Nigeria’s fintech sector is growing. It is experiencing a cambrian moment of entrepreneurial capitalism, redesigning the architecture of the nation’s financial services. But when you look deeper, the foundation of everything the fintech players are doing is tethered to traditional banking. Yes, no fintech in Nigeria has the legal rights to enroll customers into the bank verification number (BVN) database – and that means every (formal) fintech customer to a large extent is already a bank customer! In other words, Nigeria’s fintech 1.0 is built wholly on the current banking ordinance.

That national playbook has both advantages and disadvantages. The main advantage is that we have stability which comes from the established banks. The disadvantage is that fintech users are bound by the growth of the traditional banks since only banks can initiate customers into the core (banking) financial database. If you extrapolate, the digital challenger banks in Nigeria are not going to be the apostles to bring new customers into the banking sector because they are not ordained by law to baptize users into the banking networks.

So, I see all the digital challenger banks to be transitioning until something happens, and when that thing happens, a new age will begin. That new age will be fintech 2.0. The national identity number (NIN) from NIMC must evolve, eliminating the need for BVNs. I am expecting that redesign to happen by 2024 when NIN could become what matters, and no one will need BVN to have a NUBAN bank account in Nigeria.

With NIN as the identification system, the digital banks will become unleashed to bring the unbanked through innovation, and not just waiting to lure already banked customers into their domains.

Where BVN Does Not Evolve to NIN

But where BVN does not transmute into NIN, I expect a massive change in strategy by the top digital banks: some will buy current traditional banks. Kuda is currently worth more than Wema, Sterling, Fidelity, Jaiz, Unity, and FCMB combined. If it wants to grow, unbounded by the limitation of capturing already banked with BVN, it could pick one of these banks to have the ability to do BVN since today it cannot enroll customers into BVN.

So, on that hypothesis, I expect one traditional bank to be acquired by an ambitious digital challenger bank in Nigeria. Typically, digital companies begin online, winning bytes and bits, and over time move to the physical space to compete on atoms. From Amazon to Google, no one stays forever online because the physical world is where humans live.

Nigeria’s fintech 2.0 will win physically.  By 2025, I expect massive redesigns because the digital natives will move from just bytes for atoms. So, expect massive battles in the physical domain.

A federal high court sitting in Port Harcourt, Rivers State, has declared the collection of Value Added Tax (VAT) and Personal Income Tax by the federal government unconstitutional.

The judgment was delivered in the suit (FHC/PH/CS/149/2020) between the attorney general for Rivers state and Federal Inland Revenue Service (FIRS) as the first defendant and the attorney general of the federation, Abubakar Malami as the second defendant.

The Rivers State Government had last year, approached the court, seeking declaration that the constitutional power of the federal government to impose taxes and duties is only limited to the items listed in items 58 and 59 of Part 1 of the second schedule of the 1999 constitution as amended.

The court declared Rivers the rightful body to receive personal income tax and VAT emanating from the state.

Presiding judge Stephen Pam ruled that the federal government’s constitutional powers do not include VAT collection but those items in 58 and 59 of the Exclusive Legislative List.

Mr Pam issued an order of perpetual injunction restraining FIRS and the attorney general from coercing or intimidating residents of Rivers state to pay VAT and personal income tax to FIRS.

The court declared that FIRS is not entitled to receiving VAT, education tax, technology levy and withholding tax from any state in Nigeria and further dismissed the objections the defendant filed that hearing the case was not within the court’s jurisdiction.

The court granted all the 11 reliefs sought by the Rivers State Government on the basis that the federal government has no constitutional backing to collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other state of the federation. According to the ruling, the constitutional powers and competence of the federal government was limited to taxation of incomes, profits and capital gains which does not include VAT or any other levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the constitution.

What it means for states and federal government.

In February 2020, the implementation of 7.5% VAT charges on consumption goods and services in Nigeria went into force, following the enactment of the Finance Act 2019. The federal government had directed businesses in Nigeria to ensure that the VAT increment is implemented in sales and remitted accordingly to the government’s coffers. VAT had been reviewed from 5% to 7.5%, and the federal government was poised to use the revenue generated from it to cushion the effect of plummeted oil revenue.

However, the development did not augur well with some state governments as it means relinquishing a large share of their tax revenue from businesses under their jurisdiction.

The court ruling means the federal government’s VAT revenue plan has been altered and the states will have to reap the benefits of the 7.5% VAT increase. It also means that the federal government will no longer have to collect VAT from businesses operating in states and share between states under the Federation Account Allocation Committee (FAAC), a practice that has fueled the call for restructure due to the injustice it portends. Many states in northern Nigeria, under sharia law, prohibit the sale of alcohol but share the revenue derived from VAT on alcoholic beverages sold in the south.

While the judgment empowers states to take control of tax from businesses within their territory, it also exposes them to the harsh realities that come with. It’s only a few states in Nigeria, including Lagos, Kaduna and Rivers, that can boast of financial independence from the federal government. Which means, many states will face the challenge of poor revenue generation.

The judge dismissed the defendant’s plea for the case to be transferred to the Court of Appeal for interpretation. The ruling has been hailed by many as a bold step in attaining true federalism in Nigeria, if every state will act upon the judgment and take control of their VAT and income tax revenue.