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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.

REGULATORY UPDATE: INTRODUCTION OF CREDIT GUARANTEE COMPANIES IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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

1. What are Credit Guarantee Companies?

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

2. Who is to engage a CGC?

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

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

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

4. What are the permissible activities of a CGC?

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

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

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

6. What is the Consideration for the Guarantee Services?

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

7. How to apply for a CGC license?

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

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

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

8. Conclusion

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

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

INTRODUCTION OF THE PAYMENT SERVICE HOLDING COMPANY LICENSE

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By Seun Timi-Koleolu and Eustace Aroh

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Introduction

In our newsletter titled “Regulatory Requirement for Fintech in Nigeria; CBN Licenses”, we analyzed the Central Bank of Nigeria (“CBN”) categorization of the Fintech licenses into four categories based on CBN circular dated December 9, 2020 (the “Circular”). In the Circular, the CBN indicated that operating more than one license category must be done through a holding company. The CBN expects that the holding structure would help to prevent commingling of activities, facilitate management of risks and enable the CBN exercise adequate regulatory oversight on all the companies operating within the Group.

Sequel to the Circular, the CBN on August 3, 2021, issued the Guidelines for licensing and regulation of payments Service Holding Companies in Nigeria (the “Guidelines”). In this article, we analyze the provisions of the Guidelines.

  1. Which licensing categories are affected?

Companies wishing to operate the licenses in the following categories under one umbrella, are required to set up a Payment Service Holding Company (“PSHC”) which will be the holding company of the various subsidiaries holding the fintech licenses (“Subsidiaries”):

i.Mobile Money Operations;

ii.Switching and Processing; and

iii.Payment Solutions Services.

  1. How is a PSHC established?

A PSHC shall be a company registered under the Corporate Affairs Commission, and licensed by the CBN.

  1. What is the role of the PSHC?

The PSHC will be a non-operating company and will hold equity in the Subsidiaries. The PSHC shall have capital-raising capabilities to support its Subsidiaries. The PSHC shall, however, not be involved in the day-to-day management and operations of the Subsidiaries.

  1. What is the minimum paid up capital of the PSHC?

Where the PSHC wholly owns the Subsidiaries, the minimum paid-up capital of the PSHC must exceed the total of the required minimum capital of all its Subsidiaries. Where the PSHC owns less than 100% of the Subsidiaries, its minimum paid-up capital must exceed the total of its shareholding in the Subsidiaries.

  1. How should the PSHC be structured?

The PSHC should have at least two Subsidiaries which include a Mobile Money Operator (MMO) and a Switching company. Subject to the approval of the CBN, the PSHC can acquire controlling interest (51% shares) in any financial or technology company.

  1. What are the permissible activities?

In addition to holding equities in the Subsidiaries, PSHC may provide board policy direction, shared services or enter into technical or management service contract with any of its Subsidiaries.

  1. What are the non-permissible activities?

PSHC are not permitted to establish, transfer or close any Subsidiary without the consent of the CBN. They are also not permitted to receive income from sources except from dividend income; income from shared services, patents, copyrights and royalties; profits from divestment from Subsidiaries; interest from investment of funds in government securities or placement with licensed financial institutions; or any other source approved by the CBN.

  1. How to apply for a PSHC license?

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

i.Evidence of minimum paid up capital;

ii.Detailed business plan;

iii.Draft of the memorandum and articles of association; and

iv.And other required documents;

upon which, an approval in principles will be obtained. Within 6 months of the issuance of the approval in principle, an application is to be made to the CBN for the issuance of the final license.

Conclusion

The new PSHC will provides a tidier way for fintech companies to utilize several fintech license under one umbrella. It is important to note that the Guidelines and the PSHC licensing regime is relatively novel. Therefore, the effectiveness of the PSHC structure in the fintech industry can only be determined with time.

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.

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.

 

 

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.

 

CBN REGULATORY OVERSIGHT; APPOINTMENT AND REMOVAL OF DIRECTORS OF FINANCIAL INSTITUTIONS UNDER NIGERIAN LAW

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By Aderonke Alex-Adedipe and Eustace Aroh

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Introduction

On April 29, 2021, the Central Bank of Nigeria (CBN), as the apex regulator of all banks and other financial institutions in Nigeria, announced the removal of all the directors of First Bank Limited, a licensed commercial bank and financial services company, and FBN Holdings PLC, its holding company. The CBN also went a step further to appoint a new board of directors for the two companies.

In this article, we analyse the regulatory powers of the CBN to make decisions in relation to the constitution of the board of directors of financial institutions in Nigeria.

 

Provisions of the Companies and Allied Matters Act 2020[i]

The affairs of companies, including financial institutions, are generally guided by the provisions of the Companies and Allied Matters Act 2020 (“CAMA 2020”) which also provides for the general procedure for the appointment and removal of directors of a company.

Appointment – The first directors of a company are appointed by the subscribers during incorporation[ii] and subsequent directors are appointed at the annual general meeting by the shareholders.[iii] Where a vacancy is created by death, removal, retirement or resignation, a replacement director may be appointed by the board of directors to fill the vacancy until the next annual general meeting.[iv]

Removal – For a director to be removed under the CAMA 2020, a meeting of the shareholders must be convened and a decision to remove the shareholder passed at the meeting.[v] Prior to the meeting, the shareholder proposing the removal of the director is required to send a special notice to the company. The company will, in turn, send the special notice to the director proposed to be removed who will, if he wishes, make his representation in writing. The Company shall send the representation of the director alongside the notice of the meeting to all shareholders.[vi]

 

Provisions of the Bank and Other Financial Institution Act 2020

In addition to the CAMA 2020, banks and other financial services companies are also regulated by the Central Bank of Nigeria Act 2007 (CBN Act), Bank and Other Financial Institution Act 2020 (“BOFIA”) and the CBN’s various codes of corporate governance.

Under the BOFIA, before a company can carry on the business of banking, it must be licensed by the CBN.[vii] The CBN which was created under the CBN Act with the task of promoting a sound financial system in Nigeria[viii] was also granted regulatory powers under the BOFIA over all Nigerian banks. Sequel to its regulatory powers, banks are not to enter into any arrangement that will change the control (which includes appointment and removal of directors) or significant shareholding of the bank without seeking the prior written consent of the CBN.[ix]

 

Powers of the CBN to appoint and remove Directors

The powers of the CBN to remove and appoint a director can be deduced from the combined reading of sections 33 and 34(1)(2) of the BOFIA. Essentially, the CBN, under section 33, has the power to investigate the affairs of a bank where:

  • a director, shareholder, creditor or depositor applies to the CBN;
  • the bank is carrying on business in a way that is detrimental to the interest of the depositors or creditors;
  • the bank does not have sufficient assets to cover its liabilities to the public;
  • the bank has contravened any provision of the BOFIA or a relevant law; or
  • where it is in the interest of the public to do so.

Based on the investigations conducted under section 33, if the CBN is satisfied that the bank is liable in respect of the issue it was investigated for[x], the CBN may exercise the powers conferred on it under section 34(2) which includes the power to (notwithstanding any law or the memorandum and articles of the bank) remove a director and appoint any person in his stead and stipulate the amount to be paid to that director as remuneration.[xi]

 

Other Financial Institutions

Under the BOFIA, “other financial institution” refer to individuals, groups or companies that engage in the business of discount houses, bureau de change, finance company, money brokerage, foreign exchange purchase, international money transfer services, mortgage refinance or guarantee company, finance holding company or payment service providers, factoring, project financing, debt administration, equipment leasing, fund and investment management, private ledger services, and local purchases order financing.[xii]

Under the BOFIA, where the CBN is satisfied that a company classified as an “other financial institution” is in “a grave situation”, the CBN may exercise the powers granted to it under section 34, including the power to remove and appoint a director.[xiii]

 

Conclusion

The powers of the CBN to appoint and remove directors in a financial services company have been tested at the Court of Appeal[xiv] where it was held that the power of the CBN to remove and appoint directors was legal in line with sections 33 and 34 of BOFIA.[xv] Financial institutions must note that, notwithstanding their powers to remove and appoint directors at their discretion, its decision is subject to the regulatory oversight of the CBN.

 

[i] See our article on “Nigerian Companies and Allied Matters Act 2020 – Does The Removal of a Director Result in His or Her Disqualification as a Director of Other Companies?” https://pavestoneslegal.com/nigerian-companies-and-allied-matters-act-2020-does-the-removal-of-a-director-result-in-his-or-her-disqualification-as-a-director-in-other-companies/

[ii] Section 272 CAMA 2020

[iii] Section 273 (1) CAMA 2020

[iv] Section 274(1) CAMA 2020

[v] Section 288(1) CAMA 2020

[vi] Sections 288(2)(3) CAMA 2020

[vii] Section 2(1) BOFIA

[viii] Sections 1 and 2 CBN Act.

[ix] Section 7 BOFIA. CBN’s Revised Assessment Criteria For Approved Persons’ Regime For Financial Institutions

[x] Section 34(1)(d) BOFIA

[xi] Section 34(2)(f) BOFIA

[xii] Section 131 BOFIA

[xiii] Section 62 (1) BOFIA

[xiv] Danson Izedonmwen & Anor v. Union Bank PLC & Anor (2011) LCN/4919 (CA); appeal no: CA/L/1205/10 delivered by John Inyang Okoro, J.C.A on the 21st day of November, 2011

[xv] Then 33 and 35 of the BOFIA 1990.

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

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By Aderonke Alex-Adedipe and Praise Adetunmibi

Introduction

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

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

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

What is a CCI?

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

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

Why is a CCI relevant to foreign investors?

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

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

How is a CCI obtained?

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

Conclusion

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

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

UPDATE ON REGULATION OF DIGITAL ASSETS IN NIGERIA: SOME LESSONS FROM SWITZERLAND

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

 

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Introduction

Generally, skepticism expressed about cryptocurrencies stems from their classification as high-risk assets’’ which are extremely volatile and speculative in terms of price.[1] The main reason for the existence of Blockchain Technologies is their independence from financial endorsement and their universal nature. This is why the regulation of cryptocurrencies remains an arduous task for financial authorities.

Following the recent announcement of the ban on the dealing or facilitation of cryptocurrency transactions by Nigerian financial institutions by the Central Bank of Nigeria (CBN)[2], the Securities and Exchange Commission (SEC) also announced on 11th February 2020, that its previous decision to regulate cryptocurrency investments in Nigeria has now been suspended. In light of these developments, this article aims to shed light on possible options to aid the crafting of a regulatory regime for blockchain technologies in Nigeria.

There are indeed some valid concerns about cryptocurrency transactions. For instance,  the fact that they create new opportunities for criminals and terrorists to launder their proceeds, or finance their illicit activities.[3] Notwithstanding, the Swiss have built a system that innovatively utilizes pre-existing Swiss law and novel legislation, to regulate the activities of blockchain service providers in Switzerland.

Nigeria is responsible for more cryptocurrency trading than most countries and is currently rated as the third highest globally for trading volumes in cryptocurrency. It is therefore desirable, that a robust regulatory regime exists to govern these transactions, address negative tendencies, and in effect, strengthen the financial services industry and the Nigerian economy in general. For these reasons, it is essential to examine some key aspects of Swiss Blockchain Laws to understand the methodology employed to provide a grounded basis for digital asset exchange and tokenization, while simultaneously addressing the issue of digital currency money laundering.

The Swiss Approach

The Swiss Financial Market Supervisory Authority or ‘FINMA’’ recognises the tendency for block-chain business models to sidestep existing regulations. To put a check on such tendencies, Swiss authorities have successfully placed blockchain service providers under the ambits of the Swiss Anti-Money Laundering Act.[4] Blockchain service providers in Switzerland are mandated to verify all their customers’ identities, monitor business relationships based on risk level, and report to the ‘Money Laundering Reporting Office Switzerland (MROS), where there are reasonable grounds to suspect money laundering. All Virtual Asset Service Providers who intend on doing business in Switzerland are required to apply for a license from FINMA.

The new Swiss laws define ‘exchange digital securities’ and stipulate the legal procedure for the seizure of digital currency assets in bankruptcy proceedings. The roles of digital currency trading platforms and their legal standing on digital securities are also well clarified.

FINMA has currently granted licenses to several financial institutions to carry out cryptocurrency trading activities. This has served to promote distributed ledger technology and incorporate crypto assets into portfolios and Exchange-Traded Funds.

Switzerland is noted to have a comprehensive regime for Initial Coin Offerings (ICOs) which are also regulated under money laundering laws, terrorist financing laws, securities trading laws, banking laws and, Swiss collective investment scheme legislation.

Residents of the Canton of Zug in Switzerland (referred to as the “Crypto Valley”) can now pay their taxes in bitcoin and cryptocurrencies up to 100,000 CHF, under the supervision of the Swiss Federal Tax Administration (SFTA).[5]

Interestingly, like the Nigerian position, cryptocurrencies are still not classed as a legal tender in Switzerland, neither are they considered to be “money” for reasons that their intangible nature stops them from being classified as a “thing” under Swiss civil law.[6]

Conclusion

From the foregoing, it is evident that a technology-neutral legislative approach is needed and can be developed in Nigeria. To achieve this, active steps need to be taken towards streamlining regulations on insolvency, financial market, banking, collective investment, and anti-money laundering into a legal framework for the regulation of cryptocurrency transactions and investments in Nigeria. This is likely to trigger an unprecedented boost in the Nigerian economy which has continuously suffered from currency devaluation over the years.

 

[1] Mario Draghi, President of the ECB, Introductory Statement and Closing Remarks at the European Parliament Plenary Debate on the ECB Annual Report for 2016 (Feb. 5, 2018), https://www.ecb.europa.eu/press/key/date/ 2018/html/ecb.sp180205.en.html, archived at http://perma.cc/M6WX-T3RR.

[2] Aderonke Alex-Adedipe and Eustace Aroh, (Pavestoneslegal September 23, 2020) Regulation of Cryptocurrencies and Other Digital Assets in Nigeria accessed 24 March 2021

[3] CGMF’s report, National Risk Assessment: Risk of money laundering and terrorist financing posed by crypto assets and crowdfunding, October 2018

[4] Federal Council report – Legal framework for distributed ledger technology and blockchain in Switzerland, December 2018

[5] Tanzeel Akhtar, (Nasdaq, February 18, 2021)  Switzerland’s ‘Crypto Valley’ Has Started Accepting Bitcoin, Ether for Tax Payments accessed 24 March 2021

[6] Mueller / Reutlinger / Kaiser, p. 86 et seq .; Maurenbrecher / Meier, protection of users of virtual currencies under insolvency law; Eggen, Chain of Contracts – A private law dispute with Distributed Ledgers, AJP 2017, p.14; Bärtschi / Meisser, Virtual Currencies from a Financial Market and Civil Law Perspective, in: Weber / Thouvenin (ed.), Legal challenges through web-based and mobile payment systems, Zurich 2015, p. 141

 

REGULATION OF USSD SERVICES IN NIGERIA – CHARGES ON FINANCIAL TRANSACTION

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Unstructured Supplementary Service Data (USSD) has evolved from being a channel employed predominantly by Mobile Network Operators (Telcos) to one deployed by a broad spectrum of service providers. Most financial institutions have sought the services of different Telcos to deploy unique USSD codes, allowing millions of Nigerians to enjoy basic banking services from the comfort of their homes and without the need for internet connection.

How do USSD codes work?
USSDs are sometimes referred to as “quick codes” or “feature codes”. They are communication protocols that allow customers to send queries or requests and receive solutions simply by dialling a short code that begins with an asterisk (*) and ends with a hash(#) symbol. Some examples of USSDs include GTBank’s *737#, Zenith Bank’s *996#, Ghana Commercial Bank’s *422#, Kenya National Bank’s *625# e.t.c. Practical uses of USSDs in the finance space include the transfer of funds, airtime top-ups, account balance checks, BVN checks etc.

 

Are there any regulations on the use of USSD services for financial transactions?
USSDs for financial transactions are majorly regulated by the Central Bank of Nigeria (CBN) Regulatory Framework for the Use of Unstructured Supplementary Service Data (USSD) for Financial Services in Nigeria, 2018; and the Nigerian Communications Commission (NCC) Guidelines on Short Code Operation in Nigeria, 2011.

Financial institutions who wish to provide USSD services to their customers are required to obtain a letter of no objection or introduction from CBN before being considered for the issuance of the USSD shortcodes by the NCC.

 

How have customers been billed for USSD services?
For over two years now, Telcos and Deposit Money Banks (DMBs) in Nigeria have had prolonged disagreements over the appropriate USSD pricing model for financial transactions. The crux of the issue has been whether the Telcos are to adopt the End User billing model i.e. charging customers directly; or the Corporate billing model i.e. charging the financial institution directly. NCC issued a publication on the 24th  day of July 2020[1], prohibiting Telcos from using the End User billing model and instructing that they employ the Corporate billing model. The basis for this was that granting access to USSD channels was a service delivered by Telcos to financial institutions and not customers.

 

What are the current directives by the CBN and NCC on USSD billing?

On the 12th  day of March 2021, the Association of Licensed Telecommunication Operators of Nigeria (ALTON) threatened to withdraw USSD services from DMBs until the ₦42 billion debt they owe for the services is settled[2]. In response to the above, the NCC and CBN on the 16th day of March 2021, issued a joint statement to the effect that DMBs and other financial institutions will be charged a flat fee of N6.98 per transaction; in accordance with the Corporate billing model. The new charge is to be deducted from customers’ accounts by the financial institutions on behalf of the Telcos. Financial institutions are now prohibited from charging customers any other fees for the service.

Conclusion

In response to the above, the joint statement finally brings clarity on how payment is to be made for USSD services and seems to be a win for the Telcos. Although the Corporate billing model appears to have been adopted, customers will ultimately bear the costs. This may adversely affect the popularity of USSD transactions within the general populace, particularly low-income earners.

[1] https://www.ncc.gov.ng/accessible/documents/910-determination-of-ussd-pricing-amended/file

[2]https://www.thisdaylive.com/index.php/2021/03/15/telcos-suspend-withdrawal-of-banks-ussd-services/