At no time in Nigeria’s economic history has a more exponential growth in Financial inclusion and literacy been witnessed more than in the last decade due in no small measure to the rise of Fintech companies bridging the gap between traditional Financial Institutions and a greater part of the country’s population.
The term “Fintech”, a combination of the words “Financial” and “Technology” , is used to describe the practical application of technology-based software in delivering Financial services that can range from remote payments, monetary transfers and the trading of Cryptocurrencies.
What this article aims to do is provide in the most easily understandable terms, basic information on the requirements for applying for and the granting of Fintech licenses that can procured by businesses or individuals in Nigeria along with the Regulatory Compliance framework governing the use of each license in Nigeria. For the purpose of this write-up these licenses are:-
- Alternative Lending/Digital Credit licenses;
- Digital Crowdfunding Intermediary licenses;
- Digital Banking licenses under which you have a subset of licenses that include –
a). Switching and Processing licenses.
b). Mobile Money Operator licenses.
c). Payment Solutions Service Provider licenses.
d). Payment Terminal Service Provider licenses.
e). Super Agent Banking licenses.
f). Payment Service Bank licenses.
g). Foreign Exchange & Remittance licenses.
- Insurtech licenses;
- Robo-Advisory licenses;
- Sandbox Operations Framework grants.
While other specific Fintech license categories like Digital Public Revenue Collection licenses exist,this article will focus on the most available types of Fintech licenses which covers the Six categories already mentioned above and which will be analyzed one after the other.
1. Alternative Lending/Digital Credit licenses
Alternative lending or Digital Credit simply refers to the Fintech-based lending platforms for the quick and usually non-collateralized procurement of micro credit facilities as opposed to the more traditional method of securing loans through paper applications. These platforms are simply known today as “Loan apps” and can be operated by licensed Moneylenders, Banks and licensed Finance companies.
Getting a Moneylending license involves making applications to the Home Affairs Ministry in states like Lagos through the state Moneylenders law and entitles a company to physically operate within the state where the license was granted. This application involves filling a Moneylenders Ordinance Form B among other documents and then upon getting the license going through a yearly renewal process. Notable examples of Moneylending apps run by companies include Branch, L-credit, and Quickcheck while Lending apps operated by Banks include Fairmoney and Carbon . Getting a Moneylending license usually takes a time period of not more than 2 months, though it can be granted much earlier.
Getting a Financial Institution license is governed by the Central Bank of Nigeria(CBN) and entitles a company to operate Lending businesses all over the country, but with somewhat stricter options like a minimum capital requirement of 2.5Billion Naira ($5million) and if it’s a Digital or Fintech operation model the company intends to run then it must also submit a fully comprehensive IT policy as well as a 5-year detailed business plan, an Enterprise Risk Management plan, and a Dispute Resolution Framework and detailed information about its Technical/IT Service Provision partners.
2. Digital Crowdfunding Intermediary licenses
Crowdfunding is simply the practice of funding a project or venture by raising money from a large number of people through the Internet. Crowdfunding is governed in Nigeria by the Securities and Exchange Commission (SEC) through the Security and Exchange Commission (SEC) rules on Crowdfunding 2021 as a result of which any Investment/Crowdfunding Intermediary portal not yet licensed by the SEC is deemed illegal and open to the SEC’s Regulatory sanctions. A notable example of a Crowdfunding portal is GoFundMe.
To get a Crowdfunding portal/Intermediary operating license in Nigeria you need a minimum capital requirement of 100 million Naira ($200,000.00). You must also :-
– Register a company with your objects clause stating that Crowdfunding is the sole purpose of the company;
– have management accounts that are not more than a month old as at the time of filing for a Crowdfunding license with the SEC;
– submit a sworn undertaking to furnish the SEC with copies of amendments to the company’s Memorandum and Articles of Association as well as the company’s by-laws or rules ;
– render to the SEC a detailed description of its portal IT operation system;
– provide 3 sponsored individuals to represent the company, one of whom must be the company’s designated SEC Compliance officer as well as the company’s Managing Director;
– a current fidelity insurance bond valued at a minimum of 20% of the paid-up capital.
It’s also important to note that only Micro, Small and Medium enterprises (MSMEs) registered in Nigeria wit a minimum track record of 2 years can raise funds through a Crowdfunding Intermediary portal.
Medium enterprises cannot raise more than 100 million Naira($200,000.00) on a Crowdfunding portal in a year while Small and Micro enterprises cannot raise more than 70million Naira($140,000.00) and 50 million Naira($100,000.00) in a year respectively.
However, a subcategory of Crowdfunding portals exists which are Commodities Investment Portals which focus on Crowdfunding strictly Agricultural and Agro-allied businesses which can raise a total of 1 Billion Naira ($2,000,000.00) in a year. A good example of a Commodities Investment Portal is FarmCrowdy. Getting an SEC license usually takes a period of 60(Sixty) days.
3. Digital Banking licenses
This category of Fintech license is interesting because of its many subcategories.
Digital Banking in the first place means the largely or totally non-physical delivery of Banking services (taking cash deposits from customers, opening and operating bank accounts for its customers, giving loans etc.) through Digital platforms such as Apps or Virtual Chatbots operating 24 hours a day.
While their opening and licensing requirements are still the same as traditional banks as governed by the Central Bank of Nigeria, getting a Digital Banking license involves the presentation of a strictly scrutinized IT Policy that will include a privacy policy, an Information ownership/disclosure policy, a Network security policy, a Password policy, a Confidential Data policy and a Backup & Restore policy among others.
Most Digital Banks in Nigeria today tend to be National Grade Microfinance Banks operating a strictly non-physical working structure, with some of the most notable examples being Kuda Bank, Carbon Bank, Tangerine and Fairmoney MFB. However, a notable example of a digital Commercial bank exists in the form of the ALAT Digital Banking platform.
National Commercial Banking license applications require a minimum share capital of 25 Billion Naira ($50million).
Regional Commercial Banking license applications require a minimum share capital of 15 Billion Naira ( $30 million).
National Microfinance license applications require a minimum share capital of 5 Billion Naira ($10 million) while State Microfinance license applications require a minimum share capital of 1Billion Naira ($2million)
National and Regional Mortgage Bank license applications require a minimum share capital of 13Billion Naira($26million) and 5Billion Naira($10million) respectively.
Merchant Bank license applications require a minimum share capital of 15Billion Naira($30 million).
National and Regional Non-Interest banking licenses require a minimum share capital of 10Billion Naira( $20million) and 5 Billion Naira($10million ) respectively.
However, there now exists more novel Banking and Banking-related Fintech licenses granted by the CBN . These license subcategories are:-
a). Switching and Processing licenses :- Switching and Processing services involve the rendering of value exchange between Financial service providers, merchants, customers and other stakeholders, connecting payment transactions between multiple acquirers & payment service providers. A good example of a Payment and Switching company is Interswitch.
A Switching and Processing license application requires a minimum share capital of 2 Billion Naira ( $ 4million).
b). Mobile Money Operator licenses :- A Mobile Money Operator (MMO) is a licensed service provider that develops and renders financial services through mobile telecommunications networks and mobile phones. A good example of an MMO would be Paga,MoMo or Opay.
An MMO license application to the CBN requires a minimum capital of 2 Billion Naira ($4 million) .
c). Payment Solution Service Provider (PSSP) licenses :- A PSSP is simply a Digital payment intermediary acting as a link between merchants and branches. Two good examples of a PSSP are Flutterwave and Paystack.
An application for a PSSP license to the Central Bank of Nigeria requires minimum share capital of 100 million Naira ($ 200,000.00) .
d). Payment Terminal Service Provider (PTSP) licenses :- A PTSP is a CBN-licensed company that specializes in ensuring the effectiveness of Point of Sale (POS) operations as well as support and maintenance structures. A good example of a PTSP is Citiserve.
Applications for PTSP license grants in Nigeria come with a minimum share capital requirement of 100 million Naira ($200,000.00).
It should be noted that an application for a dual grant of a PSSP license as well as a PTSP license is possible and comes with a minimum capital requirement of 250million Naira ($500,000.00).
e). Super Agent Banking licenses :- A super agent is a company licensed by the Central Bank of Nigeria for the purpose of Agency banking which involves the provision/delivery of financial services within rural communities on behalf of Banks as a way of low cost mass Financial inclusion using Fintech tools. A good example of a Super Agent is Innovectives Limited.
An application for a Super Agent license comes with a minimum share capital requirement of 50 million Naira ($100,000.00).
f). Payment Service Banking (PSB) licenses :- A Payment Service Bank is a type of smaller scale operation bank engaging in the use of technology to mobilize financial services revolving mainly around deposits and transfers aimed at mainly unbanked communities, . PSBs can be owned by Telecommunications companies and operate digital wallets but cannot operate or open bank accounts for its customers. Nevertheless,they can issue Debit and Prepaid cards as well as engage in Agency banking. Notable examples of PSBs include 9PSB(owned by 9mobile Nigeria) and Hope PSB.
PSB licensing comes with a minimum share capital requirement of 5Billion Naira ( $ 10 million).
g). Foreign exchange & Remittance service licenses :- Remittance services simply involve the use of technology in seamlessly moving Foreign currencies and payments across international borders. Examples of Foreign exchange and remittance companies include Western Union, Sendwave, MoneyGram and Chipper.
Foreign exchange & remittance transaction facilitations are regulated by the Central Bank of Nigeria through its CBN guidelines on International Mobile Money Remittance service in Nigeria first mainly introduced in 2015 and flowing from earlier 2014 Guidelines for the Operation of International Money Transfer Services in Nigeria (also known as the “IMTO Guidelines”).
Licensing for International Money Transfer operations allows for the following :-
– Money Transfer Services for personal purposes;
– no money deposit or Moneylending services by companies engaged in IMTO or International Transfer Services;
– a minimum share capital of 2billion Naira for the purpose of securing an International Money Transfer license from the CBN if the company is fully Nigerian-owned and first registered in Nigeria or $ 1million if the company is foreign owned with presented evidence of being licensed as an IMTO in its home country;
– IMTOs must also have authorized Foreign exchange dealers (banks) to serve as its local agents.
Due to the 2020 CBN circulars on International Money Transfers, recipients of Diaspora remittances through IMTOs can now receive such inflows in foreign currency through the IMTO’s agent bank. These remittances can be either received over the counter as Foreign currencies or transferred to the ordinary domiciliary account of the recipient.
4. Insurtech licenses
Insurance in the first place involves the undertaking or guarantee by a company to provide a specified amount of compensation (usually monetary) in the event of a specifically mentioned type of loss in exchange for the typically periodic payment of a monetary sum called a premium.
Insurtech, a merger of the words “Insurance” and “Technology” , refers to the use of technology aimed at making more efficient current Insurance operation models. Examples of Insurtech companies include Curacel, Tangerine Life, Casava and AutoGenius.
Insurtech companies can be delivered into Digital platform Insurance service providers that would subscribe to the licensing procedures for Insurance companies in Nigeria and then Insurance Web Aggregators which are companies registered and licensed to act as an intermediary between Insurance companies and the public.
Licensing in the insurance industry is under the Insurance Act 2003 through the National Insurance Commission.
The minimum share capital requirements for Insurance Web Aggregators is 5million Naira ($10,000.00) with a bi-annual licensing fee of 2.5million Naira ($5,000.00).
The minimum capital requirement for Unit Microinsurers is 40million Naira ($80,000.00) while that of State Microinsurers is 100 million Naira ($200,000.00). The minimum capital requirement for National Microinsurers is 600million Naira ( $1.2 million).
For Life Insurance companies the minimum capital requirement is 8Billion Naira ($16 million).
For General Insurance companies, it is 10Billion Naira ( $20 million).
For Composite Insurance companies, it is 18Billion Naira ($36 million).
For Reinsurance companies, the minimum capital requirement is 20Billion Naira ($ 40 million).
5. Robo-Advisory licenses
A Robo-Advisor is a digital financial advisor that provides Investment advisory and and management services with moderate to minimal human intervention.
Robo-Advisory operations are governed by the Securities and Exchange Commission through the Robo-Advisory rules and like traditional Corporate Investment Advisors, are required to comply with the same Licensing and operation requirements.
A Robo-Advisor can be any of the following-
– A Robo Adviser:- A person who provides digital Advisory services;
– A Digital Advisory service :- Which provides advice on Investment products using automated algorithm-based tools which are client-facing with little or no human advisor interaction in the advisory process;
– A Fully Automated Robo-Adviser :- Which is a Robo-Advisor with no human advisor interaction in the entire Advisory process.
Applying for a Robo-Advisory license comes with a minimum capital requirement of 5 million Naira ( $10,000.00).
6. Sandbox Operations Framework
A Regulatory Sandbox is a framework set up by a regulator, in this case the Central Bank of Nigeria, that allows Fintech Start-ups and other innovators to live-test innovative products, services, delivery channels or business models in a controlled environment with regulatory supervision, with certain safeguards and conditions in place.
The CBN Regulatory Sandbox is different from the Financial Service Innovators Association of Nigeria (FSI) Sandbox which under falls under the supervision of the CBN and the Nigerian Interbank Settlement System (NIBSS). The Sandbox is aimed at the definition of the establishment, rules and operations of a Regulatory incubation framework aimed at the Nigerian payments system.
A company that scales through the 6 months maximum testing period of the Sandbox can be able to meet the relevant legal and regulatory requirements and then be introduced to the market.
The CBN places a high amount of regulatory seriousness on Confidentiality and Data Protection in the Sandbox aimed at the protection of Start-up Intellectual Property protection.
Special mention should be given to Blockchain and Cryptocurrency operations which have unfortunately been treated with unfriendly suspicion by the CBN to the point of being omitted in its Sandbox. Banks and Financial Institutions are specifically banned by virtue of a CBN February 2021 letter to all Banks and Financial Institutions from trading in, opening and operating Cryptocurrency transaction accounts at the risk of facing huge sanctions, but currently there’s still no law in Nigeria outlawing the trading of Cryptocurrencies.
Cryptocurrencies are digital currencies in which transactions are verified and records maintained by a decentralized system using Cryptography while a Blockchain is a storage technology used for saving data in decentralized networks beyond just Cryptocurrency transaction records. So while engaging unlicensed peer-to-peer cross border Cryptocurrency trading might not be illegal, Nigeria currently has no Legal Framework for allowing such transactions with the consequence of claims arising from Cryptocurrency transaction disputes not enforceable in the country for now. It is hoped that this situation will change soon.
It is hoped that a basic but helpful understanding of Nigeria’s Fintech Regulatory Framework has been gained through this article.
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