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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.

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.

KEY PROVISIONS OF THE FINANCE BILL 2021

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By Aderonke Alex-Adedipe and Eustace Aroh 

Introduction

In line with the tradition of the current administration, the Finance Bill 2021 (the “Bill”) was recently presented before the legislature for passage into law. Similar to its predecessors, the Bill proposes to amend twelve federal statutes in furtherance of the government’s objectives to foster the growth of the economy, stimulate investment into Nigeria, and boost revenue generation. In this article, we highlighted some key provisions of the Bill.

Proposed Amendment to Companies Income Tax (CIT)

i. The Bill specifically introduces taxation for lotteries and betting companies. These companies will be under obligation to pay income tax on the profit earned from the business of lottery and gaming. To determine their profits, prizes of customers, contribution to the lottery trust fund, agent commissions, and regulatory levies among others will be considered as allowable deductions.

ii. The Bill also confers powers on the Federal Inland Revenue Service (FIRS) to assess foreign digital and technology-driven companies with significant economic presence in Nigeria and charge income tax based on their turnover attributable to their presence in Nigeria.

iii. Income accrued from exports of companies engaging in the upstream, midstream or downstream petroleum operations are no longer exempt from CIT. Therefore, such income is now classified as taxable under the CITA.

iv. Unit trusts are no longer required to pay the usual CIT. Rather, the withholding tax deducted from income generated by the unit trust shall be full and final tax liability due to the unit trust.

v.The minimum CIT of 0.25% (as opposed to 0.5%) for companies that have recorded a loss or no profit has been extended to the period between 1st January 2019 to 31st December 2021. However, the application is only available for two accounting periods (2019-2020 or 2020-2021).

Proposed Amendment to Companies Income Tax (CIT)

vi. The Bill proposes a 5% Capital Gains Tax (CGT) on the proceeds from the disposal of shares in a Nigerian company exceeding 500 million Naira. Nevertheless, where the proceeds (or a portion of the proceeds) are reinvested into any Nigerian company within the same year, the proceeds (or the portion of the proceeds) will be exempted from taxation.

Other Taxation

vii. The Bill proposes the removal of the 0.25% National Agency for Science and Engineering Infrastructure Levy paid annually by commercial companies with over 4 million naira turnover.

viii. The FIRS has also been charged with the task of implementing the provisions of the Nigeria Police Trust Fund (Establishment) Act, 2019. Consequently, the FIRS will be required to assess and collect 0.005% of the net profit of companies operating in Nigeria to be paid into the Nigeria Police Trust Fund.

Conclusion

In addition, the provisions of the Bill attempts to remedy some loopholes in the tax laws (such as appointing the FIRS as the collecting agency of the Nigeria Police Trust Fund) as well as providing obtainable advantages to doing business in Nigeria.

Nevertheless, the annual amendment to the tax laws has made the tax regulations complex by creating a labyrinth of provisions. This will create a herculean task for the FIRS as the agency required to implement these changes. These annual amendments also create confusion among taxpayers on what applies every financial year.

ESTABLISHING A DIGITAL BANK IN NIGERIA – LEGAL REQUIREMENTS

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By Seun Timi-Koleolu and Eustace Aroh 

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

  1. WHAT IS A DIGITAL BANK?

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

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

i. Licensing

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

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

ii. Incorporation and Documentation

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

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

iii. Protecting the Intellectual Property

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

iv. Corporate Governance

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

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

 

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

 

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.

Data Protection In Nigeria; Impact On Open Banking Regulation

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By Aderonke Alex-Adedipe and Eustace Aroh

Introduction

The rapid growth of finance and technology (fintech) companies in the last decade have been necessitated by consumers’ needs for faster and more convenient financial services. These needs continue to evolve over time and traditional financial institutions struggle to keep up. Open banking offers financial institutions who have access to information of customers (“Providers”) the opportunity to share such information with other financial institutions (“Consumers”) to keep them aware of those needs and enable them offer optimum services.

In our previous article, we highlighted the provisions of the recent Central Bank of Nigeria’s (CBN) Regulatory Framework for Open Banking in Nigeria (“Framework”). In today’s article, we consider specifically, the implication of data sharing under the Framework in light of the Nigeria Data Protection Regulation 2019 (NDPR).

NDPR
The NDPR was issued by the National Information Technology Development Agency (NITDA) in 2019 to regulate the collection, processing and storage of personal data. Personal data is information relating to an individual who can be identified, directly or indirectly, in particular by reference to an identifier. It includes a name, address, a photo, an email address, bank details, medical information, IP address, IMEI number, IMSI number, SIM, and others.

Due to the fact that the damage an individual may suffer in the course of breach of some personal data may be higher, data such as ethnic and racial information, religious beliefs, biometric and health information are categorized as sensitive data. These data must, therefore, be subject to a higher level of protection. Although the NDPR does not classify financial data as sensitive data, financial institutions have access to a number of sensitive data such as ethnicity and biometrics.

Applicable Personal Data
Under the Framework, four types of data qualify for the open exchange of data. These are Product Information and Service Touchpoints (PIST), Market Insight Transactions (MIT), Personal Information and Financial Transaction (PIFT), Profile, Analytics and Scoring Transaction (PAST). Only the PIFT and PAST, however, involve the sharing of personal data of consumers amongst participants.

The PIFT deals with the sharing of customer’s information provided during the Know Your Customer (KYC) process and information of the customer’s transactions such as account balance, payments, loans, recurring transactions etc. The PAST involves the sharing of information on the customer which analyses, provides scores and gives an opinion on customer behaviour (profiling).

Safeguards of the Framework
The Framework stipulates a number of security standards and protocols with respect to sharing of personal information over the Application Programming Interface (API) as it relates to authentication, authorisation, encryption, and secure hosting of data. The Framework also provides for a risk management system for each participant to, among others, track the risk of data sharing with other participants, comply with data privacy laws such as the NDPR, and report such associated risks to the CBN.

Consent
Irrespective of the data protection requirements under the Framework, the Framework specifically requires participants to comply with all extant laws on data privacy such as the NDPR and the NDPR Implementation Framework. Under the NDPR, before personal data of a customer can be used for a purpose different from that which it was initially given, the data controller, (in this case, the financial institution) is required to inform the customer of:

  1. the purpose for which the data was originally collected;
  2. if there is any connection between the original purpose and the proposed purpose;
  3. the possible impact of the new processing on the data subject; and
  4. the existence of security safeguards to protect the data.

The Framework further requires participants to list the specific rights which customers may grant to the participants and obtain the consent of the customer for each right separately.

Providers are also expected to ensure that customers revalidate their consent annually or after 180 days in cases where the services of the provider have not been used.

Conclusion
While the Framework seeks to support innovation in the Nigerian financial sector, participants of the open exchange of data are expected to reassess their data privacy practices to ensure they meet data compliance requirements of the NDPR and the Framework.

THE REGULATION OF OPEN BANKING IN NIGERIA

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By Seun Timi-Koleolu and Praise Adetunmibi
Introduction

The Banking sector worldwide is undergoing major changes and the key drivers of these change are You and I. In today’s world (described as the Experience Economy by Pine and Gilmore, Harvard Business Review 1998), we all want easier, seamless and personalised digital banking experiences.

One way banks in the United Kingdom and other countries are meeting this need is with the use of Open Banking. Open Banking is the banking practice that grants third-party financial service providers access to consumer banking transactions and financial data through the use of Application Programming Interfaces (APIs). Such access must be only to the extent approved by customers.

It is expected that with Open Banking, customers would: (i) view and manage their various bank accounts from one centralized location; (ii) grant easy access of account information to creditors when applying for a loan rather than gathering reports from various banks; (iv) have easier accounting processes; and (v) enjoy competitive banking rates, amongst other benefits.

In view of the foregoing and with a view to enhance financial inclusion, improve competition in the financial services space and promote efficient services, the Central Bank of Nigeria (CBN) on the 17th day of February 2021, issued the Regulatory Framework for Open Banking in Nigeria (“Framework”).

In this article, we have highlighted some of the key provisions of the Framework.

1.Scope – The Framework applies to banking and other related services including: (i) payments and remittance services; (ii) collection and disbursement services; (iii) deposit-taking; (iv) credit; (v) personal finance advisory and management; (v) credit ratings/scoring; (vi) leasing/hire purchase; and (vii) mortgages.

2.The Participants – The Framework regulates the following 4 Participants in Open Banking: (i) The Providers (who use API to provide data or a service to another participant); (ii) The Consumers (who uses API released by the providers to access data or service); (iii) The Fintech companies (they may be Providers or API Users; in such instance, they assume the responsibilities of the role they play at any point in time); (iv) the Developer Community (individuals and entities that develop APIs for participants based on requirements). The responsibilities of each of the Participants are set out in the Framework.

3.The Regulator – Though not listed as a Participant, it is pertinent to note that the CBN is the primary regulator of Open Banking in Nigeria. The CBN is to be responsible for the maintenance of an Open Banking Registry and the development of the Common Banking Industry API Standards. These Standards are to be developed within 12 months of issuance of the Framework.

4.Categories of Financial Data that can be shared through APIs – The Framework divides data and services that can be shared through APIs into four broad categories and defines the risk level associated with each category.

S/N Data and Service Category Risk Rating Participants who can access this data
i. Product Information and Service Touch Points – includes data on products provided by Participants to their customers and the access points e.g. ATM/POS/Agents locations, website/app addresses, fees, rates etc. Low All Participants (including participants without licences and those in the CBN Sandbox).
ii. Market Insight Transactions (MIT) – this includes data exchanged for the purpose of gathering statistics of products, services and segments. Such information must not be associated to any individual, customer or account. Moderate All Participants (as above).
iii. Personal Information and Financial Transaction (PIFT) – this includes data at an individual customer level either on general information on the customer (e.g., KYC data, total number of accounts held, etc) or data on the customer’s transaction (e.g., balances, bill payments, loans, recurring transactions on customer’s accounts, etc). High These can be accessed by Participants in the CBN Sandbox; licenced Payment Service Providers and other financial institutions; and Deposit Money Banks.
iv. Profile, Analytics and Scoring Transaction (PAST) – this includes data of a customer that analyses, scores or gives an opinion on the customer e.g., credit score, incoming ratings etc. High and Sensitive These can only be accessed by licenced Payment Service Providers and other financial institutions; and Deposit Money Banks.

5. Customer Protection – The implementation of Open Banking is hinged on the explicit consent of the customers/end users of financial products. The Framework mandates Participants to obtain the consent of customers in the customer’s preferred language and to ensure the security of financial data of such customer.

6. Liability for Misuse of Data – Participants and their partners would be jointly liable for any loss occurring to the customer as a result of data sharing; save for where the Participant can prove wilful negligence or fraudulent act against the customer.

Conclusion

As earlier stated, there are various benefits attributable to Open Banking including more ease in banking transactions. There is, however, a major risk of data breach or the misuse of consumer data. It is imperative that data protection regulations are properly implemented in Nigeria to avoid grave financial losses to consumers.

Data Protection Compliance Organisations and Legal Advisers1 will be expected to play a major part in supporting Participants and regulators in protecting consumers, as Open Banking develops in Nigeria.

NIGERIA’S CROWDFUNDING REGULATIONS; IMPACT ON FUNDRAISING

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By Aderonke Alex-Adedipe and Praise Adetunmibi

 

Introduction

The size of the global crowdfunding market is steadily on a rapid increase as a large number of start-up businesses engage crowdfunding platforms for the purpose of raising capital. The value of the global crowdfunding market was reported[i] to be at 13.9 billion U.S dollars in 2019 and expected to triple by 2026. Start-ups in Nigeria also use crowdfunding platforms such as Kickstarter, GofundMe, Patreon amongst others, to raise capital. Crowdfunding in Nigeria however, remained unregulated until January 2021 when the Securities and Exchange Commission (SEC) issued the SEC Rules on Crowdfunding (the “Rules”).

In our previous article[2], we had provided an overview of the proposed Rules, prior to the final issuance by SEC. In today’s article, we examine some of the provisions of the Rules and their impact on businesses in Nigeria.

Meaning of crowdfunding

Crowdfunding involves the use of an online web-based platform to raise funds from a large number of individuals or organizations in order to fund a project or business. It is important to note that the SEC Rules are only applicable to investment-based crowdfunding. i.e. where funds are raised in exchange for ordinary shares, plain vanilla bonds or debenture and simple investment contracts or other instruments approved by SEC. Such investment instruments can only be issued through a crowdfunding portal operated by an entity registered with SEC as a crowdfunding intermediary.

Eligibility of a fundraiser

An entity seeking to raise funds through a crowdfunding portal must be a Micro, Small and Medium Enterprises (MSME) incorporated in Nigeria and must;
(i) have been in operation for at least 2 years or;
(ii) where the entity has been in operation for less than 2 years, it must have a strong technical partner that possesses a minimum of a 2 -year operating track record or have a core investor.

How to raise funds

Funds can only be raised by an eligible fundraiser through a registered crowdfunding portal i.e. one that has been registered by SEC.

In addition, it is important to note that a crowdfunding investment offer can only remain on the portal for a period of 60 days and can be extended for a further period of 30 days after which the offering is to be withdrawn.

Where an offer has been withdrawn, a new offering cannot be made by the same fundraiser until (i) after the expiration of 30 days after the withdrawal date and (ii) after the fundraiser has updated all financial information to the satisfaction of the crowdfunding intermediary.

 

[i] https://www.statista.com/statistics/1078273/global-crowdfunding-market-size/

[2] https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

Key Developments In The New Finance Act 2020

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By Aderonke Alex-Adedipe and Eustace Aroh

 

On December 31, 2020, the President of Nigeria signed the Finance Act 2020 (the “Act”) into law. The Act amended fourteen federal tax and finance legislations and came into effect on  January 1, 2021. The provisions of the Act are in line with the Government’s agenda to improve the ease of doing business in Nigeria, promote investments and develop key sectors of the economy.

The table below highlights some of the salient provisions of the Act.

 

Applicable Section Legislation Affected Implications
Section 25 Personal Income Tax Act Profits from trades or businesses of non-resident “individuals” providing technical, management and consultancy services to Nigerians shall be deemed to be derived from Nigeria and subject to personal income tax provided they have significant economic presence as declared by the Minister of Finance.
Section 30 Personal Income Tax Act Individuals who earn the national minimum wage or lower, are exempt from paying personal income tax on the wages earned.
Section 23 Industrial Development (Income Tax Relief) Act Small or medium-sized companies with annual gross turnover of between 25 Million to 100 Million Naira, engaged in primary agricultural production such as raw or semi-processed goods, live animals and their direct produce, all kinds of fish and forestry products, may apply for tax exemption for a period of 4 years and an additional 2 years.
Section 60 Companies and Allied Matters Act 2020 (CAMA) The law requires that dividends that are unclaimed by shareholders of private companies, after a period of 12 years should be shared among the shareholders as profit. In the case of public companies quoted on the Nigerian Stock Exchange, unclaimed dividends shall be transferred to the Unclaimed Funds Trust Fund after a period of 6 years and shall be a debt owed by the federal government which can be claimed by the shareholder subsequently.
Section 48 Stamp Duties Act The introduction of the Electronic Money Transfer Levy of N50 (Fifty Naira), imposed on electronic transactions exceeding the sum of N10,000 in any financial institution.
Section 34 Tertiary Education Trust Fund Act Small companies (as defined in CAMA) are exempted from payment of the tertiary education tax.
Section 43 Value Added Tax Act (VATA) Non-residents individuals are obligated to register under the VATA where they make a taxable supply of goods or service in Nigeria and obtain a Tax Identification Number.
Section 45 Commercial aircrafts, engines and spare parts; air transportation with registered airlines; and lease of agricultural equipment are goods and services which are now exempt from VAT.
Section 13 Companies Income Tax (“CIT”) Act The minimum CIT for companies which have recorded a loss or no profit between the period of 1st January 2020 and 31st December 2021 has been reduced to 0.25% of the annual gross turnover of the company as opposed to the otherwise applicable 0.5%.

This relief was created to support businesses affected by the COVID 19 pandemic.
Section 16 All non-resident companies deriving profit from Nigeria are now required to submit audited financial statements identifying their Nigeran operations to the tax authorities.
Section 38 Customs and Excise Tariff (Consolidation) Act Import duties for the following goods have been reduced as follows:

(i) Tractors, from 35% to 5%

(ii) Cars and motor vehicles for transport of persons, from  30% to 5%

(iii) Vehicles for transportation of above 10 people or goods, 35% to 10%.

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

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

 

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

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

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

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

 

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

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

 

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

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

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

Conclusion

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