Towards an exhaustive fintech regulatory framework in Nigeria

The scope of the financial market has changed in recent times from a physical setting where buyers and sellers converge to exchange commodities to a system that allows people trade goods, ideas and services electronically.

Fintech is a new system that allows for trade without the physical transfer of money. The storekeeper now allows POS transactions while the shoemaker allows OPAY transfers. Shopping malls receive BITCOIN and the Suya or Bike-man allows you to pay him via KUDA. Technology and innovation have, in recent years shaped the system of our financial transactions. 

The assertion that Fintech is instigating a new evolution in Nigeria’s market system has become unarguable at this point. The development of a suitable fintech ecosystem in Nigeria is however at the mercy of certain factors including good infrastructure, financing, data security, youthful population, computer literacy, increased access to smartphones and (most imperative), the regulatory drive.

To this end, by the end of 2020, Nigeria ranked 17 in Sub-Saharan Africa for ease of doing business. 

Fintech is a portmanteau for Financial and Technology. It describes the synergy between Finance and Technology. FinTech is a sector that concerns itself with the enhancement of business operations, banking and financial services with the employment of newly developed digital and online technologies.

Fintech involves the use of software and online services to provide an advanced, faster and easier way of rendering financial services, sweeping away the analogue method. The products of fintech include money transfer, lending, blockchains and digital currency, peer-to-peer agreements, crowdfunding, public revenue collection, electronic payment and investment among others.

An exhaustive regulatory framework is a perfect recipe to secure the success of a thriving fintech ecosystem in this electronic age where day to day financial transactions are conducted electronically. In this light, let us consider the necessity for a holistic regulatory framework in Nigeria.

As of this moment, there is no regulatory framework for the fintech sector in Nigeria. The effect of this on some fintech services has been detrimental. While there are certain regulatory frameworks in existence regulating commercial and business activities, the need for specific regulations in the fintech sector cannot be withered down. The consequence of the dearth of specific legislation is the implementation of a ‘one size fits all’ approach which digs up a lot of loopholes in the regulations.

A practical indicator of the existence of this menace is found in the crowdfunding scheme. Crowdfunding is a means of raising modest amounts of money from a large number of individuals by using social media or other online platforms.

In Nigeria, this is widely utilised to cover medical needs, pay school tuitions, provide basic facilities to indigenes, and raise capital for SMEs, among other things. Because there is no specialised regulation for this fintech service, it is subject to laws that govern corporations and investments, such as the Companies and Allied Matters Act (CAMA) and the Investment and Securities Act (ISA). Invitations to the public to invest in a firm are restricted under CAMA and ISA since this amounts to both equity and debt investment.

As a result of the application of these rules, crowdfunding has been declared illegal. The downside is that the lack of specialised fintech legislation has effectively stifled the development of fintech services.

The SEC, on the other hand, quickly acknowledged that it is considering regulations to address the issues raised by these provisions. This prompted the SEC to issue an exposure draft of the Proposed New Rules on Crowdfunding (the “Rules”) on March 8, 2020, which attempts to provide a regulatory framework for private enterprises with the proper structure and mechanism to raise funds from the public through crowdfunding. Thankfully, the legislation was passed and went into effect on January 21, 2021.

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While the assertion above that no fintech law exists stands, there are however some relevant regulations that deal with some fintech activities. Some of these activities that enjoy sectoral regulation include electronic payments, digital credits, banking, fintech testing foreign exchange and data protection amongst others. 

• Electronic Payment: Electronic Payment platforms such as Quickteller, Paga, Flutterwave, Remita, PayU and Paystack, have evolved in integrating the payment side of commercial transactions. It is instructive to note that this was not regulated until 2018 when the CBN issued the Regulation for Bill Payments in Nigeria and the Regulation on Electronic Payments and Collections for Public and Private Sectors in Nigeria in 2019 (the “EPC Regulation”). These regulations were primarily to document minimum standards for processing bill payment transactions.
• Digital Credit: Digital Credit platforms allow their subscribers easily access unsecured credit facilities with attractive rates and convenient repayment periods, online. Prevalent among these platforms are- Paylater, Lidya, Quickcheck and Kiakia.co. This sub-sector is regulated by the circular issued to banks by the CBN on January 7, 2020, where the CBN set the Loan to Deposit Ratio (“LDR”) at 65%. This, according to CBN was done in a bid to stimulate the economy by increasing lending to sectors of the economy.
• Mobile Banking: Another area that enjoys regulation is Banking. The CBN has issued various guidelines on electronic and mobile banking. All banks in Nigeria have mobile Banking Apps where customers can perform online transactions such as transfers, bill payments and deposit cheques. One of the challenges with this was the creation of two models for mobile money services – Bank led and Non-Bank led – by Guideline on Mobile Money Service in Nigeria. The Bank-led is initiated by a bank in partnership with other approved organisations, while the non-bank led is initiated by approved organisations e.g Flutterwave and Interswitch. This guideline prevents telcos from being licensed for mobile services. This is bad for a country with high phone penetration where a majority of the population deal with telcos. In other words, banks do not have the customer penetration that telcos have. Intuitively, in a bid to correct this anomaly, the CBN introduced the Payment Services Bank (PSB) Model which now allows the telcos to provide certain banking activities.
• Fintech Testing: Fintech testing involves testing applications and software and ensuring they are fit for the market. Usually, most startups are not aware that there are certain regulations navigating around how to test their software. The result of this is that after their herculean task of testing, they find themselves in a breach of the regulation which may render the whole process nullity and at other times, attract penalties. To this end, the SEC has launched a regulatory framework on its portal to guide a startup on regulatory requirements for testing their software.  
• Foreign exchange: Foreign exchange is a cross-border business that involves settling accounts or debts electronically between persons residing in different countries. Forex is regulated primarily through two major guidelines i.e Guidelines on International Mobile Money Remittance Service, 2014 and the Guidelines on International Mobile Money Remittance Service in Nigeria, 2015. These regulations authorise licensed operators to provide inbound and outbound international money transfer services in Nigeria using mobile phones and other handheld devices.
• Data Protection: Data protection in Nigeria is regulated by the Nigeria Data Protection Regulation (NDPR) 2019. The NDPR regulates the use of information of any natural person in Nigeria by Data Controllers. It is no fallacy that the term ‘Data controller’ includes fintech companies that collect and process individuals’ personal information. Thus, that aspect of the sector is regulated by the NDPR.
• Cryptocurrency/Blockchain: Another downscale in Nigeria’s fintech regulatory framework is evident in its disapproval of cryptocurrencies. Cryptocurrency transactions in Nigeria are officially disallowed. The CBN has frowned upon investment in cryptocurrencies. The SEC has continually issued public notices and press releases forbidding Nigerians from Investments in Cryptocurrencies. The reason behind the stern warning was that the SEC has not approved of it nor has it made any regulations to regulate them. Till today, the CBN and SEC still reiterate their disapproval of cryptocurrencies.

While few operations and activities in the fintech sector are regulated, a vast number of them remain unregulated. The operations that do not have specific guidelines or regulations suffer either of these two catastrophes. One, they are not regulated at all. Thus, one is uncertain of its legality or not.

In this situation, anyone who carries on such operations is without bounds. He may fly as high as heaven permits or bend as low as the sea tolerates.

The Second catastrophe is found in the multiplicity of relevant regulations. There will be little to no problem where the provisions of these regulations are similar. However, the problem lies where these regulations are overlapping or contradictory.

Moshood Yahaya Kolawole is a 5th-year law student at the University of Ilorin and a writer passionate about FinTech Law, Corporate Law, Tax Law and Data Privacy Law.