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Foreign Exchange Controls in Nigeria: Updated Rules for BDCs

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BY SEUN TIMI-KOLEOLU AND PROMISE ITAH

Introduction

On February 10, 2026, the Central Bank of Nigeria (CBN) issued a circular on Participation of Licenced Bureau De Change in the Nigerian Foreign Exchange Market (NFEM) (the “Circular”) allowing licensed Bureau de Change (BDC) to operate as intermediaries in the NFEM (the official foreign exchange market). This represents a significant policy shift, as BDCs had been excluded from accessing foreign exchange (FX) through official channels since July 2021 due to practices deemed to have contributed to exchange rate instability.

The Circular builds on the 2024 regulatory reforms, which strengthened capital requirements, licensing standards, reporting obligations, and compliance expectations for BDCs. According to CBN, the decision to re-admit BDCs aims to improve FX liquidity and ensure that legitimate end users can access foreign exchange more reliably.

In this newsletter, we highlight the key rules for BDC participation in the foreign exchange market and their practical implications.

What Are the New Rules for BDC Participation?

Under the Circular, licensed BDCs may participate in the NFEM, subject to the following requirements.

a. Weekly FX Purchase Limit: To manage liquidity and prevent excessive exposure, each licensed BDC may purchase up to $150,000 per week from any authorized-dealer bank. All purchases must be conducted at the prevailing market rate, with no preferential pricing arrangements.

b. Mandatory Resale Timeline and Position Restrictions (NFEM-Sourced FX): Any FX acquired under this scheme must be sold or used within 24 hours. BDCs cannot hold NFEM-sourced FX in their accounts beyond this period, and any unused balances must be returned to the market the next day. This rule prevents speculative hoarding and ensures that FX flows efficiently to end-users.

c. Settlement and Payment Structure: All FX transactions must be processed through bank accounts at licensed financial institutions. BDCs cannot route FX through third parties or non-customer intermediaries. Cash settlement is permitted, but it is strictly limited to no more than 25% of the transaction value, with the remainder required to pass through the banking system. This ensures that FX flows are traceable and transparent.

d. Compliance and Regulatory Oversight: In addition to operational limits, BDCs remain subject to enhanced compliance obligations:

i. Authorised dealers must perform full Know Your Customer (KYC) and due diligence on any BDC client before selling FX.

ii. Licensed BDCs are required to submit timely electronic reports of their transactions to the CBN and comply fully with all Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) rules.

iii. Anonymous transactions or round-tripping (buying FX at official rates and reselling it elsewhere for profit rather than for legitimate use) are strictly prohibited.

The Circular further reinforces that BDCs must operate within the broader Regulatory and Supervisory Guidelines for Bureau de Change Operations in Nigeria 2024.

What Are the Practical Implications?

a. For BDC operators:

i. Immediate Turnaround: BDCs must find buyers immediately or face the administrative burden of selling funds back to the NFEM within 24 hours;

ii. Strategic Forecasting: To avoid the inconvenience and potential losses involved in returning unused funds, BDCs must accurately forecast customer demand before purchasing their weekly $150,000 limit;

iii. Digital Accountability: The new framework emphasizes a “digital footprint,” requiring BDCs to integrate their IT systems with the CBN for real-time monitoring and reporting.

b. For the market and the public:

i. Easier access: The participation of BDCs in the official exchange market is expected to make it easier for the average person (travelers, students etc.) to obtain FX. Since BDCs are widely accessible to these users and are required to sell NFEM-sourced FX within 24 hours, supply of FX is expected to circulate more quickly to end users.

ii. Price stability: By prohibiting the hoarding of FX, the rules are expected to help reduce the extreme price jumps often seen in the parallel market.

Conclusion

The reintegration of licensed BDCs into Nigeria’s FX market provides a transparent and reliable channel for accessing foreign exchange. For businesses, it is likely to enhance predictability and reduce reliance on informal sources, while for BDCs, it reinforces the need to operate strictly within the established regulatory framework. The CBN expects that, when properly implemented, this structure will promote smoother FX flows, support effective business planning, and contribute to overall market stability.

 

For further information on any of the issues covered in this newsletter, please contact us at info@pavestoneslegal.com. At Pavestones, we deliver quality and innovative legal support across diverse industries, helping businesses operate in compliance with applicable laws and regulations to drive sustainable business growth.

RECAPITALIZATION IN THE NIGERIAN BANKING SECTOR: LEGAL CONSIDERATIONS AND STRATEGIC OPTIONS

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BY SEUN TIMI-KOLEOLU AND MARK IMONITIE

Introduction

The CBN in its March 28, 2024 circular announced an upward review of the minimum capital requirements for banks in Nigeria, mandating banks to raise their minimum paid-up capital by March 31, 2026 as follows: ₦500 billion for international commercial banks; ₦200 billion for national commercial banks; ₦50 billion for regional commercial banks; ₦50 billion for national merchant banks; ₦20 billion for national non-interest banks; and ₦10 billion for regional non-interest banks.

As the CBN deadline approaches, this newsletter following our newsletter earlier written on the subject of recapitalization, outlines the options available to banks yet to meet the CBN’s recapitalization requirements and key legal considerations.

 

  1. Legal Considerations

The process of recapitalization requires strict compliance with the provisions of the law; the procedures set out by the CBN, and other applicable regulatory authorities.

Below are some legal considerations for banks seeking to recapitalize.

i. Conduct legal due diligence and Anti-Money Laundering screening

Banks seeking to recapitalize are required to conduct due diligence and effective anti-money laundering screening/checks on prospective investors, to mitigate the risk of injecting capital from fraudulent sources into the bank. Measures for due diligence include know your customer, customer due diligence and suspicious transactions monitoring. The CBN is empowered to enforce strict enforcement of checks for all prospective and significant shareholders as well as directors and senior management staff of banks.

ii. Obtain corporate approvals

Banks are required to obtain board and shareholders’ approval, ensuring alignment with the Banks and Other Financial Institutions Act (BOFIA) 2020 as amended and good corporate governance practices, for sustainable compliance. The resolutions approving the recapitalization among other documents, will be provided to CBN and SEC in the request for approval for recapitalization.

iii. Obtain regulatory approvals

A bank seeking to recapitalize is required to submit a detailed application to CBN and the Securities and Exchange Commission (SEC) containing the means by which the bank will meet the recapitalization target. Documents to be provided to the CBN and SEC for approval include, written request for approval, board resolution, shareholders resolution, prospectus, etc.

iv. Preparation and execution of transaction documents

Depending on the choice method of recapitalization which the bank will apply, transaction documents will to be prepared and executed, after due negotiation by relevant parties. For example, if the bank seeks to recapitalize through an acquisition, documents such as share sale and purchase agreement, non-disclosure agreement etc. will be prepared and executed by the relevant parties.

v. Filing necessary post transaction documents

Upon completion of the transaction, banks will be required to file necessary post-issuance returns to the CBN and SEC. Also, the bank’s record with the Corporate Affairs Commission (CAC) will need to be updated.

 

B. Strategic Options

In the CBN’s circular, the CBN prescribes the following options as available to Nigerian banks seeking recapitalization:

  • Public Offers
  • Rights Issue
  • Private Placements
  • Mergers and Acquisitions
  • Upgrade or downgrade of license authorization

i. Public Offers

For the purpose of bank recapitalization, a public offer involves issuing new shares or securities to the general public through stock exchanges or regulated markets to raise required capital.

This process enables larger investor participation to meet capital adequacy thresholds and provide large-scale funding.

ii. Rights Issue

This refers to the method of recapitalization where a bank offers existing shareholders the right (but not the obligation) to purchase additional new shares. By the use of rights issue, the bank will be able to raise additional capital while minimizing ownership dilution for existing shareholders.

iii. Private Placements

Private placement refers to a method of recapitalization where the bank raises capital by directly selling its shares to a select group of pre-identified investors like institutions or high-net-worth individuals and bypassing public markets.

This approach enables quick funding, offers confidentiality, lower costs, and regulatory exemptions compared to public offerings, making it suitable for mandatory recapitalization.

iv. Mergers and Acquisitions (M&As)

For bank recapitalization, M&A involves undercapitalized banks merging with or being acquired by stronger banks to consolidate capital base, assets, and operations, thereby meeting the minimum share capital set by the CBN.

Mergers create a unified entity with enhanced scale and stability, while acquisitions allow financially robust banks to absorb others, thereby boosting combined equity without new share issuance. An example of the use of this strategy for recapitalization is the concluded merger between Union Bank of Nigeria and Titan Trust Bank, with Union Bank of Nigeria being the surviving entity.

v. Upgrade or downgrade of license authorization

This refers to adjusting a bank’s operational category—such as from national to regional or vice versa—under CBN guidelines to align with the new minimum capital requirements.

An upgrade expands scope and requires higher capital for broader operations, while a downgrade scales back activities to a lower-threshold license, avoiding full recapitalization costs.

 

CONCLUSION

As the March 2026, deadline for recapitalization looms, Nigerian banks stand at a pivotal crossroad where strategic action today would secure tomorrow’s dominance.

Rights issues, mergers, and compliant capital raises provide banks with a launchpad for expansion and economic impact.

Banks yet to recapitalize are therefore required to prioritize legal diligence under CBN/SEC guidelines and mitigate dilution risks pursuant to the provisions of the Companies and Allied Matters Act 2020.

The recapitalization wave is expected to reshape Nigeria’s financial landscape, and provide a pathway for enduring growth and stability in Nigeria’s banking sector.

 

About us:

Pavestones is a full-service legal practice, registered with the Securities and Exchange Commission as a Capital Market Solicitor. Pavestones deliver quality and innovative legal support across diverse industries, helping clients operate in compliance with applicable laws and regulations to drive sustainable business growth.

REGULATORY UPDATE: THE REVISED GUIDELINES FOR THE OPERATION OF NON-INTEREST FINANCIAL INSTRUMENTS BY THE CENTRAL BANK OF NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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On June 9 2022, the Central Bank of Nigeria (“CBN”) issued the “Revised Guidelines For The Operation of Non-Interest Financial Institutions’ Instruments by the Central Bank of Nigeria” (the “Guidelines”) to enhance their operations, respond to developments in the banking sector, and to provide uniform rules for accessing non-interest financial instruments.

What are Non-Interest Instruments?

Non-Interest Instruments (“NIIs”) are interest-free financing facilities granted by the CBN to Non-Interest Financial Institutions (“NIFIs“) by way of an incentive to ensure that they maintain liquidity for granting non-interest loans.

Who can access Non-Interest Instruments?

They are available to NIFIs ie., Non-interest Banks (NIB) (e.g, Jaiz Bank, Lotus Bank and Taj Bank) and deposit money banks with non-interest banking window (e.g. Sterling Alternate Finance, Suntrust Bank). In addition,  a deposit money bank wishing to gain access to NIIs may apply to the CBN for access to the non-interest banking window.

What are the conditions for obtaining NIIs?

NIFIs are required to fulfil the following conditions;

  1. Appoint and authorize two dedicated representatives who shall be responsible for initiating and consummating transactions on the non-interest banking window.
  2. Initiate each transaction in the prescribed format including through emails, letters, Real-time Gross Settlement (RTGS) and Scripless Securities Settlement System (S4).
  3. Refer disputes arising from the operations of the Guidelines to the Director of the Financial Markets Department within the CBN.

 

Which NIIs are available under the Guidelines?

  1. CBN Safe Custody Account (“CSCA”)

The CSCA allows participants to deposit excess funds in their possession with the CBN, for a period of 3 or 7 days. The CBN may in return pay returns on the deposit to the participating institutions considering: (i) the prevailing monetary policy and liquidity conditions in the banking system; (ii) the deliberation and decisions of the Market Support Committee of the CBN; (iii) the size of the deposit; (iv) prevailing conventional banking conditions; and (v) alternative investment options.

2. CBN Non-interest Note (“CNIN”)

The CNIN is a financial paper issued by the CBN as evidence that an interest-free loan, which must be a minimum of N100 million, was issued by the participating institution to the CBN. The CNIN, then entitles the participating institution to subsequently obtain interest-free loans from the CBN within 12 months after the maturity of the initial interest-free loan to the CBN. The issuance of such interest free-loans by the CBN shall also be subject to liquidity needs of the participating bank.

3. CBN Non-Interest Asset-Backed Securities (“CNI-ABS”)

Typically, the CBN invests in Islamic financial certificates issued by multilateral financial institutions (Sukuk).  Subsequently, the CBN may auction a portion of its interest in the Sukuk to participating banks by way of a CNI-ABS. The duration of the CNI-ABS shall be based on the duration of the underlining asset (the asset under the Sukuk). The CBN shall thereafter, allocate earnings received on the securitized asset (the asset under the Sukuk) to the participating institutions based on their financial participation in the auction, (less its agency fee).[i]

The minimum investment into the CNI-ABS shall be 100 million Naira and shall be tradable in the money market and the secondary market.

4. The CBN Non-Interest Special Bills (“CNI-SB”)

The CNI-SB is issued by the CBN to a participating institution subject to an interest-free loan which the CBN must have obtained from the Cash Reserve Requirement Account of the participating institution. In this case, the participating institution is subsequently entitled to borrow 10% of the value of the loan previously issued by the participating bank for 1/3 of the tenure of the initial loan.

5. Intra-day Facility (“IDF”)

The IDF provides interest-free funds to the participating institution for 1 business day to avoid the gridlock on the settlement system.  The IDF shall be provided on the same day of request, and shall be secured by a collateral approved by the CBN and valued at 120% of the loan.

6. Funding for Liquidity Facility (“FfLF”)

The FfLF provides an overnight facility to participating institutions for short-term liquidity. The facility will be secured by a collateral and will be terminated by the next business day. A participating institution may convert an IDF to an FfLF, subject to rules of the CBN.

Conclusion

Non-interest banking was introduced in 2011 to grow the Nigerian financial system, encourage financial inclusion and provide alternative investment and financing options. The issuance of the Guidelines will encourage investments in the non-interest banking sector.

 

[i] The CBN also issued the Framework for the operationalization of the Central Bank of Nigeria Non-Interest Asset Backed Securities, which provides clarity on the operation of the CNI-ABS.

GUIDELINES ON THE OPERATION OF PAN AFRICAN PAYMENTS AND SETTLEMENT SYSTEM IN NIGERIA

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By Aderonke Alex-Adedipe and Adedolapo Arisoyin

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Introduction

On October 11, 2021, the Central Bank of Nigeria (CBN), issued the Guidelines on the Operations of Pan African Payments and Settlement System (“PAPSS”) in Nigeria (the “Guidelines”).

The CBN issued these guidelines with the aim of fostering economic integration amongst African countries in tandem with the African Continental Free Trade Area Agreement (AFCFTA).

Before the advent of PAPSS, transactions within West African Countries were conducted mostly in hard currencies (foreign currencies such as the USD, GBP, EUR amongst others), which was usually time consuming and more expensive. However, the introduction of this new payment system enables buyers in one African country to make payment in their local currency while the sellers in another country receives payment in their  local currency. Therefore, payments carried out on the platform can be made and received in each party’s respective local currency.

What is PAPSS?

PAPSS which is an initiative of the African Export-Import Bank (Afrixembank) in partnership with West African Monetary Institute (WAMI), is a cross-border payments infrastructure for instant payment transactions across Africa. The platform is being deployed within the West African Monetary Zone (WAMZ)- Nigeria, the Gambia, Sierra Leone, Liberia, Ghana and Guinea; before extending it to other regions within Africa. This platform has even been termed by some persons as the African equivalent of SWIFT. Interestingly, PAPSS was officially launched for use in Accra, Ghana, on Thursday, January 13, 2022.

This Article highlights the key features of the PAPPS, the Guidelines provided by the CBN for its use and some benefits of this initiative to the African economy.

Features of PAPSS

Outlined below are the key features of this platform as captured in the CBN’s guidelines:

  • The platform supports payment in the local currency of the sender and receipt of funds in local currency by the beneficiary.
  • It involves the use of Real-Time Gross Settlement (RTGS), which enables instant payments.
  • Inter-bank settlements will be in United States Dollars (USD) for the time being. A proposed single currency for WAMI and the African Union (AU) will be decided upon in the future for inter-bank settlements.
  • Afreximbank will be the settlement agent and the Central Bank of the participating countries will maintain a USD settlement account at Afreximbank.
  • The Central Bank of each Country has the prerogative of determining the nature of transactions eligible under the PAPSS.

Guidelines for compliance in Nigeria

To ensure effectiveness of this laudable initiative, the CBN has provided that the following guidelines are required to be complied with by stakeholders in Nigeria (government institutions, banks, payment providers, businesses and transacting parties):

  • Payment of imports and receipt of export proceeds which are eligible for PAPSS as decided by the CBN shall be restricted to transactions that are solely for the purpose of trade.
  • All required documents must be provided before a transaction is initiated on PAPSS by authorized dealers and their customers.
  • The prevailing exchange rate at Investors and Exporters Forex Window and the Financial Market Departments shall be used to determine conversion rates between the Naira, USD and any other third currency within Africa.
  • Only eligible transactions as may be determined by the CBN from time to time is eligible for payment on PAPSS.
  • Banks in Nigeria would be given the opportunity to maintain a United States Dollars settlement account within the PAPSS settlement bank (Afrixembank) for transactions which fall outside eligible transactions.

Benefits of PAPSS/ What this means for businesses in African Countries

PAPSS will support the initiation of cross-border retail payments in local currencies between African Countries and this is expected to provide a simplified and faster settlement and payment process within Africa.

With the promulgation of PAPSS, it is expected that the following will occur;

  1. there will be a significant boost to intra-continental trade;
  2. the PAPSS will reduce the costs incurred when trading with other currencies;
  3. traders will be able to make and receive payments in their local currencies which will eliminate the cost of acquiring hard currencies;
  4. government institutions will be able to keep a record statistics of cross border trade;
  5. a demand for African currencies will become evident.

 Conclusion

According to the Secretary General of AFCFTA, Mr. Wamkele Mene[1], it costs the African economy approximately $5 billion annually for currency convertibility. Based on the foregoing, the PAPSS if effectively executed amongst participating countries, has the capacity to create and foster a better payment system, and boost the economies of participating Countries.

[1] Nigeria, others lose $5b annually on currency convertibility cost | The Guardian Nigeria News – 198 Nigeria News

REGULATION OF FINTECH IN NIGERIA: DIFFERENCE BETWEEN MMOs, PSBs AND MFBs (version 2.0)

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By Seun Timi-Koleolu and Eustace Aroh 

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In our February 3, 2020 article, we had written on the differences between a Mobile Money Operator (MMO) license, a Payment Service Bank (PSB) license and a Microfinance Bank (MFB) license. The article was aimed at supporting Fintechs in determining which of the existing Central Bank of Nigeria (CBN) licenses is compatible with their services or proposed products.

Since our article, the CBN has issued various regulations and policies affecting MMOs, MFBs and PSBs. In view of this, we have updated our table on the different licenses to reflect the regulatory update.

MMO PSB MFB
Minimum share capital

 

 NGN 2 billion NGN 5 billion Unit (Tier 1) – NGN 200 million

Unit (Tier 2) – NGN 50 million

State MFB – NGN 1 billion

National MFB – NGN 5 billion
Service Area No restriction 25% of its operations in Rural Areas Unit (Tier 1) – operating in urban areas with 5 offices in 5 Local Government Areas (LGAs).

Unit (Tier 2) – operating in rural areas with two branches in 1 LGA.

State – operating in one state.

National – operating in all the states.
Loan Not permitted Not permitted Permitted provided that:
• No single loan will exceed 1% of the
sharecapital of the MFB; and
• subject to 80% Micro loan of the total loan portfolio.*Micro loans are credit facilities not more than NGN 500,000 for Unit
(Tier 1) and NGN 1 million for other categories.
Bank accounts and Wallets Bank Account-Based

Card Account-Based (Credit, Debit and Pre-paid)

e-Wallet

 Account and e-Wallets Bank accounts
Cards Limited to card processing Debit and Pre-paid cards Debit and Credit cards
Transaction limit Depending on KYC level

level 1 – NGN 50,000 (balance of NGN 300,000)

level 2 – NGN 200,000 (balance of NGN 500,000)

level 3 – NGN 5,000,000 (unlimited balance)

 Depending on KYC level

level 1 –  NGN 50,000 (balance of NGN 300,000)

level 2 – NGN 200,000 (balance of NGN 500,000)

level 3 – NGN 5,000,000 (unlimited balance)

 No Limit
Foreign Currency transaction Can receive and sell foreign exchange from inbound transfer.

Prohibited from remittance.

 Can receive and sell foreign exchange from inbound transfer.

Prohibited from remittance.

 Prohibited from foreign exchange transactions
Airtime and USSD service  Permitted (subject to NCC approval) Permitted (subject to NCC approval) Permitted (subject to NCC approval)
QR Code Payments Permitted Permitted Permitted
Connection with the Nigeria Inter-bank Settlement System

(NIBSS)

 Required Required Required
Connection with the
CBN Real Time Gross
Settlement (RTGS)		 Required Not required Not required
Agent Banking Permitted Permitted Permitted
Who can Operate Existing Banks and any
company can apply for an MMO license.		 Limited to the types of companies
listed below:Banking AgentsTelecommunication companiesRetail chainsPostal Service and Courier CompaniesMMO (converting to PSB)Switching Companies

Financial Technology companies

Financial Holding companies

 Any company can apply for an MFB license.

If you require clarity or further information on the licenses above, contact Pavestones at info@pavestoneslegal.com.

ESTABLISHING A DIGITAL BANK IN NIGERIA – LEGAL REQUIREMENTS

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By Seun Timi-Koleolu and Eustace Aroh 

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With the growing demand for faster and more convenient financial services, there are more people looking to solve this problem by setting up a digital bank. We have had startups ask us for advice on how to set up a digital bank in Nigeria.[1] In view of this, we have set out below the steps to be taken by a startup wishing to establish a digital bank.

  1. WHAT IS A DIGITAL BANK?

It is a technology-based company that provides banking and other financial services to its customers solely through digital/virtual platforms such as websites, mobile applications etc. Examples of these are Kuda, Vbank and ALAT by Wema in Nigeria; and Starling Bank in the United Kingdom. Digital Banks aim at providing faster and more convenient banking and financial services than the average traditional bank.

2. WHAT ARE THE LEGAL AND REGULATORY STEPS TO TAKE IN SETTING UP A DIGITAL BANK?

i. Licensing

Promoters seeking to establish a digital bank must first understand the regulatory landscape before proceeding to set up a company. The principal regulatory authority for all financial institutions in Nigeria is the Central Bank of Nigeria (CBN). As the CBN is yet to create a specific licensing regime for digital banks, companies intending to provide digital banking services must work with one of the available financial licenses including the following:

  • Microfinance Bank Licence: A microfinance bank (MFB) licence is the most commonly used licence for the purpose of digital banking in Nigeria. The MFB licence enables the holder to receive deposits and grant loans to its customers. It, however, prohibits its holder from purchasing or selling foreign currency or from remitting funds internationally. Also, 80% of the loans granted by MFBs must be below 500,000 naira. The capital requirement to obtain this licence ranges between 50 million to 5 billion naira depending on the category of the licence.
  • Payment Service Banks Licence:[2] A holder of a Payment Service Banks (PSBs) licence is permitted by the licence to accept deposits from its customer but cannot issue loans. The PSB licence can only be obtained by already established banking agents, licensed telecommunication companies and existing fintech companies etc. The capital requirement to obtain this licence is 5 billion naira.
  • Finance Company License:3 A holder of a finance companies licence is permitted by the licence to provide fund management and credit facilities such as loans, asset finance, project finance, debt factoring, debt securitization and other forms of credit facilities, to individuals and companies. They are, however, not permitted to receive deposits. The capital requirement to obtain this licence is 100 million naira.

ii. Incorporation and Documentation

Upon determining the right licence, the next step will be setting up the company at the Corporate Affairs Commission (CAC). In determining the share capital requirement for the company, it is important to take into account the CBN licensing capital requirement as set out above.

In addition to incorporating the company at the CAC, promoters must ensure that they have the right contract in place to protect their business and their interest in the business such as properly negotiated terms of investment in the digital bank.

iii. Protecting the Intellectual Property

The intellectual property of the business such as the logo, software and source codes are to be properly protected at the appropriate registry such as the National Copyright Commission or the Trademarks, Patents And Designs Registry.

iv. Corporate Governance

It is important that companies set up to provide digital banking services adopt good corporate governance practices in their operations such as ensuring the board is properly constituted with at least an independent director, setting up the required board committees etc. Companies with good corporate governance are attractive to investors.

For clarity in respect of the foregoing, please send an email to info@pavestoneslegal.com

 

  1. To read our article on Setting up a Fintech company, click here
  2. To read our article on Payment Service Banks, click here
  3. To read our article on establishing a Finance Company, click here

 

SETTING UP A FINTECH COMPANY IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Introduction

With the rapid growth of technology, Start-ups have continually found ways to improve financial services. This trend has been matched by the growing appetite of consumers globally, for faster and more convenient financial services. The financial sector in Nigeria has witnessed a growth in FinTechs with their revenue expected to reach $543m in 2022.

In this article, we have set out below the process of setting up a fintech company in Nigeria.

1. Licences
For promoters seeking to set up a FinTech, it is generally advised that they understand the existing regulatory space before proceeding to incorporate the business. This will help promoters to understand the acceptable organisational structure, share capital requirements and financial implications attached to any business they seek to engage in.

Fintechs in Nigeria are generally categorized and regulated as follows:

Fintech categories Regulators
i Payment service providers, mobile money operators, digital bank, switch companies Central Bank of Nigeria (CBN)
ii Lending CBN; State Ministry of Home Affairs
iii Savings, investment and funding CBN; Securities and Exchange Commission (SEC)
iv Cryptocurrency CBN; SEC
v Insurtech National Insurance Commission

Notwithstanding the above, some regulators cut across all sectors due to their general regulatory function such as the National Communications Commission (NCC) (for FinTechs providing value added services) and the National Information Technology Development Agency (NITDA) (for users of data, amongst other things).

2. Incorporation
Once there is a clear understanding of the regulatory terrain, the next step is to incorporate the company for the FinTech service. Although the minimum share capital for incorporating a private company in Nigeria is 100,000 naira, the share capital requirement for FinTechs usually exceeds this amount. Promoters must consult the regulators and relevant laws (via their legal advisers) to determine the adequate minimum share capital and shareholding requirement for their FinTech.

There are also capital deposits required by relevant regulators such as CBN for setting up FinTechs, to find out more, click here.

3. Documentation
Upon incorporation, it is pertinent for the founders to ensure that all relevant contracts are in place to properly protect the business. The founders are generally advised to execute the following: a Founders’ Agreement (to regulate the relationship of the founders of the business); a Shareholders’ Agreement (to regulate the relationship between all shareholders including present and future shareholders); Loan Agreements (to evidence and detail all capital injections including investments by founders and friends into the business); and Employee Stock Option (granting an option of share purchase to key employees).

4. Protecting the Intellectual Property

Founders of FinTechs are advised to ensure that intellectual property developed in the cause of the business are protected. It is important that the company’s logos are registered as trademarks at the Trademark Registry; and the software and codes are registered at the National Copyright Commission or Patent Registry (if it qualifies). Although software and codes are automatically copyrighted under Nigerian law, it is useful to carry out the registration of the software at the relevant registry.

It is pertinent to note that intellectual property rights automatically vests in the developer (which could be employees or contractors of the company) under Nigerian law. To ensure that the rights vest in the company/founder, it is advisable that the FinTech enters into an agreement with the developer assigning rights in the software to the company/FinTech either through an employment contract or a Copyright Agreement.

5. Financing

Founders may choose to first source for funds from family and friends, after which they may need to progress to venture capital and other institution.

The CBN and the SEC recently launched programs to aid FinTechs in test running their software under-regulated spaces. Click here to find out more about these programs.

Conclusion
With the population of unbanked Nigerians currently calculated at above 50% of the adult population, there are great growth opportunities in the FinTech ecosystem. It is, however, recommended that professional advice is obtained by emerging and existing FinTech founders from the inception of the FinTech, to properly guide the business.

 

 

THE CBN’S OPERATIONAL GUIDELINES ON GLOBAL STANDING INSTRUCTION: LEGAL MATTERS FOR CONSIDERATION

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In our newsletter of 17th July, 2020, we discussed the Operational Guidelines on Global Standing Instruction (“Guidelines”) recently issued by the Central Bank of Nigeria (“CBN”), its applicability, its triggering criteria and its potential impact on loan repayments by individual debtors. The CBN issued the Guidelines for the purpose of ensuring that debtors contractually authorize creditor financial institutions to set-off any unpaid debts by applying proceeds from any or all accounts operated by the customers across all Participating Financial Institutions licensed by the CBN. In today’s newsletter, we discuss in brief detail, some legal considerations which may arise from the application of the Guidelines. Below are some of the key legal considerations which are worthy of note:

 

What is the effect of a Global Standing Instruction (“GSI”) on accounts operated in joint ownership?

The Guidelines identify various types of accounts in respect of which a GSI can be activated. Whilst the GSI is only applicable to accounts operated by individuals, the Guidelines specifically seek to operate against accounts operated by debtors in conjunction with third parties, notwithstanding that the third parties may not be parties or beneficiaries of contractual relationships between a debtor, who is a joint account owner and the creditor financial institution.

Since the relationship between banks and their customers are contractual- in this case, a debtor and a creditor, the application of the GSI appears to deviate from the general principle of privity of contract which states that a person who is not party to a contract cannot be bound by the terms of that contract.

Consequently, in the absence of any legal agreement or written consent by a joint account holder, it becomes apparent that a question of the legality of the GSI and its application on joint account ownership arises. It is therefore unclear how the GSI will operate in this regard without violation of rights of joint account holders by the creditor.

 

How can potential disputes arising from a GSI mandate be resolved?

It is not unusual that potential disputes will arise in a debtor-creditor relationship, especially in relation to issues affecting excess bank charges and unauthorised debits. In the Guidelines, reference is made to an Arbitrator being ”… a person appointed to resolve a dispute between two parties by arbitration…” While it is not clear in what instances an Arbitrator may be appointed, or by what means, the language of the Guidelines suggest that an arbitration agreement may exist between Participating Financial Institutions/Bank and debtors and an Arbitrator may be appointed where there is a dispute in connection with an alleged wrongful GSI activation.  It is, however, uncertain whether Banks will be compelled to include arbitration clauses in their GSI mandates with customers. Assuming that this is the case, this potentially creates a restriction on the contractual right of parties to decide the forum for settling commercial disputes and ultimately, the rights of parties to the freedom of contract.

 

Are there any punitive measures against arbitrary activation of a GSI?

In addition to a fixed fine applicable to creditor banks for erroneous GSI activations, the Guidelines also specify that where an Arbitrator rules against a creditor bank for a disputed GSI transaction, the creditor bank shall also pay a fine of N10,000,000 (Ten Million Naira) or 10% of the disputed sum, whichever is greater.

This provision, it is believed will ensure that Participating Financial Institutions adhere strictly to the provisions of the Guidelines and that their powers to activate the GSI are not abused, thereby protecting the interest of debtors.

Conclusion

The ultimate purpose of the Guidelines is to increase creditor confidence by reducing non-performing loans. Prior to its proposed effective date (August 1, 2020), it is important that the highlighted legal issues be duly considered by the CBN to avoid a floodgate of disputes arising from the application of the Guidelines.

 

 

 

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.