On November 12, 2020, President Muhammadu Buhari assented to the Banks and Other Financial Institutions Act 2020 (the "Act") which repealed the previous Banks and Other Financial Institutions Act 1991 (as amended) (the "Previous Act"). The Previous Act, which remained operational for over 16 years, dealt substantially with matters affecting traditional banking and financial services. Over time, there has been significant activity in technology-enabled financial transactions. These activities have heightened in the wake of the covid-19 pandemic which has necessitated digitisation across several sectors. In recognition of these facts, the Act introduces new provisions which are in line with current and modern financial services rendered by financial technology ("Fintech") companies in Nigeria.
In our previous article, we highlighted in summary, some differences between the provisions of the Act and the Previous Act. In today's newsletter however, we analyse the potential impact of the Act on Fintech companies and their services in Nigeria.
Definition of "Other Financial Institutions"
Under the Previous Act, "other financial institutions" include discount houses, finance companies, money brokers and companies which engage in factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, local purchases order financing, export finance, project consultancy, financial consultancy and pension fund management. Under the Act however, the definition has been expanded to include bureau de change businesses, finance companies, authorized buying of foreign exchange, international money transfer services, mortgage refinance and mortgage guarantee company, financial holding companies, and payment service providers.
The Act further provides that the above listed businesses shall be regulated by the Central Bank of Nigeria (the "CBN") "regardless of whether such businesses are conducted digitally, virtually or electronically only".
What is the impact of the expanded definition?
Prior to the advent of the Act, the CBN had through several circulars, publications, and guidelines, sought to regulate businesses which were not previously covered by the definition of "other financial institutions". Consequently, majority of the businesses now defined as "other financial institutions" in the Act were already regulated by the CBN through several fragmented rules. Therefore, the Act seeks to ensure that these businesses are controlled and organised by the primary piece of legislation which applies to financial institutions in Nigeria.
In addition, the expansion of the applicability of the Act to financial services conducted "digitally, virtually or electronically" implies that Fintech companies offering financial services, strictly through the use of technology and which have no physical presence or offices in Nigeria will now be regulated by the Act provided that the services they render fall within the definition of "other financial institutions". Therefore, such businesses will now be required to obtain licenses to commence or continue operations in Nigeria.
Although, the Act provides significant coverage of Fintech services, it, also appears to exclude businesses relating to blockchain and digital assets, virtual savings, lending services, amongst others. Whilst the reason for the decision to exclude certain Fintech services from the purview of the Act remains unknown, it should be noted however that the Act also makes provision for discretionary powers of the CBN to "designate" businesses as "other financial institutions' from time to time. Therefore, the CBN may at any time, expand the definition as it deems fit.
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