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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: REGISTRATION OF DIGITAL LENDING COMPANIES WITH THE FEDERAL COMPETITION AND CONSUMER PROTECTION COMMISSION

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By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

In 2021, the National Information Development Technology Agency (“NITDA”) issued a fine of 10 Million Naira against Soko Lending Company (a digital lending company) after receiving over 40 petitions on the abuse of personal data by the lending company.[i] Due to the rising complaints about the abuse of customers’ rights, the NITDA consequently collaborated with the Federal Competition and Consumer Protection Commission (“FCCPC”) for the protection of the rights of Consumers. The FCCPC had since then (together with the Inter-agency Joint Regulatory and Enforcement Task Force[ii]) imposed and enforced several sanctions on digital lending companies for breach of consumer rights.

On August 18, 2022, the FCCPC issued the “Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022” (the “Framework”) further to its enabling Act[iii], which would allow the FCCPC regulate the digital lending space.

Who does the Framework apply to?

The Framework was issued and aimed at any company intending to carry on the business of digital lending in Nigeria.

Potential Conflict with the BOFIA 2020

Upon review of the Framework, it would appear that the Framework seeks to apply to all digital lending companies irrespective of their enabling license. In view of provisions of the Bank and Other Financial Institution Act 2020 (“BOFIA”), however, the intention of the FCCPC to regulate institutions licensed by the Central Bank of Nigeria (“CBN”) conflicts with the provision of section 65 of the BOFIA. Specifically, section 65 restricts the Federal Competition and Consumer Protection Act 2019 (FCCPA)[iv] from applying to the services of banks and other financial institutions.

Provisions of the Framework

  1. The Framework requires digital lending companies to apply to the FCCPC for registration by completing the FCCPC Interim Digital Lending Guidelines Form 001. The FCCPC will further request for specific information on the lending business of the company such as:
  1. the name and contact address of the business in Nigeria;
  2. The identity and nationality of the promoters, directors, nominee directors, secretaries, and key officials;
  3. the source of funding including the nature of the instrument, identity, nationality and nature of business of the source;
  4. any affiliations the lending company has with any company whether in Nigeria or abroad including parent companies, subsidiaries, associate companies etc;
  5. the license authorizing the business;
  6. a list of its digital application used in its operation;
  7. the interest rate and applicable fees including the method of calculation.

 

  1. The Framework also requires lending companies to prepare and submit the following documents together with their application for registration.
  1. Incorporation documents.
  2. An organogram showing its key officers.
  3. Contact information of the staff authorised to accept correspondence.
  4. Service level agreement with its service providers relating to operations.
  5. Evidence of feedback and complaint mechanism.

 

  1. The lending company is expected to appoint a representative who will relate with the FCCPC and act on behalf of the company.

 

Conclusion

Whilst the Framework is an interim instrument, the intention is to ensure that all digital lending companies are governed by a single regulatory regime in view of consumers’ rights.

The Framework, however, does not provide clear rules for digital lending companies to comply with. It is expected that upon release of the final regulation, the rules of the FCCPC will be adequately spelt out and CBN licensed institutions will be exempted from the Framework.

[i] See the NITDA press release <https://nitda.gov.ng/nitda-collaborates-with-the-federal-competition-and-consumer-commission-fccpc-to-tackle-data-abuse-by-money-lending-operations/>

[ii] An inter-agency Joint Regulatory and Enforcement Task Force was formed constituting the FCCPC, NITDA, Independent Corrupt Practices Commission (ICPC) etc.

[iii] The Federal Competition and Consumer Protection Act 2019 (“FCCPA”)

[iv] The enabling law of FCCPC

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.

REGULATION OF LENDING IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

The business of lending in Nigeria has evolved from the traditional system to a more flexible and digitally enabled system for a faster and more convenient process. This evolution has attracted extensive participation in the lending sector spurring the growth of the Nigeria Domestic Credit by 16.2% YoY as at December 2021.[1]

In this article, we highlight the various regulations and licenses applicable to lending in Nigeria.

Money Lenders (ML) License

The Money Lenders (ML) license is issued and regulated by the money lenders laws of the various states in Nigeria. Given that Lagos is the commercial hub of Nigeria, majority of the money lenders license holders in Nigeria are registered within Lagos State.  The Lagos State Moneylenders Law[2] is the principal law which regulates money lending in the state and the office responsible for issuing licenses is the Lagos State Ministry of Home Affairs and Tourism. The ML license grants any individual or company the ability to carry on business of money lending in the state within which it is established.

Under the Law, entities such as cooperative societies, banks, insurance companies, pawnbrokers are exempted from obtaining the ML in Lagos State.

Licenses expire on the 31st of December of every year and are subject to renewal provided that the requirements for renewal are met.[3]

Microfinance Banks

Microfinance Banks (MFBs) are financial institutions licensed by the Central Bank of Nigeria (CBN) to provide financial services to microfinance clients (i.e. low-income earners, the un-banked and persons operating in the informal sector). MFBs are regulated by several laws including the Banks and Other Financial Institutions Act 2021 and the Guidelines for the Regulation and Supervision of MFBs 2020.

In addition to providing credit, MFBs are permitted to accept deposits from customers and provide other ancillary financial services.

The geographical operation of an MFB is dependent on the nature of the license obtained from the CBN. There are 3 major categories of MFB licenses to wit: (i) Unit MFBs, which are permitted to operate within certain local government areas; (ii) State MFBs which are licensed to operate within the state they are located; and (iii) National MFBs which are permitted to operate across all states within Nigeria.[4]

Finance Company (FinCo)

Finance companies (FinCos) are financial institutions also licensed by the CBN to provide financing services to micro, small and medium enterprises. They provide customer loans, fund management and credit facilities, asset finance, project finance, debt factoring, debt securitization and other forms of credit facilities, to individuals and companies. They were created to bridge the financing gaps and complement the roles of banks.

The table below highlights several major differences between the 3 major lending licenses in Nigeria.

  MFB FINCO MLs (LAGOS STATE)
Timeline for Registration Usually 10 – 15 months Usually 10 – 15 months Usually 8 – 12 weeks
Lending Limits 80% of the total loan portfolio must be Micro loans (not exceeding N1 million) Limited to 20% of the FinCo’s shareholders’ funds unimpaired by losses There is currently no lending limit.
Official Fees ·         N350,000 + 200 Million Naira (Escrow deposit) for Unit MFBs.

·         N700,000 + 1 Billion Naira (Escrow deposit) for State MFBs

·         N1,300,000 + 5 Billion Naira (Escrow deposits) for National MFBs

 N350,000 + 100 Million Naira (Escrow deposit) N400,000 to N500,000
Interest Rate Limits Nil (Key lending rate at 11.5%) Nil (Key lending rate at 11.5%) 5% monthly [5]
Operational Limitations Unit (Tier 1) -can operate 5 branches within  urban areas of a state.

 

Unit (Tier 2) – can operate 2 branches  in rural/underbanked areas within a state.

 

State MFB – can operate within an entire state.

 

National MFB –can  operate in all the states in Nigeria

 

 FinCos can operate across all states in Nigeria Operations are limited to Lagos State[6].

Conclusion

It is pertinent to note that no particular license is preferred over the other. The suitability of each license depends on the operations and the structure of the applicant and the requirement of the regulator. Applicants are advised to consult with professionals before commencing the application for any license.

 

 

[1] https://www.ceicdata.com/en/indicator/nigeria/domestic-credit-growth

[2] Cap M7 2009

[3] For more information on this, please read our article here.

[4] For more information on this, please read our article here.

[5] Under the Lagos State Ministry of Home Affairs regulations

[6] In practice, moneylenders are able to provide credit beyond Lagos state through the use of technology

NON-FUNGIBLE TOKENS (NFTs): REGULATORY CONSIDERATIONS IN NIGERIA

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By Seun Timi-Koleolu and Karo Isiorho

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A survey conducted by Finder.com in 2021 revealed that Nigeria ranked 6th amongst 20 countries in the world that have adopted Non-Fungible Tokens (“NFTs”). The reason for this is not far-fetched. As a result of the continued devaluation of Naira, Nigerians are constantly on the lookout for new ways to stay above inflation. One of such ways appears to be delving into the acquisition and sale of digital assets – NFTs.

Given the rapid growth of the NFT ecosystem in Nigeria, we have provided useful information to guide NFT transactions in Nigeria.

  1. What is a Non-Fungible Token?

An NFT, also known as a Non-Fungible Token is a digital asset that represents real-world objects like art, music, in-game items and videos which are typically logged and authenticated on cryptocurrency blockchains, primarily Ethereum.

  1. What is the difference between a Fungible Token and a Non-Fungible Token.

Fungible tokens or assets are divisible and non-unique assets that store value such as a $1 note or 1 Bitcoin whilst Non-Fungible Tokens are unique and non-divisible assets that store data like digital artworks, tweets, music composition, digital shots, etc. They are similar to a deed of title for assets. In 2021, Twitter CEO, Jack Dorsey, sold his first-ever tweet for $2.9 million dollars as an NFT.

  1. Who are those that can benefit from NFTs?

Artists, buyers, collectors and marketing platforms can benefit from NFTs.

NFTs create a medium for artists to showcase and monetize their work on a broader spectrum. Artists get to retain their intellectual property rights in the works after it is sold and receive royalties on subsequent sales of the digital works. For buyers/collectors, acquiring an NFT gives a right of ownership to a unique asset that cannot be easily replicated and holds the potential for good future profit where the NFT increases in value. NFT marketing platforms, where artists can offer their NFTs for sale, also provide good business opportunities.

 

  1. What are the Regulations affecting NFTs in Nigeria?

Since NFTs are quite new in Nigeria, there has been no law or regulation specifically enacted in respect of it. There are, however, certain laws that might affect its operations in  Nigeria which are worthy of note as highlighted below:

  1. Copyright Act: Under the Copyright Act, literary works, musical works, artistic works amongst others are eligible for copyright. Accordingly, authors of digital works – NFTs will be deemed to have copyright in such works (unless as otherwise agreed in writing) and will therefore have the right to seek relief in connection with violation of their intellectual property rights in the NFT.
  2. Cybercrime (Prohibition, Prevention, etc) Act: Creators of NFTs can seek relief or claims over infringement of their NFTs under the Cybercrime Act where they are able to prove unauthorized use of their unique words or phrases that form the basis of their NFT. There are several penalties the law prescribes for those found guilty of these offenses.
  • The Securities and Exchange Commission: The Securities and Exchange Commission ( “SEC”) is the body empowered to regulate securities and investments in Nigeria. SEC through its statement on digital currencies suggests that virtual assets including blockchain based offers of digital assets- within Nigeria; or by Nigerian issuers; or sponsors; or foreign issuers targeting Nigerian investors- shall be subject to the regulation of  SEC. In view of this, it is likely that NFTs will be subject to the regulation of SEC unless issuers can prove otherwise.
  1. Central Bank of Nigeria (the “CBN”):The CBN is yet to release any circulars particularly on the use of NFTs. It has, however, repeatedly prohibited the use of virtual currencies as a legal tender by banks and other financial institutions in Nigeria. The fact that NFTs are traded using blockchain technology such as Ethereum, creates uncertainty as to whether the CBN will fully welcome its operations in Nigeria.  There is, however, no indication that Peer to Peer sale of NFTs will be affected by CBN regulations.

Other legal considerations also exist in areas such as taxation and data protection.

Conclusion

Despite the growth of the NFT amongst Nigerians, it remains a novel concept. A large number of the population are still unaware of its operations. Also, the government is yet to provide an elaborate and uniform regulation to guide its usage in Nigeria. It is important for current investors to stay vigilant in their dealings in NFTs in order to protect their assets.

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

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.