Neobanks In Nigeria: Key Considerations For Market Entry - Part II

In Part 1 of ourNeobankingSeries, we explored some of the strategic considerations that make Nigeria a compelling destination for global Neobanks. In Part 2 of our Neobanking Series, we will focus on some of the key legal and regulatory considerations governing market entry, licensing, and operational compliance

1. Nigeria's Banking Model: No Universal Banking for Banks

Unlike the regulatory framework in the United Kingdom and the European Union, Nigerian banks cannot operate a full or universal banking model that allows them to provide retail, investment, and wealth management services under a single licence. The universal banking model was introduced in Nigeria in 2001 but was formally abolished in 2010 due to concerns over risk concentration and the stability of deposit-taking institutions. Today, Nigerian banks operate under a segmented licensing framework with each category of bank operating within clearly defined boundaries and cannot automatically offer investment products, trading, insurance, or cross-border foreign exchange services without partnering with licensed entities. Commercial banks offer a broad range of retail and corporate services. Merchant banks focus on corporate finance, advisory services, and investment banking, typically without accepting retail deposits. Microfinance banks serve individuals and SMEs in underserved areas. Payment service banks provide digital payments, savings accounts, and limited transaction services but cannot offer full lending or investment products. Primary mortgage banks are licensed to engage in primary mortgage banking activities including mortgage‑related savings and loans rather than full commercial banking services.

2. Nigeria's Regulatory Architecture: No Twin Peaks

Nigeria operates a segmented, functional regulatory framework for financial services, which differs significantly from the Twin Peaks approach used in the UK. In Nigeria, different types of financial activities are overseen by different regulators, each with specific mandates. For instance, the Central Bank of Nigeria is responsible for conduct supervision and prudential regulation and supervises deposit-taking institutions, including commercial banks, microfinance banks, money transfers, electronic payments, neobanks, payment service banks (PSBs), as well as payment service providers and banking infrastructure/open banking firms. On the other hand, investment-related services, such as digital brokerage, crowdfunding platforms, cryptocurrency offerings and exchanges, and other capital market activities, fall under the regulatory purview of the Securities and Exchange Commission (SEC). Insurance products are regulated by NAICOM, and the Nigeria Deposit Insurance Corporation provides deposit protection and monitors bank insolvency risk.

3. The Nigeria Inter-Bank Settlement System

The Nigeria Inter-Bank Settlement System (NIBSS) is a central pillar of Nigeria's financial infrastructure. Owned by the Nigerian banks, NIBSS provides a centralized platform for interbank clearing, settlement, and payments, enabling seamless transactions across the country. Through systems like the NIBSS Instant Payment (NIP), the NIBSS facilitates near real-time transfers between bank accounts, processes card transactions, and supports bulk disbursements such as salaries, government payments, and corporate transfers. NIBSS ensures interoperability with all Nigerian banks, allowing customers to send and receive funds quickly and reliably. NIBSS also supports compliance with CBN settlement and reporting requirements, including fraud monitoring and transaction reconciliation. For Neobanks entering Nigeria, integration with NIBSS may be essential depending on the particular service being offered. By leveraging this shared infrastructure, Neobanks can reduce operational complexity, lower costs, and efficiently expand their services to both domestic and diaspora users. In essence, NIBSS provides the foundational backbone that enables digital banks to operate effectively within Nigeria's banking ecosystem.

4. Account Types & KYC Flexibility

Nigeria's banking system operates a tiered bank account structure with varying levels of Know Your Customer (KYC) requirements for individuals. At the most basic level is the Tier-1 Account, which can sometimes be opened instantly using just a phone number as the account identifier and minimal customer information, such as a passport photograph, name, place of birth, gender, address, and telephone number. Financial institutions are not obligated to verify this information. A Tier-1 Account is subject to a maximum single deposit limit of ₦50,000 ($65) and a maximum cumulative balance limit of ₦300,000 ($390). Tier-1 accounts allow ATM transactions, but international fund transfers are prohibited, and withdrawals can only be made by the account holder.

Tier-2 Accounts are similar in structure but require banks to verify customer information. The single deposit limit is ₦100,000 ($130), and the maximum cumulative balance is ₦500,000 ($650). Other features, such as ATM access, remain similar to Tier-1 accounts. Tier-3 Accounts represent full-service banking accounts. Thus, banks must verify customer information and comply fully with AML/KYC requirements. There are no limits on single deposits or cumulative balances, and account holders have access to the full range of banking services, including international transfers and high-value transactions. However, Tier-3 accounts can only be opened in-person at a bank branch.

For Neobanks entering Nigeria, this tiered-accounts approach provides multiple advantages. The approach allows for rapid customer acquisition by lowering entry barriers while still adhering to regulatory requirements, making them suitable for mass adoption among previously unbanked populations. This flexibility makes it possible to implement a phased onboarding strategy, balancing regulatory compliance, customer convenience, and operational scalability.

5. Deposit Liability in Nigeria

In Nigeria, depositors are protected under a limited deposit insurance scheme administered by the Nigeria Deposit Insurance Corporation (NDIC). The NDIC provides a safety net for customers in the event of a bank failure, ensuring that depositors can recover a portion of their funds up to a statutory limit. The maximum deposit insurance coverage for bank and financial institution customers in Nigeria has recently been significantly increased. Depositors of Deposit Money Banks (DMBs) are now insured up to ₦5,000,000, approximately $3,420. Microfinance Bank (MFB) customers have coverage up to ₦2,000,000, around $1,370, while Primary Mortgage Bank (PMB) and Payment Service Bank (PSB) depositors are similarly insured up to ₦2,000,000, or roughly $1,370. Subscribers of Mobile Money Operators (MMOs) now benefit from coverage of ₦5,000,000 per subscriber, also approximately $3,420, aligning their protection with that of DMB depositors. The NDIC is responsible for administering this scheme, managing payouts, and coordinating with the Central Bank of Nigeria during bank resolution processes.

6. Basel Standards & Compliance in Nigeria

The Central Bank of Nigeria has formally committed to aligning the Nigerian banking sector with Basel standards and has issued a series of guidelines to support this transition. In 2013, the Central Bank of Nigeria published the Framework for the Implementation of Basel II/III for the Nigerian Banking System, thereby introducing the foundational principles for credit, market, and operational risk management in line with Basel II and III expectations. In September 2021, the Central Bank of Nigeria issued the Guidelines on Regulatory Capital and the Guidelines on the Leverage Ratio, setting explicit minimum requirements for regulatory capital, capital buffers, and leverage ratios for deposit money banks. Additionally, the CBN signaled its Basel III implementation plan through a September 2021 circular, outlining a phased adoption approach that incorporates liquidity, leverage, and capital standards while providing transitional timelines for Nigerian banks. Collectively, these reforms position Nigeria's banking sector on a trajectory consistent with global best practices

7. Representative Offices of Foreign Banks in Nigeria

The Central Bank of Nigeria now allows global financial institutions, including Neobanks, to establish representative offices in Nigeria, providing a foothold in the market without conducting full banking operations. These offices function primarily as liaison or marketing entities and can also be used to promote the parent bank's services to clients locally. While representative offices provide an initial presence in Nigeria, they are not a substitute for fully licensed operations and are expressly prohibited from engaging in deposit-taking, lending, or any other core banking activities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.