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

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By Seun Timi-Koleolu and Eustace Aroh 

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

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

MMO PSB MFB
Minimum share capital

 

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

Unit (Tier 2) – NGN 50 million

State MFB – NGN 1 billion

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

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

State – operating in one state.

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

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

e-Wallet

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

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

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

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

 Depending on KYC level

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

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

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

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

Prohibited from remittance.

 Can receive and sell foreign exchange from inbound transfer.

Prohibited from remittance.

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

(NIBSS)

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

Financial Technology companies

Financial Holding companies

 Any company can apply for an MFB license.

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

ESTABLISHING A DIGITAL BANK IN NIGERIA – LEGAL REQUIREMENTS

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By Seun Timi-Koleolu and Eustace Aroh 

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

  1. WHAT IS A DIGITAL BANK?

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

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

i. Licensing

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

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

ii. Incorporation and Documentation

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

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

iii. Protecting the Intellectual Property

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

iv. Corporate Governance

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

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

 

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

 

SETTING UP A FINTECH COMPANY IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Introduction

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

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

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

Fintechs in Nigeria are generally categorized and regulated as follows:

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

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

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

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

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

4. Protecting the Intellectual Property

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

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

5. Financing

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

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

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

 

 

Loan Recovery in Nigeria – The Recent Central Bank of Nigeria Policy

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Access to credit in Nigeria has been low for a while, with the Central Bank of Nigeria affirming that only 5.3% of the adult population have access to finance. There are many reasons for this including high interest rates deterring borrowers and high rates of default on loans deterring creditors.

In a bid to reduce the high rate of defaults by borrowers, enhance loan recovery by financial institutions and generally improve creditor confidence in Nigeria, on July 13, 2020, the Central Bank of Nigeria (CBN) released Guidelines[i] on Global Standing Instruction (the “Guidelines”). Below are key points from the Guidelines.

What is a Global Standing Instruction? Global Standing Instruction (GSI) is a mandate or an instruction to be executed by a borrower authorizing financial institutions to recover a borrower’s debt from any or all accounts maintained by that borrower across various participating financial institutions through a direct set-off from deposits/investments held in those financial institutions.

What Financial Institutions can offer a GSI to a Borrower? All financial institutions in Nigeria licensed by the CBN including commercial banks, microfinance banks, finance companies, mortgage banks, and investment banks (“Financial Institutions”).

Does it apply to Individuals or Companies? The current guidelines apply to borrowers who are individuals and not companies. We expect that guidelines for company debtors would be issued by the CBN in due course.

How does the GSI work? Borrowers are to execute a GSI mandate/authorization in hard copy or digital when taking a loan from a Financial Institution. Where the Borrower defaults on the loan, the Financial Institution would be entitled to deduct the money owed plus interest due from any other personal account, joint account or child account in any other Financial Institution, linked to the borrower’s BVN (Bank Verification number)[ii].

When can a GSI be triggered? Where a Financial Institution is unable to recover debt through other means, the institution may trigger the GSI and the Nigerian Inter-Bank Settlement System will proceed to debit the Borrower’s accounts across various Financial Institutions. A GSI is to serve as a last resort by a Financial Institution and can only be used to recover the principal loan amount and accrued interest only (not penalty interests).

Can a GSI be triggered over a joint account? Yes. However, the CBN may need to clarify how GSIs are to work in relation to joint accounts. Where a GSI is triggered over a borrower’s joint account with a third party, how would the rights of the third party to the funds in the account be protected?

What happens if a GSI is triggered in error? The Guidelines provide for penalties where it is established that a Financial institution breached the provisions of the Guidelines. For example, where a Financial Institution activates a GSI in error, the bank will pay a flat fine of ₦500,000.00 and bear all liability from such erroneous GSI activation.

When will the GSI take effect? The Guidelines are to take effect from August 1, 2020 and will be applicable on all loans granted from August 28, 2019.

Conclusion.

The GSI is a good initiative which should help improve creditor confidence in the Nigerian credit system. It would also be beneficial to fintechs in Nigeria who utilize microfinance bank licences[iii] to offer credit facilities such as payday or small business loans. Fintechs/creditors who offer loans with the use of a moneylender’s license[iv]  are, however not permitted to use GSIs. Since such money lenders play a major role in improving access to credit in Nigeria, particularly to individuals, it would be useful for similar regulations to be put in place for their benefit.

[i] You can access our articles on previous guidelines issued by the CBN by clicking on this link https://pavestoneslegal.com/tag/central-bank-of-nigeria/

[ii] The CBN had previously indicated that BVNs would be utilized to assist in the recovery of loans. Please access our articles on this here https://pavestoneslegal.com/tag/bvn/

[iii] Find more articles on microfinance banks in Nigeria here  https://pavestoneslegal.com/tag/microfinance-banks/

[iv] Please access our article on Money lending services here https://pavestoneslegal.com/tag/money-lending/

The Finance Act 2019: Impact on Startups and SMEs

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On the 13th of January, President Muhammadu Buhari assented to the Finance Bill 2019, which is now known as the Finance Act 2019 (the “Act”). Following this, the Minister of Finance announced February 1 as the commencement date of the Act. In our previous post, we detailed some of the key changes made to the various tax laws. This week, however, we identity the effects the Act will have on startups and Small and Medium Scale Enterprises (SMES) in Nigeria.

New Basis for Charging Companies Income Tax (CIT)

Startups and SMES may pay 0% CIT due to the new basis of computing CIT. Though, this depends on their annual turnover. The Act exempts small companies (defined as companies with turnovers of less than ₦25,000,000) from paying minimum tax. In addition, medium sized companies (with turnovers between ₦25,000,000 – ₦100,000,000) are now required to pay a lesser rate of 20% as CIT; however, the former CIT rate of 30% is still applicable to large companies (with turnovers above ₦100,000,000).

  Digital Tax Introduced

An interesting amendment to the CIT Act is that its provisions will now apply to companies providing online/digital services or goods and who have significant economic presence in Nigeria. This deviates from the previous provisions of the CIT Act which requires foreign companies to have a physical presence or a fixed base in Nigeria. This expands tax revenue sources by including digital services such as e-commerce businesses, online payment platforms, cloud storage platforms, and online consultancy and management services, provided such companies have a significant economic presence. Although, the Act does not define what “significant economic presence” means, this may see tech companies such as Google and Alibaba who operate some of the digital services mentioned above pay tax on the services they provide to Nigerians.

  Non-Resident Tech Companies Affected

Foreign companies (or Non-Resident Companies) supplying goods or services are also required to include the VAT of 7.5% on their invoices. However, a foreign company is not required to withhold and remit VAT as that burden rests on the Nigerian company receiving the services provided. For example, where a foreign tech company (not incorporated in Nigeria but derives income or profits from Nigeria) provides tech services to a Nigerian startup, the Nigerian startup is required to withhold and remit VAT on behalf of the foreign tech company to the FIRS.

 

  Conclusion

The Act introduces laudable changes to Nigeria’s tax laws and brings it on par with global best standards. It encourages the growth of early stage startups and SMES through the various tax palliatives targeted at them. These companies will be able to redirect revenue saved from these palliatives back to their businesses. Considering that SMES account for 96% of all businesses and 84% of employment, it is likely to impact positively on economic growth.