring broker/dealer or assists investors in buying and selling securities through the sponsoring broker/dealer. The Amendment now recognises that a Sub-Broker may utilize a digital platform to engage investors and interact with sponsoring brokers (“Digital Sub-Broker” or “Sub-Broker Serving Multiple Brokers Through A Digital Platform”).

In effect, Digital Sub-Brokers such as Chaka, Bamboo and Rise now fall within the ambit of the Rules and are required to be registered with the SEC, provided the requirements for registration are complied with.

What can a Sub-Broker do?
A Sub-Broker may purchase and sell securities on behalf of investors through the sponsoring broker. The Sub-Broker is required to remit any fund, certificate and warrants supplied to it by the investor to the sponsoring broker within two (2) working days of receipt.

What are the obligations of a Sub-Broker?

Records of transactions
Under the Rules, a Sub-Broker is required to keep adequate records of transactions for and on behalf of investors. The records should include: (i) the mandate form; (ii) proof of payment for the purchase of shares; (iii) all communications with the investors, amongst others.

Risk Management

Specifically, all Digital Sub-Brokers are required to implement a risk management practice which includes the implementation of the following:

  1. procedures and controls to monitor and test the algorithms on a regular basis;
  2. internal policies to address technology risks;
  3. adequate cyber-security mechanism;
  4. an anti-money laundering/combatting financing of terrorism (AML/CFT) policy in line with applicable regulation;
  5. operational and technical controls systems to manage the risks;
  6. ensuring that all electronic communication is digitally signed, encrypted and secured with a backup stored in soft and secured form;
  7. a complaint management policy in compliance with SEC Rules; and
  8. complying with the SEC technology risk guidelines, amongst others.

What are the requirements for obtaining a Digital Sub-Broker license?
In addition to fulfilling all the requirements applicable to a Sub-Broker, Rule 67(4) of the Rules, specifically contains provisions that are clearly tailored towards fintech businesses. Some of the requirements for obtaining the Digital Sub-Broker license include:

  1. providing a detailed description of the technology infrastructure to be used by the proposed Sub-Broker;
  2. evidence of adequate KYC processes in respect of investors;
  3. evidence of notice of potential risks and obligations of parties issued to investors; and
  4. evidence of minimum paid-up capital of Ten Million Naira and current fidelity insurance bond covering twenty per cent (20%) of the minimum paid-up capital.

Conclusion
The development of fintech in Nigeria has provided the average Nigerian with multiple investment opportunities within the capital market sub-sector and consequently, required regulators such as SEC to provide adequate protection for investors through regulation. This effort is indeed commendable. Chaka Technologies Limited became the first company to obtain the Digital Sub-Broker licence as announced in its public statement of June 23, 2021.
In anticipation of continuous innovation and disruption, a holistic review of the SEC Rules to include, where applicable, provisions permitting digital involvement is advised. In addition, an integration of all current amendments into the Rules will prove most helpful and unambiguous to investors seeking to penetrate the Nigerian market.

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

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By Seun Timi-Koleolu and Praise Adetunmibi

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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

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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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

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By Seun Timi-Koleolu and Baraebibai L. Ekpebu

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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

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By Aderonke Alex-Adedipe and Praise Adetunmibi

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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

REGULATORY REQUIREMENTS FOR FINTECH IN NIGERIA; CBN LICENCES

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Seun Timi-Koleolu and Eustace Aroh

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Introduction

On December 9, 2020, the Central Bank of Nigeria (CBN) issued a circular, recategorizing Payments System licensing in Nigeria into four major categories: Switching and Processing; Mobile Money Operations; Payment Solution Services; and Regulatory Sandbox. There was, however, no unified document containing the requirements for each of these licensing categories. This made gathering information on the licenses cumbersome for potential license applicants. To resolve this issue, the CBN recently released a compendium containing all the requirements for Payment System licenses.

We have provided in this article, a snapshot of the CBN requirements and gone a step further by setting out the activities permissible under each licensing category.

  NAME OF LICENSE ACTIVITIES THE LICENSE PERMIT LICENSING REQUIREMENT FEE AND CAPITAL REQUIREMENT
 
1 Switching and Processing Licence

 

 Switching; card processing; transaction clearing; settlement agents; and all activities permitted for Payment Solution Services (in 3 below). ·Corporate documents;

·Tax Clearance Certificate (TCC) for 3 years (if applicable) and Taxpayers Identification Number (TIN) of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·Bank Verification Number (BVN), Curriculum Vitae (CV) and means of identification (ID) for the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan and product deployment methodology;

·Requisite policies and framework;

·Signed agreements with sub-agents, financial institutions and business parties; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
2 Mobile Money Operator Licence

 

 E-money issuing; mobile wallet creation and management; pool account management; and all activities permitted for Super-Agent (in 6 below). ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan;

·Requisite policies and framework;

·Project deployment time; and

·Signed agreements with its partners.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
3 Payment Solution Services (PSS)

 

 It includes all the activities permitted for Payment Solution Service Providers (PSSP) (in 5 below); Payment Terminal Service Providers (PTSP) (in 4 below); and Super Agents (in 6 below).

 

Companies seeking to obtain the PSS license will have to select any one or combination of the following licenses: PSSP; PTSP; and Super-Agent.

 ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework;

·Signed agreements with its sub-agents, financial institutions, and partners;

·Minimum of 50 agents;

·Evidence of payment card security certification and other relevant payment terminal certification; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of up to 250 million (depending on which of the licenses the company wishes to obtain) in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
4 Payment Terminal Service Provider (PTSP) Licence

 

 POS Terminal deployment and services and POS terminal ownership. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
5 Payment Solution Service Provider (PSSP) Licence

 

 Payment processing gateway; payment solution development; and merchant service aggregation and collection. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of directors and top management (including one non-executive director, chairman, managing director);

·Signed agreements with its partners;

·Requisite policies and framework; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
6 Super-Agent Licence Conducting certain banking activities such as cash deposit and withdrawal; bill payments; local fund transfer; balance enquiry etc. ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Minimum of 50 agents;

·Reference letter from a financial institution and signed agreement with the sub-agents, financial institution, and business partners;

·Must have existed for over 12 months;

·Requisite policies and framework; and

·Payment Terminal Service Aggregator of Payment Terminal Application Certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N50 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
7 Regulatory Sand Box As may be determined in the Sandbox.

 

The regulatory Sandbox is aimed at stimulating innovation and deepening financial inclusion. To this end, the CBN will review the products during the implementation.1

 ·Corporate documents including shareholding structure;

·Company details and profile;

·Project plan, business proposal and outline of the strategy of the sandbox trial;

·Evidence of patent rights (if applicable);

·CV of directors and top management; and

·Requisite policies and framework.

 Not applicable.

 

PROPOSED REGULATION OF DIGITAL (ROBO) ADVISORY SERVICES IN NIGERIA

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

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INTRODUCTION

As Lord Denning once said; “If we never do anything which has not been done before, we shall never get anywhere. The law will stand still while the rest of the world goes on, and that will be bad for both”.

On May 5, 2021, The Securities and Exchange Commission (SEC) published its “Proposed New Rules on Robo-Advisory Services1 (the “Rules”), which signifies the progression of certain aspects of the Nigerian legal framework on financial advisory services. In recent times, the extension of technology to money management in the form of “Fully Automated Robo-Advisers,”2  presents an option to an investor willing to take advantage of automated digital investment advisory technology, for discretionary online algorithmic-based financial advice.

This newsletter examines in summary, some key provisions of the Rules and what they mean for the financial business community.

KEY PROVISIONS

Scope: The Rules seek to apply to all capital market operators as well as individuals or corporate bodies, interested in providing “Digital (Robo) Advisory Services”. The Rules also require that all interested individuals and companies shall be subject to registration by the SEC. This is in line with international best practices on investor protection. For example, in the U.S., Robo-Advisers must register with the U.S. Securities and Exchange Commission just like human advisers and are subject to the same securities laws and regulations as traditional broker-dealers.3

Definitions: The Rules offer three (3) definitions, and in essence categorisations of Robo-Advisory services. These are – “Fully Automated Robo-Advisers,” (“Robo-Advisers with no human adviser interaction in the advisory process.”) “Digital Advisory Services” (“the provision of advice on investment products using automate, algorithm-based tools which are client-facing, with little or no human adviser interaction…”) and “Robo-Adviser” (“a person who provides digital advisory services”). Although Robo-Advisory technology exists, there are varying degrees of human interface and influence on the functionalities of this novel technology. This appears to be the rationale for SEC’s decision to seek to hold humans accountable in the deployment of algorithm/artificial intelligence-based financial advisory services.

Additional Regulatory Requirements: The Rules mandate strict compliance by Robo-Advisers to all ‘business conduct requirements’ in the Investment and Securities Act 20074. Robo-Advisers are also instructed to carry out due diligence5 on all third-party providers to assess risks associated with such outsourcing arrangements.6  In addition, Robo-Advisers are to adhere strictly to client’s orders7  and Robo-Advisers intending to perform portfolio management functions are required to comply strictly with the rules and regulations governing Fund/Portfolio Management Functions.8

Rebalancing of Client Investment Asset Allocation: The procedure for digital advisory services which involves requesting a set of information regarding the risk appetite and preferred portfolio of the investor, is described under the Rules. Upon providing the requested data, the Robo-Adviser provides the best investment option, which is algorithm-based. The client may accept or reject the advice. Where the client, however, chooses to act on the previously rejected advice, the Rules refer to this as “Rebalancing”. The Rules mandate Robo-Advisers to seek the express consent of an investor when presented with a revised portfolio after rejecting a previously recommended one. 9

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance.  Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Developing the Client-Facing Tool: Robo Advisers are required to ensure that the technology utilized is programmed to carry out tasks to a premium standard. This includes the collection of information, analyses, and recommendations given by algorithm-driven advisor tools. Robo-Advisers are mandated to identify inconsistent responses from clients, identify and eliminate clients who are unsuitable for investing10 and also ensure that algorithms can detect bias, assign risk profiles correctly and consistently, and produce the intended asset allocation and investment recommendation.

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance. Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Information on Algorithms: Another innovative inclusion in the Rules is the requirement for Robo-Advisers to disclose in writing, to their clients, all assumptions, limitations, and risks associated with the algorithms, circumstances where Robo-Advisers may override algorithms or halt services, and material adjustments to the algorithms.

CONCLUSION

Robo-Advisers have the potential to offer investors speedy and cost-effective access to investment advisory services. However, the fiduciary nature of this role demands prompt oversight. The provisions highlighted above, reveal that investor protection is at the heart of the Rules.  Whilst implementing rules against an algorithm may seem impossible, ensuring that persons behind such algorithms are responsible for ensuring their efficient operation can be achieved. Therefore, the proposed monitoring of these innovations and future implementation of safeguards is a necessary step for the protection of investors in Nigeria.

 

  1. SEC NIGERIA, ‘Proposed New Rules and Sundry Amendments To The Rules And Regulations Of The Commission’ (2021) < https://sec.gov.ng/proposed-new-rules-and-sundry-amendments-to-the-rules-and-regulations-of-the-commission/> Accessed 19 May 2021
  2. Section 1 of the proposed Robo-Advisory Rule defines this to mean Robo Advisers with no human intervention
  3. CFA Institute, ‘Robo-Advisors’ (2021)< https://www.cfainstitute.org/en/advocacy/issues/automated-advisors> Accessed 19 May 2021
  4. Section 3 (i) of the Proposed New Rules on Robo-Advisor Services
  5. Section 3 (iii) of the proposed New Rules on Robo-Advisor Services
  6. Section 3 (ii) of the proposed Robo-Advisory Rule provides that third-party providers to whom development and maintenance of client-facing tools have been outsourced to by a Robo Advisor are required not to be registered by the commission.1. https://www.companybug.com/what-is-share-capital/
  7. Section 27(2) of the Companies and Allied Matters Act, 1990.
  8. Section 27(2) of the Companies and Allied Matters Act, 2020.
  9. Paragraph 13 of the Companies Regulations, 2021
  10. Section 130 of the Companies and Allied Matters Act, 2020.

THE REGULATORY PROCEDURE FOR IMPORTATION OF GOODS INTO NIGERIA

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By Seun-Timi-Koleolu and Feyijuwa Akinyanmi

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Importation forms a key part of the Nigerian economy as statistics show that over US$53 billion worth of goods were imported from around the globe into the country in the year 2020[1]. To cater for the high demand for imported goods in the country, the Nigerian Customs Service (NCS) in collaboration with other government agencies has put in place procedures for importing goods into the country.
In our previous article, we outlined the process for acquiring a Standards Organisation of Nigeria Conformity Assessment Program (SONCAP) certificate in line with the procedure for importing goods into the country. Today’s article will briefly highlight the steps for importing goods into Nigeria.

  1. Confirm that the goods can be imported into Nigeria.

A company wishing to import goods into Nigeria must first check the Import Prohibition List published by the NCS[2] to ensure the goods to be imported are not prohibited or restricted. The rationale for the list is to improve the local economy by reducing reliance on imported goods and to control the inflow and outflow of foreign exchange. Some of the items on the prohibition list include frozen poultry, bagged cement, paracetamol tablets, soaps and detergent, telephone re-charge cards and vouchers etc.

  1. Register the TIN with the FIRS as an Importer

Upon registration of the company to be used for the importation (Importing Company), the company will be issued a certificate of incorporation and a Tax Identification Number (TIN). The Importing Company is required to register its TIN with the Federal Inland Revenue Service (FIRS) by submitting the TIN and a valid email address on the Single window for trade portal (“Trade Portal”).

  1. Obtain a Product Certificate (PC)

The PC is issued by the Standards Organisation of Nigeria (SON)  to the exporter of the goods through firms accredited by it (“Accredited Firms”) e.g Cotecna, SGS etc. The PC certifies that the quality of the goods to be imported are in compliance with the standards set out by the SON. The exporter is required to share the PC with the Importing Company who will then activate the PC on the SON website[3], where it will be sent to the NCS and uploaded on the Trade Portal.

  1. Obtaining and submitting of e-Form M

The e-Form M can be obtained from the Trade Portal or an authorized dealer bank and submitted for approval online to the authorised dealer bank with the required supporting documents. The supporting documents must be marked “valid for forex” or “not valid for forex” where applicable. The Importing Company is required to refer to the Central Bank of Nigeria’s circular on the list of goods not valid for foreign exchange[4] to determine if the goods to be imported are valid for forex. Examples of such goods include furniture, toothpick, kitchen utensils, sardines, textiles etc. Please note that the importation of these goods are not banned as the Importing Company will just be required to import the above goods without access to the official Nigerian Foreign Exchange Market. Where the goods are not valid for forex, the Importing Company will be required to write a letter to the authorized dealer bank stating and providing evidence showing the source of the foreign exchange for the payment of the goods. Upon approval, the authorised dealer bank will forward the e-Form M and the supporting documents to the NCS for registration on the Trade Portal upon conducting a preliminary review of the documents submitted.

  1. Obtaining SONCAP Certificate (the “Certificate”) and other regulatory permits

The Certificate is issued by the SON upon inspection of the goods to be imported by any of the Accredited Firms. The company needs to submit the required documents and its e-Form M for the SONCAP certification process. Once the Certificate is issued, the Importing Company is to activate it on the SON website after which it will be sent to the NCS and uploaded on the SON Certificate database on the Trade Portal. Depending on the type of goods to be imported, the Importing Company may be required to obtain the appropriate permit from various regulatory bodies such as the Department of Petroleum Resources (DPR) or the National Agency for Food and Drug Administration and Control (NAFDAC).

  1. Pre-arrival Assessment Report (PAAR) Process

A valid PAAR approved by NCS is required to clear imported goods. The company is required to send its final documents including the final invoice; Certificate of Origin (CoO); transport documents; Packing list; e-Form M; and PC to the authorized dealer bank who will then complete an electronic PAAR Consignment form and will submit it together with the final documents to the NCS via the Trade Portal. Upon approval by the NCS, the PAAR will be generated.

  1. Clearance of the goods by the NCS and Payment of Import Duties

To clear the goods upon arrival to Nigeria, the Importing Company is required to prepare and upload a Single Goods Declaration (SGD) alongside the final documents and PAAR to the Trade Portal. The SGD shows the details of the imported goods and can be obtained through the Trade Portal. The Importing Company is also required to pay import duty on the goods which will be determined by the tariff published by the NCS[5]. The  Importing Company pays the import duties by selecting the assessment option on the NCS page of the Trade Portal. The details of the imported charges will be sent to the designated duty collection bank. A signed receipt will be issued to the Importing Company and an e-confirmation to the NCS acknowledging payment of the duties and taxes.

  1. Request release of goods

After payment of all charges by the Importing Company, a request may be made for the release of the goods. Upon scrutiny of the goods, they will be deemed clear and an exit note will be issued by the Terminal Operator.

 

Conclusion

It is important to note that companies may choose to outsource the importation process to a logistics company who will handle the importation of their goods on their behalf. Suitable contractual terms would have to be entered into with the logistics company to protect the interest of the Importing Company.

[1] https://www.worldstopexports.com/nigerias-top-10-imports/

[2] https://customs.gov.ng/?page_id=3075

[3] https://soncap.son.gov.ng/certificateActivation/webform

[4] https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf

[5] https://trade.gov.ng/tariff/search.do