The late 20th century has witnessed the rise of Fintech companies in Nigeria that offers financial services which were originally exclusive to traditional financial institutions. Taking bearing from the likes of Remita, Paystack, Flutterwave, PiggyVest, Kuda Bank, etc fintech companies are primarily known for using technology to improve financial services and increase access to finance.
The Central Bank of Nigeria is the apex body responsible for regulating the formation and operation of Fintech companies in Nigeria. There are other agencies that regulate the operations of Fintech companies based on the nature of services carried out such as the Securities and Exchange Commission(SEC), Nigerian Stock Exchange (NSE), Corporate Affairs Commission (CAC), and the Nigerian Communications Commissions(NCC).
This article will be considering recent regulations and licensing requirements put in place by the Central Bank of Nigeria with specific reference to popular online financial transactions platforms operating in Nigeria in respect to Fintech companies.
CBN REGULATIONS AND LICENSING REQUIREMENTS
1. Regulations for Payment Solution Service Provider:
This includes payment processing gateways and portals, payment solution/application development, and merchant service aggregation. Payment processing gateways are online payment services that ensure payments are made online directly from the bank account of one customer to another, rather than the giving of physical cash in any transaction. This means is regarded by consumers as being fast and secure. Examples of such payment gateways are; Paystack, Remita, Rave by Flutterwave, Interswitch Web Pay and Vogue Pay, etc.
For one to be an operator, a CBN Payment Service Provider (PSP) license must be obtained. The PSP license are in categories with various license requirements. The PSP categories are as follows;
A. Payment Solution Services (PSSs) License; which consists of;
a. Super Agent License: this license category permits activities such as agent recruitment management and other activities specified in the Regulatory Framework for licensing super agents in Nigeria. The minimum share capital requirement for obtaining the Super Agent license is N50,000,000 (fifty million naira).
b. Payment Terminal Service Provider (PTSP) License: This license category permits activities such as; POS terminal deployment and services, POS terminal ownership, merchant/agent training, and support. The minimum share capital requirement for obtaining the PTSP license is N100,000,000 (one hundred million naira).
c. Payment Solutions Service Provider (PSSP) license: this license category permits activities such as; payment processing gateway portals, payment solution, and application development, merchant service aggregation and collection.
B. Mobile Money Operation (MMO) License: This license category permits activities such as; e-money issuing, wallet creation, and management, as well as activities companies with the Super Agent license are permitted to carry out. The minimum share capital requirement for the MMO license is N2,000,000,000 (two billion naira).
C. Switching and Processing License: this license category permits activities such as; switching, card processing, transaction clearing, and Settlement agent services, non-bank acquiring services, and also activities permitted by holders of the Super Agent, PTSP, and PSSP license. The minimum share capital requirement for this license is N2,000,000,000 (two billion naira).
Please note the minimum shareholder fund requirements stated above do not imply that such an amount would be provided by the operator seeking such a license when incorporating such a company. In addition, a payment solution service provider must not necessarily obtain all licenses listed above. A company may opt for a license category that is compatible with its proposed business activities.
2. Regulation for Online Lending Platforms:
This is an online platform that engages in lending short-term loans to individuals and businesses to cater to their urgent needs. Examples of operators of these platforms are; Okash (a product of Opay), KiaKia, Fair Money, and Renmoney. There are several regulations to consider when going into online lending. For instance, a company desirous of becoming an operator may consider obtaining a money lender’s license, which governs money lending activities within a State, and a microfinance bank license which permits lending activities with certain restrictions.
To obtain a microfinance bank license, the least category of microfinance banks requires a minimum share capital requirement of N50,000,000 (fifty million naira) while the highest category requires a N5,000,000,000 (five billion naira) share capital.
Please note the minimum share capital requirement stated above would not be provided by an applicant seeking to incorporate his/her company with the Corporate Affairs Commission. However, such an amount is to be deposited with the Central Bank as part of the license application process, and will be refunded after the conditions for grant of final license are met and satisfied.
Documentary requirements for obtaining Approval in Principle for Micro Finance Banks:
i. Evidence of payment of non-refundable application fee to the Central Bank of Nigeria;
ii. Evidence of capital contribution made by each shareholder;
iii. Evidence of minimum capital deposit in line with Section 4.2.7 of the CBN Guidelines;
iv. Evidence of name reservation with the Corporate Affairs Commission (CAC);
v. Detailed business plan or feasibility report which shall, at a minimum, include:
a. Objectives of the Microfinance Bank;
b. Justification for the application;
c. Ownership structure in a tabular form indicating the name of proposed investor(s), profession/business and percentage shareholdings;
d. Sources of funding of the proposed equity contribution for each investor;
e. Where the source of funding the equity contribution is a loan, such shall be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system;
f. Organizational structure, showing functional units, responsibilities, reporting relationships and grade of heads of departments/units;
g. Schedule of services to be rendered;
h. Five-year financial projection of the proposed bank indicating expected growth, profitability, and the underlying assumptions; and
i. Details of information technology requirements and facilities.
C. For institutional investors, promoters shall forward the following additional documents:
1. Certificate of Incorporation and certified true copies of other incorporation documents.
2. Board resolution supporting the company’s decision to invest in the equity shares of the proposed bank;
3. Names and addresses (business and residential) of owners, directors, and their related companies, if any;
4. Audited financial statements & reports of the company and Tax Clearance Certificate for the immediate past 3 years.
D. Draft copy of the company’s Memorandum and Articles of Association (MEMART). At a minimum, the MEMART shall contain the following information:
1. Proposed name of the MFB
2. Objects clause
3. Subscribers to the MEMART
4. Procedure for amendment
5. Procedure for share transfer/disposal
6. Appointment of directors
E. A written and duly executed undertaking by the promoters that the bank will be adequately capitalized for the volume and character of its business at all times;
F. For regulated foreign institutional investors, an approval or a ‘no objection letter from the regulatory authority in the country of domicile;
G. Shareholders’ agreement providing terms for disposal/transfer of shares as well as authorization, amendments, waivers, and reimbursement of expenses;
H. Statement of intent to invest in the bank by each investor;
I. Technical Services Agreement, where applicable;
J. Detailed Manuals and Policies covering:
1. Credit Policy Manual;
2. Internal Audit Manual;
3. Asset/Liability Management Policy (ALM Policy);
4. Accounting policies and principles;
5. Roles and responsibilities of the senior management officials responsible for financial management
6. Treasury operations, including funds management, vouchers, payroll and procurement;
7. Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) Policy;
8. Enterprise-Wide Risk Management Framework;
9. Whistle Blowing Policy;
10. Code of Ethics and Business Conduct.
K. Bank Verification Number (BVN) and Tax Clearance Certificate of each member of the Board and significant shareholders.
L. Duly signed resume and valid means of identification for proposed shareholders of proposed MFB
M. Criteria for selecting board members;
N. Board composition, directors’ duly signed resumes, and valid means of identification. The size and composition of the board shall comply with the provision of the CBN Code of Corporate Governance for MFBs
O. Consolidated statement of account showing the capital contribution for all shareholders;
P. Completed Fitness and Propriety Questionnaire; and sworn declaration of net worth executed by the proposed shareholders, directors, and management personnel;
Q. Any other information that the CBN may require from time to time.
3. Regulation for Online Saving Platforms:
This platform allows for saving money and investment via a mobile application. Examples of these platforms are; PiggyVest, KoloPay, Kuda Bank and Cowrywise, etc. A company desirous of becoming an operator in this sector may take advantage of the Micro Finance Bank (MFB) License.
To obtain the license, a prospect should take note of the various categories of Micro Finance Banks as well as the various share capital requirements as provided in the link above. For instance, the minimum shareholder fund to be paid for a Tier 2 Unit Microfinance bank is fifty million naira (N50,000,000). While the application for approval in principle is N100,000 (one hundred thousand naira) and licensing fee is two hundred and fifty thousand naira (N250,000) respectively.
Same as the Regulation for Micro Finance Bank license in (Point 2) above. You may also click HERE for details.
No doubts the licensing requirements listed above imply that running a Fintech startup in Nigeria is indeed capital intensive, especially for founders whose products are at an idea stage. However, there are lawful means by which founders without the required capital can embark on such ventures to arrive at the same level as pre-existing fintech startups. Some of them include; securing partnerships, competing and participating in startup funding incubators and accelerator programs, etc.
If you are having difficulties meeting up with the licensing requirements, we would be happy to provide you with the needed effective strategies to navigate the regulatory hurdles of starting and running your fintech startups. You may reach us at info@lexpraxisng or HERE