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

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By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

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

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

Who does the Framework apply to?

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

Potential Conflict with the BOFIA 2020

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

Provisions of the Framework

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

 

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

 

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

 

Conclusion

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

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

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

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

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

[iv] The enabling law of FCCPC

REGULATORY UPDATE: INTRODUCTION OF CREDIT GUARANTEE COMPANIES IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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

1. What are Credit Guarantee Companies?

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

2. Who is to engage a CGC?

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

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

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

4. What are the permissible activities of a CGC?

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

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

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

6. What is the Consideration for the Guarantee Services?

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

7. How to apply for a CGC license?

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

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

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

8. Conclusion

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

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

REGULATION OF LENDING IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

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

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

Money Lenders (ML) License

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

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

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

Microfinance Banks

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

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

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

Finance Company (FinCo)

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

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

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

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

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

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

 

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

 

State MFB – can operate within an entire state.

 

National MFB –can  operate in all the states in Nigeria

 

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

Conclusion

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

 

 

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

[2] Cap M7 2009

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

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

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

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

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.