Exploring The Regulatory Framework for Fintech Innovation in Nigeria: Lessons from Selected Jurisdictions

By Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)

INTRODUCTION

Technology continues to be an exciting topic of discourse in modern society, and the level of technology adoption across different social arrangements often measures development.[1] Technology has permeated every sector of society, becoming the principal driver of change in the contemporary world. With particular reference to the financial services sector, innovative technologies (fintech) are a primary vehicle of financial inclusion and growth in various economies.[2]

Nigeria has, in recent times, witnessed a surge in the development and adoption of financial technology solutions.[3] Several fintech companies have emerged, and even well-established traditional banking institutions are using technology to offer a variety of financial services. This development, however, explicates the need for a robust regulatory framework that can foster innovation while ensuring consumer protection and financial stability. This article will examine the current regulatory landscape for fintech innovation in Nigeria, the challenges faced, and the growth opportunities, drawing lessons from some selected jurisdictions.

THE CURRENT REGULATORY LANDSCAPE FOR FINTECH INNOVATION IN NIGERIA

The fintech industry testifies to the youthful and entrepreneurial spirit of the Nigerian population, which has witnessed widespread adoption in the last few years.[4] However, these companies operate in an increasingly regulated environment, and this is necessary because the sector deals directly with people’s money.[5] The principal regulatory framework will be considered anonymous.

To begin with, the Central Bank of Nigeria is established by the Central Bank of Nigeria Act[6] with the mandate of ensuring monetary and price stability, issuing legal tender currency, promoting a sound financial system in Nigeria, etc.[7]  It is also empowered by the Banks and Other Financial Institutions Act,[8] to exercise licensing and regulatory control over banks and other financial institutions in Nigeria.[9] Thus, the Central Bank remains the primary regulator for the financial sector, capturing the operations of fintech in Nigeria. In exercise of its regulatory powers, the Bank issues, from time to time, guidelines and regulations to direct and manage the operations of actors in the industry and some of these include the CBN Guidelines on Operations of Electronic Payment Channels in Nigeria,[10] CBN Guidelines on Mobile Money Services in Nigeria,[11] CBN Guidelines on International Money Transfer Services in Nigeria,[12] CBN Regulations on Instant (Inter-Bank) Electronic Funds Transfer Services,[13] CBN regulatory Framework for the use of USSD for Financial Services in Nigeria,[14] CBN Customer Due Diligence Regulations 2023,[15] Central Bank of Nigeria’s Consumer Protection Framework 2016, etc.[16] These guidelines and regulations cover various aspects of fintech operations, including licensing, capital requirements, payment services, digital banking, risk management, cryptocurrency activities, etc. in conjunction with the AML

Moving forward, the Securities and Exchange Commission (SEC) is another vital regulator of the fintech industry. As the primary overseer of the capital markets in Nigeria, it is saddled with the responsibility of regulating investments and securities in Nigeria and overseeing all other related capital markets activities,[17] under the Investments and Securities Act.[18] The regulatory oversight of the Commission extends to dealings in digital assets and securities, crowdfunding platforms, etc. It thus issues guidelines within the purview of its powers to safeguard the capital markets.[19]

The Nigerian Data Protection Commission, established by the Nigerian Data Protection Act 2023[20] aims to regulate the deployment of technology and organizational measures for the enhancement of personal data protection, align Nigeria’s landscape with international best practices on privacy and data protection, promote public awareness of the rights and obligations related to data protection, etc.[21] As fintech relies heavily on technology, fintech companies must appreciate and conform to data privacy and protection rules in the Nigerian economic sector. Thus, they must, within their operations, establish measures that safeguard user data from unauthorised access, and prevent unlawful processing of personal data or the loss of the same. [22] Violations of the provisions of the Act are met with stiff punishments provided by the Act[23] and fintechs are mandated to appoint Data Protection Officers to oversee and ensure that their data compliance levels are at par with the requirements of the law.[24]

In addition, the Nigerian Communications Commission (NCC), established[25] by the Nigerian Communications Commission Act[26] also plays a crucial role in regulating the telecommunications infrastructure used by fintechs. It regulates the communications industry, promoting fair competition, consumer protection, the granting of communications licenses, the management of the frequency spectrum, etc.[27] Thus, the activities of fintechs must not be such that they violate the protection of their users with regard to the provisions of the Act.

The Federal Inland Revenue Service is the foremost institution saddled with overseeing taxation in Nigeria. It is empowered by law to manage tax administration and monitor compliance with tax laws at the national level and in relation to certain institutions and persons, including companies.[28] Thus, fintechs must remit their taxes in accordance with the provisions of various tax legislation, such as the Companies Income Tax Act, Value Added Tax Act, Capital Gains Tax Act, Stamp Duties Act, etc.

The Federal Competition and Consumer Protection Commission is also a regulator in the fintech industry. This is made possible by virtue of the provisions of the Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022 made pursuant to Sections 17, 18 and 163 of the Federal Competition and Consumer Protection Act 2018. The guideline mandates businesses intending to venture into digital lending to seek approval from the Commission by registering in accordance with its provisions, unless such is a microfinance bank in which case, it must apply for a waiver.[29] It allows the registration of up to five applications for the digital lending company and banks and telecom companies are forbidden from providing hosting services to such company unless the provisions are complied with.[30]

CHALLENGES FACED IN THE FINTECH INDUSTRY IN NIGERIA

Despite the widespread adoption of technology and the efforts of regulators, the fintech industry in Nigeria faces several challenges. These are summarised as follows:

1. Cybersecurity concerns as a result of increased digital activities which has concomitantly affected the increase in cybercrimes.[31]
2. Limited access to finance by fintechs for the boosting of their products and services to serve the Nigerian population.
3. Uncertainty in the regulatory landscape exits because innovative technologies in the industries are developing at a very fast pace, resulting in regulations having a lot of catching up to do.[32]
4. Lack of technological infrastructure in the Nigerian system to ensure seamless interoperability.[33]
5. Apathy by users as a result of the fact that the terrain is unfamiliar for a significant portion of the Nigerian population and adapting to change definitely requires time.[34]
6. Limited financial inclusion as significant numbers of Nigerians are either unbanked or underbanked.[35]
7. Huge compliance costs discourage innovation in fintech as it weighs heavily on the finances of fintech companies.
8. Shortage of technical talent for the development of vibrant technologies.[36]
9. Data privacy and protection concerns as a result of effective monitoring of the system.

OPPORTUNITIES FOR GROWTH: LESSONS FROM SELECTED JURISDICTIONS

Amidst the challenges, there are significant opportunities for growth in the Nigerian fintech landscape. Nigeria can draw valuable lessons from other jurisdictions that have, to a large extent, successfully navigated the regulatory complexities of fintech innovation. Particular focus in this part will be given to the UK and Kenya as they have implemented regulatory approaches that seek to strike a balance between promoting innovation and managing risks. By examining these models, Nigerian regulators and fintech stakeholders can learn about best practices and regulatory frameworks that can be customised for the Nigerian environment.

THE UNITED KINGDOM

With its regulatory sandbox initiative, the Financial Conduct Authority (FCA) of the United Kingdom has been at the forefront of fintech regulation.[37] The FCA’s regulatory sandbox, which was established in 2016, allows fintech companies to test cutting-edge products, services, and business concepts in a monitored setting while adhering to the necessary safety measures.[38] With this strategy, authorities can keep an eye on new technology and any hazards they may pose while still fostering innovation.

In a recent development, the FCA announced plans to expand its regulatory sandbox to include firms developing sustainability and green finance solutions.[39] This move recognises the growing importance of sustainable finance and the need to foster innovation in this domain.

 Although Nigeria has a similar arrangement in the SEC Regulatory Incubation Guideline[40] and CBN’s Regulatory Framework for Sandbox Operations,[41] the UK model is broader in scope, as it encompasses various fintech innovations across different financial sectors, while the Nigerian model is focused on the capital markets and payment services. Thus, Nigeria could look into expanding its horizons and accommodating a wider range of fintech innovations. Moreover, the collaboration and support of fintech companies in the sandbox period is more enhanced than in the Nigerian situation, and the UK model has a more nuanced approach to transitioning fintech to full-scale deployment.[42] Finally, Nigeria can learn from the UK model by exploring international collaborations to enable Nigerian fintech companies to put their innovations to the test in other jurisdictions’ markets, and conversely. This will, no doubt, promote global competitiveness and information exchange.[43]

KENYA

In the area of financial inclusion and mobile money, Kenya has led the way. The success of M-Pesa, a mobile money transfer service, has been predominantly ascribed to a legislative milieu that fostered innovation while simultaneously tending to concerns over consumer protection.[44]

To find a balance between advancing financial inclusion and shielding customers from unscrupulous lending practices, the Central Bank of Kenya has recently begun looking into regulating digital lending companies.[45]

By promoting a supportive regulatory framework for fintech solutions targeted at financial inclusion, Nigeria can learn from Kenya’s experience. This would entail creating more specialised laws for digital lending services, mobile money services, and other fintech products that help marginalized communities.[46] It is imperative to enact suitable policies for safeguarding the interests of marginalized populations while also advancing financial inclusion.

CONCLUSION

Nigeria’s fintech innovation regulatory environment is changing and offers both opportunities and challenges. Regulators, fintech start-ups, and industry stakeholders must work together as the industry develops to provide a regulatory framework that stimulates innovation, protects consumers, and upholds the stability of the financial system as a whole. By utilizing a proactive and cooperative regulatory strategy, Nigeria may establish itself as a premier location for fintech innovation on the African continent.

SNIPPET

Nigeria’s fintech innovation regulatory environment is changing and offers both opportunities and challenges. Regulators, fintech start-ups, and industry stakeholders must work together as the industry develops to provide a regulatory framework that stimulates innovation, protects consumers, and upholds the stability of the financial system as a whole.

KEYWORDS

Fintech innovation, fintech adoption in Nigeria, sandbox technology in the UK, and mobile money in Kenya.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Tech Law and Practice, and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng  

CONTRIBUTOR: Tobenna Mogbo

Tobenna is the Team Lead of the Dispute Resolution Department at OMAPLEX Law Firm. He also holds commendable legal expertise in Banking and Finance Law.

He can be reached at tobenna.mogbo@omaplex.com.ng

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[1] Onyeanwusi O., ‘Legal and Regulatory Consideration for the Fintech Industry in igeria’ An Undergraduate Thesis submitted to the Faculty of Law, University of Lagos, in Partial Fulfillment of the Requirement for the Award of Bachelor of Laws, November 2019 available at https://www.academia.edu/44419707/LEGAL_AND_REGULATORY_FRAMEWORK_FOR_THE_FINTECH_INDUSTRY_IN_NIGERIA accessed on the 27th of May 2024.

[2] Isukul, Araniyar, and Ben Tantua. “Financial inclusion in developing countries: applying financial technology as a Panacea.” Economic Growth and Financial Development: Effects of Capital Flight in Emerging Economies (2021): 1-21.

[3] Ediagbonya, Victor, and Comfort Tioluwani. “The role of fintech in driving financial inclusion in developing and emerging markets: issues, challenges and prospects.” Technological Sustainability 2, no. 1 (2023): 100-119.

[4] Reyes-Mercado, Pável. FinTech Strategy: Linking Entrepreneurship, Finance, and Technology. Springer Nature, 2021.

[5] See Olatunji, Tolu. “Advancing the Cause of fintech in Nigeria through regulation.” The Gravitas Review of Business & Property Law 11, no. 4 (2020): 17-34. Available at https://d1wqtxts1xzle7.cloudfront.net/65259300/Advancing_the_Course_of_Fintech_in_Nigeria_through_Regulation-libre.pdf accessed on May 27, 2024

[6] 2007

[7] Section 2 CBN Act 2007.

[8] 2020

[9] See for instance Part I and Part VIII of the Act.

[10]https://www.cbn.gov.ng/out/2016/bpsd/approved%20guidelines%20on%20operations%20of%20electronic%20payment%20channels%20in%20nigeria.pdf accessed May 27, 2024

[11]https://www.cbn.gov.ng/out/2015/bpsd/guidelines%20on%20mobile%20money%20services%20in%20nigeria.pdf accessed May 27, 2024

[12]https://www.cbn.gov.ng/out/2014/bpsd/guidelines%20on%20international%20money%20transfer%20services%20in%20nigeria%20approved%20d.pdf accessed May 27, 2024

[13] https://www.cbn.gov.ng/out/2018/bpsd/regulation%20on%20instant%20payment.pdf accessed May 27, 2024

[14] https://www.cbn.gov.ng/out/2018/bpsd/ussd%20regulatory%20framework.pdf accessed May 27, 2024

[15] https://www.cbn.gov.ng/Out/2023/CCD/CBN%20Customer%20Due%20diligence%20Reg.%202023-combined.pdf accessed May 27, 2024

[16] https://www.cbn.gov.ng/out/2016/cfpd/consumer%20protection%20framework%20(final).pdf accessed May 27, 2024

[17] See section 13 of the Investments and Securities Act 2007.

[18] 2007.

[19] See for instance the SEC Regulatory Incubation Guidelines for Specific Category of Fintech Entrepreneurs 2021 available at https://sec.gov.ng/wp-content/uploads/2021/06/SEC-Regulatory-Incubation-Guidelines_18521.pdf accessed May 27, 2024

[20] Section 4.

[21] See Section 5 of the Act.

[22] See section 24 of the Act.

[23] See Section 49 of the Act.

[24] Section 32 of the Act.

[25] Section 3.

[26] 2003

[27] See Section 4 of the Act.

[28] See Section 8 of the FIRS Establishment Act 2007.

[29] FCCPC, Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022, available at https://fccpc.gov.ng/wp-content/uploads/2023/10/LIMITED-INTERIM-REGULATORY_-REGISTRATION-FRAMEWORK-FOR-DIGITAL-LENDING-2022.pdf accessed on May 27, 2024.

[30] See Section 159 of FCCPA

[31] See Shehu, Ibrahim. “Fintech Regulations in Nigeria’s Digital Environment: Problems & Prospects.” Issue 3 Indian JL & Legal Rsch. 4 (2022): 1.

[32] See Ojo, Oluwaseun Viyon, and Ugo Nwaokike. “Disruptive technology and the fintech industry in Nigeria: Imperatives for legal and policy responses.” Gravitas Review of Business and Property Law 9, no. 3 (2018). Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3306164 accessed on May 27, 2024

[33] Sampat, Brinda, Emmanuel Mogaji, and Nguyen Phong Nguyen. “The dark side of FinTech in financial services: a qualitative enquiry into FinTech developers’ perspective.” International Journal of Bank Marketing 42, no. 1 (2024): 38-65.

[34] Ediagbonya, Victor, and Comfort Tioluwani. “The role of fintech in driving financial inclusion in developing and emerging markets: issues, challenges and prospects.” Technological Sustainability 2, no. 1 (2023): 100-119.

[35] Damilola, Arotile Omolabake. “FinTech and Financial Inclusionin West Africa: Nigeria’s SMEs Market.” International Journal of Multidisciplinary and Current Educational Research 4 (2022): 210-2018. Available at https://d1wqtxts1xzle7.cloudfront.net/80590703/AROTILE_FinTech_2022_IJMCER_Z0410210218-libre.pdf accessed May 27, 2024.

[36] Sampat, Brinda, Emmanuel Mogaji, and Nguyen Phong Nguyen op cit. fn32.

[37] Ahern, Deirdre. “Regulators Nurturing Fintech Innovation: Global Evolution of the Regulatory Sandbox as Opportunity-Based Regulation.” Indian JL & Tech. 15 (2019): 345.

[38] Ibid.

[39] FCA to lead GFIN Greenwashing TechSprint; Financial Conduct Authority, 2023; available at https://www.fca.org.uk/news/news-stories/fca-lead-gfin-greenwashing-techsprint accessed May 27, 2024.

[40] SEC Regulatory Incubation Guidelines for Specific Category of Fintech Entrepreneurs 2021 available at https://sec.gov.ng/wp-content/uploads/2021/06/SEC-Regulatory-Incubation-Guidelines_18521.pdf accessed

[41] Central Bank of Nigeria, ‘Framework for Regulatory Sandbox Operations’ 2021 available at https://www.cbn.gov.ng/out/2021/ccd/framework%20for%20regulatory%20sandbox%20operations.pdf accessed May 27, 2024

[42] Olatunji, Tolu. “Advancing the Cause of fintech in Nigeria through regulation.” The Gravitas Review of Business & Property Law 11, no. 4 (2020): 17-34.

[43] Ibid.

[44] Ndung’u, Njuguna. “The M-Pesa technological revolution for financial services in Kenya: A platform for financial inclusion.” In Handbook of blockchain, digital finance, and inclusion, volume 1, pp. 37-56. Academic Press, 2018. See also Kingiri, Ann Njoki, and Xiaolan Fu. “Understanding the diffusion and adoption of digital finance innovation in emerging economies: M-Pesa money mobile transfer service in Kenya.” Innovation and Development (2019).

[45] Kenya’s Central Bank Casts a Watchful Eye over its Digital Lenders, (ORADIAN, 2022) available at https://oradian.com/insights/public/kenyas-central-bank-casts-a-watchful-eye-over-its-digital-lenders/ accessed May 27, 2024.

[46] Monye, Ogochukwu Fidelia. “Rethinking the legal and institutional framework for digital financial inclusion in Nigeria.” (2021).