1. FINTECH MARKET
1.1 Evolution of the Fintech Market
The fintech ecosystem in Nigeria is largely comprised of businesses focused on mobile payments, mobile lending and personal finance, including wealthtech.
Nigerian Fintechs Play Key Role in COVID-19 Pandemic
2020 was an unprecedented year across the world and countries such as Nigeria are still grappling with the effects of the COVID-19 pandemic. Fintechs, however, rose to the occasion, with the likes of Softcom and PalmPay providing support to relief organisations and collaborating with state governments to set up support funds for vulnerable Nigerians affected by COVID-19.
The COVID-19 pandemic also meant that there was considerable reliance on digital infrastructure to service the needs of customers. For example, Flutterwave, a Nigerian payments system service provider, launched Flutterwave Store, a portal that allows African merchants and SMEs to create online stores to sell their products (Harnessing Nigeria's Fintech Potential: September 2020 McKinsey Report).
Notwithstanding the challenges posed by the COVID-19 pandemic in the past 12 months, Nigeria has continued to bolster its reputation as one of the leading African markets leveraging technology to democratise financial services.
From an investment perspective, there were a number of equity investments as well as M&A activity recorded in the Nigerian fintech market. For instance, Kuda, a digital bank with over 300,000 customers, raised USD10million in its seed round led by Target Global, a leading European venture capital fund, to deepen its digital banking services. Global Accelerex, an electronic payment and fintech solutions company, signed an investment agreement with Africa Capital Alliance, a regional private equity firm, for a USD20 million investment to foster financial inclusion and for the company's expansion plans. Lastly, US payments giant Stripe acquired Nigerian payments start-up Paystack for over USD200 million, a deal that has been described as "the largest exit-by-acquisition for any Nigerian start-up".
Regulations Impacting the Nigerian Fintech Market
The activities of regulators have also contributed to the growth of the fintech market in the past 12 months as the regulators have been eager to create an enabling environment that will support innovation in financial services, without compromising stability within the overall financial system. For instance, as it relates to the mobile payments subsector, in August 2020 the Central Bank of Nigeria (CBN) issued revised Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) (the "Revised PSB Guidelines"). PSBs are required to enhance financial inclusion in rural areas by facilitating high-volume, low-value transactions in remittance services, micro-savings and withdrawal services in a secured technology-driven environment.
Importantly, the Revised PSB Guidelines now permit PSBs to undertake payment and remittance (including inbound cross-border personal remittances) services through various channels within Nigeria as well as deal in foreign exchange in limited circumstances by permitting the sale of foreign currencies realised from inbound cross-border personal remittances to authorised foreign exchange dealers (PSBs were not permitted to undertake these activities pursuant to the initial PSB Guidelines issued in 2018).
To further mitigate risks within the payments system – including systemic risks, credit risks, liquidity risks, operational risks, legal risks, settlement risks and information security risks – the CBN introduced the Guidelines on Nigerian Payments System Risk and Information Security Management Framework. Furthermore, the CBN recently published a circular approving new licence categorisations for the Nigerian payments system (the "Payments Licensing Circular"), which has streamlined licensing under the Nigerian payments system as follows:
- switching and processing;
- mobile money operations;
- payment solution services; and
- regulatory sandbox.
This circular brought some clarity to the scope of activities that licence holders within the payments system can undertake.
In September 2020, the Securities and Exchange Commission (SEC) also released a statement on digital assets (the "2020 SEC Statement on Crypto-Assets"), wherein it defined crypto-assets as "a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction. A crypto asset is neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the crypto asset; and distinguished from fiat currency and e-money."
Importantly, the SEC statement classified all crypto-assets as securities unless proven otherwise and noted that the burden of proving that any crypto-assets "proposed to be offered" are not securities is placed on the "issuer" or "sponsor" of the crypto-assets. In addition, and in line with the recommendation by the Fintech Roadmap Committee of the Nigerian Capital Market, the SEC published Draft Crowdfunding Rules to regulate equity and debt securities-based crowdfunding in Nigeria. The Draft Crowdfunding Rules are yet to take effect.
However, in February 2021, the CBN — in a letter to deposit money banks (DMBs), non-bank financial institutions and other financial institutions (the regulated financial institutions) — prohibited all regulated financial institutions from dealing in cryptocurrencies or facilitating payments for cryptocurrency in Nigeria. This letter further directed all regulated financial institutions to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately. Further, the CBN — in a press release aimed at clarifying its stance in the letter — stated that the requirement for regulated financial institutions to refrain from dealing in cryptocurrencies and to close accounts of cryptocurrency exchangers/customers was justified because:
- the anonymity and lack of identification of cryptocurrency users encourages illegal activities such as money laundering; and
- given that cryptocurrencies are issued by unregulated and unlicensed entities, their use runs against the key mandate of the CBN (under the CBN Act) as the issuer of legal tender in Nigeria.
As such, the CBN considers the use of cryptocurrencies in Nigeria to be a contravention of existing law. While the CBN maintains that it has not banned cryptocurrencies in Nigeria, this regulation has impacted the ability of cryptocurrency exchanges, which facilitate trades in cryptocurrencies to transactions within the traditional banking system. As a result, cryptocurrency exchanges like Binance have directed its users to move funds from their bank accounts into their peer-to-peer wallets in order to facilitate trades in cryptocurrencies on the Binance platform. The expectation is that more cryptocurrency exchange platforms will take similar action(s) in response to this CBN directive.
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Originally published by Chambers & Partners FinTech Global Practice Guide 28 May 2021.
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