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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.

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

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

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.

5 INCENTIVES AVAILABLE TO STARTUPS IN NIGERIA

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By Seun Timi-Koleolu and Oghenekaro Faith Isiorho

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Startups have the potential to play a major role in the growth of developing countries particularly because of their ability to: (i) improve the standard of living in countries through innovation; (ii) create wealth by attracting local and foreign investments; and (iii) reduce the rate of unemployment by creating new jobs.

Despite the potential to bring good to countries, the prevalent view amongst Startups in Nigeria is that the regulatory and business terrain provides many hurdles to their ability to the achievement of their fullest potential. These include high costs of doing business; multiple taxes and unpredictable regulatory oversight.

Notwithstanding the foregoing, there are incentives in existing regulations in Nigeria, which Startups can benefit from but might not utilize due to a lack of awareness of such incentives. We have tried to solve this problem by putting together in this article a list of incentives which can be enjoyed by Startups from various legislations.

The 5 Incentives are as follows:

  1. Exemption from Company Income Tax: Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million Startups may find this useful in their early stages. Click here to read on other impacts of the Finance Act 2019 on Startups and SMEs.
  2. Tax Holiday of Up to 5 Years: Startups who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period as established under the Nigerian Industrial Development (Income Tax Relief) Act. Startups in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives. Click here to read more on industries eligible for Pioneer status in Nigeria.
  3. Reduced Tax Rate for Investors: There are various incentives provided in the Nigerian Venture Capital Incentives Act for investors and Startups engaged in venture projects. These include: (i) up to 30% capital allowances for eligible Startups on equity investments made by Venture Capitalist firms; and (ii) up to 100% exemption on capital gains tax on capital gains accruing to Venture Capital investors upon disposal of their equity interest.
  4. Opportunity for Startups in Government Projects: One way the Nigerian government has tried to encourage the growth of Startups is by requiring companies to engage Startups in projects involving the Federal Government or any of its agencies where the gross value of the project contract is 500 million naira or above. This requirement is provided in the Guidelines for Nigerian Content Development in Information and Technology 2019.
  5. Tax Exemption for Start-ups in the Agricultural Sector: Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020 which amended the former provision under the Industrial Development (Income Tax Relief) Act. Click here to read more on the key highlights of the Finance Act, 2020.

Please note that this list is not exhaustive.

Conclusion  

As stated earlier, many Startups and investors are unaware of incentives available to them in Nigeria because of the absence of a comprehensive platform or document that highlights all applicable incentives and regulations. A search by Startups for such incentives (without the assistance of professionals) can be as tedious as searching for a needle in a haystack. It is, therefore, our recommendation that the Nigerian government collates relevant incentives and applicable regulations on a single platform for ease of reference by Startups.

 

 

 

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.

 

 

REGULATORY REQUIREMENTS FOR FINTECH IN NIGERIA; CBN LICENCES

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Seun Timi-Koleolu and Eustace Aroh

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Introduction

On December 9, 2020, the Central Bank of Nigeria (CBN) issued a circular, recategorizing Payments System licensing in Nigeria into four major categories: Switching and Processing; Mobile Money Operations; Payment Solution Services; and Regulatory Sandbox. There was, however, no unified document containing the requirements for each of these licensing categories. This made gathering information on the licenses cumbersome for potential license applicants. To resolve this issue, the CBN recently released a compendium containing all the requirements for Payment System licenses.

We have provided in this article, a snapshot of the CBN requirements and gone a step further by setting out the activities permissible under each licensing category.

  NAME OF LICENSE ACTIVITIES THE LICENSE PERMIT LICENSING REQUIREMENT FEE AND CAPITAL REQUIREMENT
 
1 Switching and Processing Licence

 

 Switching; card processing; transaction clearing; settlement agents; and all activities permitted for Payment Solution Services (in 3 below). ·Corporate documents;

·Tax Clearance Certificate (TCC) for 3 years (if applicable) and Taxpayers Identification Number (TIN) of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·Bank Verification Number (BVN), Curriculum Vitae (CV) and means of identification (ID) for the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan and product deployment methodology;

·Requisite policies and framework;

·Signed agreements with sub-agents, financial institutions and business parties; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
2 Mobile Money Operator Licence

 

 E-money issuing; mobile wallet creation and management; pool account management; and all activities permitted for Super-Agent (in 6 below). ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan;

·Requisite policies and framework;

·Project deployment time; and

·Signed agreements with its partners.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
3 Payment Solution Services (PSS)

 

 It includes all the activities permitted for Payment Solution Service Providers (PSSP) (in 5 below); Payment Terminal Service Providers (PTSP) (in 4 below); and Super Agents (in 6 below).

 

Companies seeking to obtain the PSS license will have to select any one or combination of the following licenses: PSSP; PTSP; and Super-Agent.

 ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework;

·Signed agreements with its sub-agents, financial institutions, and partners;

·Minimum of 50 agents;

·Evidence of payment card security certification and other relevant payment terminal certification; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of up to 250 million (depending on which of the licenses the company wishes to obtain) in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
4 Payment Terminal Service Provider (PTSP) Licence

 

 POS Terminal deployment and services and POS terminal ownership. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
5 Payment Solution Service Provider (PSSP) Licence

 

 Payment processing gateway; payment solution development; and merchant service aggregation and collection. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of directors and top management (including one non-executive director, chairman, managing director);

·Signed agreements with its partners;

·Requisite policies and framework; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
6 Super-Agent Licence Conducting certain banking activities such as cash deposit and withdrawal; bill payments; local fund transfer; balance enquiry etc. ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Minimum of 50 agents;

·Reference letter from a financial institution and signed agreement with the sub-agents, financial institution, and business partners;

·Must have existed for over 12 months;

·Requisite policies and framework; and

·Payment Terminal Service Aggregator of Payment Terminal Application Certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N50 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
7 Regulatory Sand Box As may be determined in the Sandbox.

 

The regulatory Sandbox is aimed at stimulating innovation and deepening financial inclusion. To this end, the CBN will review the products during the implementation.1

 ·Corporate documents including shareholding structure;

·Company details and profile;

·Project plan, business proposal and outline of the strategy of the sandbox trial;

·Evidence of patent rights (if applicable);

·CV of directors and top management; and

·Requisite policies and framework.

 Not applicable.