FINTECH: Law & Regulation in Nigeria by Omobolaji O. Oyeniran Esq.

INTRODUCTION

Financial Technology (abbreviated as “FinTech”) is a fast growing sector in the Nigeria economy and globally. Apart from the fact that the industry enjoys a seamless physical restriction in the global market, it also has high possibility of growth. For instance, according to a Nigerian Startup Funding Report for Q1 2020, Nigerian, Fintech Startups raised $55.37 million which amounted to 82.2 % of the total funding received in the startup space in Nigeria. Further example is the recent acquisition by a US-based payment giant, Stripe, of a 5-year-old-Nigerian payment startups, Paystack (a FinTech company) for a whooping sum of $200million.

In the light of this development, the writer chooses to give an overview of the laws regulating the financial technology (FinTech) industry in Nigeria. The writer commences the article with a gist of what FinTech is, then proceeds to the regulatory framework of FinTech in Nigeria, and further adumbrates the legal framework of FinTech in Nigeria. 

FINTECH

Financial technology (FinTech) is the technology and innovation that uses technology to improve activities in finance. The word “Fintech” is defined according to Oxford as “Computer programs and other technology used to support or enable banking and financial services”. According to Wikipedia, it defines “Fintech” as “Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.” 

When fintech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. ​Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. Fintech now includes different sectors and industries such as education, retail banking agriculture, fundraising and nonprofit, and investment management to name a few. Fintech also includes the development and use of crypto-currencies such as bitcoin, litecoin, ethereum and so on.

The industry is a fast growing one in Nigeria. It has business offerings in banking; alternative lending and digital credit; electronic payment; public revenue collection; investment and financial management; and foreign exchange and remittance transaction.

REGULATORY FRAMEWORK

There are several regulatory bodies that supervise the registration and activities of fintech companies in Nigeria. The body a fintech company approaches for approval is based on the nature of the business such fintech company seeks to offer. However, there are paramount regulatory bodies that supervise every fintech company in Nigeria. Adumbrated below are some of these regulatory bodies:

1. CENTRAL BANK OF NIGERIA (CBN): The CBN is the body that is primarily responsible for regulating financial services in Nigeria. It is also the body that administers the Banks and Other Financial Institutions Act 2020 (BOFIA) under which the CBN is mandated to issue licenses to banks and other financial institutions. Any Fintech companies offering financial services in Nigeria must obtain license from CBN to operate in the country.
2. CORPORATE AFFAIRS COMMISSION(CAC): CAC regulates the registration and incorporation of companies in Nigeria and the Commission administers the provisions of the Companies and Allied Matters Act, 2020. Fintech companies must be incorporated under the CAC to carry on business in Nigeria except where exemption has been obtained under section 54 of CAMA, 2020.
3. NIGERIAN COMMUNICATIONS COMMISSION (NCC): The NCC is empowered by the Nigeria Communication Act, 2003 to regulate the telecommunications industry in Nigeria. Fintech companies that intend to render services involving the use of mobile networks or mobile are to obtain requisite license from the NCC.
4. SECURITY AND EXCHANGE COMMISSION(SEC): The SEC is the securities and capital market regulator in Nigeria pursuant to the Investment and Securities Act (ISA), 2007. Fintech companies that desire to raise capital from the capital market must register their security with SEC and comply with the provisions of ISA.

LEGAL FRAMEWORK

Presently, there are no laws specifically tailored to the fintech sector. However, embedded in certain legislations are provisions that stipulate regulatory requirements as well as the permissible and prohibited activities of financial institutions in Nigeria. Highlighted below are some of these legislations. These legislations include:

1. THE BANK AND OTHER FINANCIAL INSTITUTION ACT (BOFIA) 2020: Section 3 of the BOFIA 2020 stipulates that any person who wishes to carry on the business of banking must be registered with CBN. Under section 57 (2)  of the Act “other financial institutions” include entities that carry on financial businesses electronically, virtually, or digitally. Such entities are to incorporate a company in Nigeria and obtain a licence from the CBN before carrying out financial businesses in Nigeria. FinTechs (digital financial service providers) are now recognised as other financial institutions in Nigeria and their operations are regulated by BOFIA 2020 and the CBN.
2. THE TERRORISM (PREVENTION) (AMENDMENT) ACT 2013: This Act provides that where any person solicits or renders support to any association for the commission of a terrorist activity, including through the Internet or electronic means, such a person will be liable to a minimum of 20 years’ imprisonment.
3. THE ADVANCE FEE FRAUD AND OTHER FRAUD-RELATED OFFENCES ACT 2006: Under this Act, a person who conducts a financial transaction which involves the movement of money by wire or the use of a financial institution engaged in activities which affect commerce with the intent to promote a specified unlawful activity has committed a crime and will be liable to a fine and imprisonment.
4. THE CYBERCRIMES ACT 2015: The Cybercrime (Prohibition Prevention) Act 2015 requires a financial institution to:

• verify the identity of customers carrying out electronic financial transactions;
• observe adequate know-your-customer procedures;
• ensure that it obtains proper authorisation before debiting accounts; and
• keep all traffic data and subscriber information as may be required by the NCC.

The Act also prohibits the interception of electronic messages, e-mails and electronic money transfers, computer-related forgery and fraud, unauthorised modifications of computer systems, network data and system interference, and the manipulation of automated teller machines and point of sale terminals.

5. NIGERIA DATA PROTECTION REGULATION 2019: This regulation issued by the Nigerian Information Technology Development Agency provides that all personal data notwithstanding the means through which the data was obtained can be processed only where the data subject gives their consent directly or indirectly or where it relates to a task carried out in the interest of the public.
6. CIRCULARS AND GUIDELINES ISSUED BY THE CBN: The CBN, as the key regulator of the financial sector in Nigeria issues regulations to govern the financial technology sector. Highlighted below are some of the guidelines on Fintech in Nigeria.

• The CBN Consumer Protection Framework 2016: This regulation imposes a burden on financial institutions to maintain the confidentiality and privacy of all financial services customers.
• The CBN Anti-money Laundering and Combatting the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria Regulations 2013: This regulation requires all financial institutions to adopt a policy on anti-money laundering and to combat the financing of terrorism. Fintech companies fall under this category. They must also have policies and procedures to address any risks for customers in relation to anti-money laundering and the financing of terrorism.
• The CBN Guidelines on International Money Transfer Services in Nigeria 2014

These guidelines regulate foreign exchange transactions over mobile applications. It states the minimum standards and requirements for the operation of international funds remittance over mobile devices in Nigeria. For instance, in order to provide inbound or outbound international funds remittance service in Nigeria, an institution must be approved by the CBN to carry out such services

• The CBN Guidelines on Mobile Money Services in Nigeria 2015

The CBN issued the guidelines on mobile money services in Nigeria with the aim of ensuring a structured and orderly development of mobile money services in Nigeria. Basically, mobile money services are financial services offered over mobile devices, such as mobile payment, credit card payment, and QR code payment.

The guidelines identify two models for the implementation of mobile money services: Bank Led and Non-Bank Led. Under the Bank Led model, either a bank or a consortium of banks may act as a Lead Initiator in providing mobile money services as part of its banking services. 

A corporate organization (other than a deposit money bank or telecommunication company) specifically licensed by CBN to provide mobile money services in Nigeria may also act as a Lead Initiator of mobile money services under the Non-Bank Led model.

• The CBN Guidelines on Operations of Electronic Payment Channels in Nigeria 2016

This guideline specifies the standards and specifications for ATM technology, guidelines for ATM deployment, minimum standards and specifications for POS terminals, minimum standards and technical specifications  for MPOS devices, and minimum standards for gateway provider of web payment services. 

The guidelines also establish a settlement mechanism for POS and MPOS transactions with the Nigeria Interbank Settlement Systems (NIBSS) acting as the Payment Terminal Service Aggregator for the financial industry.

• The CBN Regulatory Framework for the Use of Unstructured Supplementary Service Data (USSD) for Financial Services in Nigeria 2018

The guidelines regulate the use of USSD technology for offering financial services in Nigeria. By virtue of section…the only persons eligible to issue USSD short codes by the Nigerian Communications Commission (NCC) are Mobile Network Operators (MNOs) and CBN licensed entities furnished with a letter of no objection or letter of introduction from the CBN are eligible for the issuance. 

Also, financial institutions providing use of the USSD channel are required to encrypt all USSD information  and offer customers the option to opt in/out of the USSD channel. All transactions conducted through the USSD channel are placed with a transactional limit of N100, 000 per customer per day. A customer can increase their limit executing a documented indemnity.

• The CBN Guidelines on International Mobile Money Remittance Service in Nigeria 2015

This guideline applies to International Money Transfer Service Operators which is abbreviated as (IMTSOs) who offer digital international money transfer services. Under the guideline, IMTSOs must be licensed by the CBN, and deposit money banks are prohibited from operating as international money transfer service operators, but they may act as agents. CBN has licensed more international money transfer operators [IMTOs] to operate in Nigeria in furtherance of effort to liberalize the foreign exchange market, ensure liquidity and make foreign exchange more readily available to low end users.

• The CBN draft Risk-Based Cybersecurity Framework and Guidelines for Deposit Money Banks and Payment Service Providers 2018, which is to provide a framework for managing cybersecurity.
• The NCC Consumer Code of Practice Regulations 2007 provide that all licensees must take reasonable steps to protect consumer information against “improper or accidental disclosure” and ensure that such information is securely stored.

FINTECH LICENSING REQUIREMENTS

Basically, any company who desires to be registered as a Fintech company in Nigeria are licensed if they provide fintech-based products or services similar to a regulated financial product or service. For instance, under the Guidelines for the Operation of International Money Transfer Services in Nigeria 2014, IMTOs are required to obtain licences from the CBN before engaging in money transfer services or otherwise be sanctioned. Also, under the CBN Guidelines on International Mobile Money Remittance Service in Nigeria 2015, for foreign IMTOs to operate in Nigeria, it must apply to the CBN for a licence and show evidence of possession of a licence in their home country. Furthermore, under the NCC Licence Framework for Value-Added Service, mobile payment service providers must obtain a five-year renewable licence from the NCC.

From the above it’s clear that there is no clear cut requirement for the registration of Fintech companies in Nigeria; the requirement is solely dependent on the industry.

In a subsequent article, the writer would discuss the requirements and procedure for registration as a Fintech company in Nigeria.

PROHIBITED FINTECH PRODUCTS IN NIGERIA.

Cryptocurrency as a product of Fintech, as simply defined by the Federal Trade commission is “digital money. that means there is no physical coin or bill-its all online.”2 in recent times, we have seen how cryptocurrency has become a currency for most online transactions and engagements and at the same time prone to manipulation and the fact that it does not have any insurance and  protection like the Naira does and scammers have been using it as a means of receiving victims monies due to the fact that it is not reversible and not refundable once made, for this latter reason, the Nigerian Government vide a Letter to all Deposit Money Banks, Non-Bank Financial Institutions and other Financial Institutions, 2021, the CBN prohibits the holding of, and entry into transactions in cryptocurrencies by licensed banks and other financial institutions in Nigeria. 

Basically, all financial institutions in the country are to desist from transacting in virtual currency as it is not recognised as legal tender in Nigeria and any Bank or institution that transacts in such businesses does so at its own risk.  

CONCLUSION

The financial technology industry is a fast growing one in the banking, financial and technological sectors in Nigeria. It is laudable that there are tangible regulations that govern and regulate the industry. These legislations seek to promote and ensure an effective and sound financial system for the settlement of transactions, including the development of electronic payment systems in Nigeria. These regulations also leverage technology to promote financial inclusion and enhance access to financial services among low-income earners in the Nigerian society by legitimizing their access to a cheaper payment service through the mobile payment service.

Omobolaji O. Oyeniran Esq is an Associate Counsel at Path Solicitors.