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.
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 having witnessed a 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 anon.
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 which inure 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 which safeguard user data from unauthorised access, and prevent unlawful processing of personal data or the loss of 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, granting of communications licences, management of the frequency spectrum, etc.[27] thus the activities of fintechs must not be such that 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 the various tax legislations 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:
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 horizon and accommodate a wider range of fintech innovations. Moreover, collaboration and support of fintech companies in the sandbox period is more enhanced than 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, mobile money in Kenya.
AUTHOR: Oyetola Muyiwa Atoyebi, SAN FCIArb. (U.K)