The Legal Considerations Of Operating A Fintech Startup In Nigeria.
The core business of the FinTech sector revolves around financial services which are, as such, regulated activities.
Generally, it is common for FinTech startups to enter into relationships with existing operators within the financial industry by way of service level agreements or technical partnerships which, amongst other benefits, allows these startups to deliver their services under the partner/client financial institution’s existing licence.
However the alternative method is for a startup to operate on its own steam by meeting the requirements to obtain the requisite licences although this method requires significant capital outlay. As such, FinTech startups that are seeking to exploit the significant market opportunities in Nigeria are bound to run into several regulatory compliance obligations.
The payment and processing segment of the FinTech sector for example — which has shown the most growth and success thus far — is primarily governed by the same general framework as are traditional financial institutions providing offline financial services (e.g. money/payment transfers, clearing, switching, settlement etc), in addition to regulations related specifically to that sub-sector.
Thus, the legal and regulatory framework that is generally applicable to financial institutions — such as the Central Bank of Nigeria (CBN) Act, 2007, the Banking and Other Financial Institutions Act (BOFIA) and all subsidiary instruments stemming from same — are all relevant to any non-bank led startups providing digital equivalents of offline financial services. This framework brings with it mandatory obligations such as KYC and AML requirements that must be strictly adhered to.
Additionally — where regulators have shown a particular interest in particular FinTech services – there are also specific subsidiary instruments such as the Central Bank of Nigeria’s Guidelines on Mobile Payments in Nigeria that come into play. However, despite the clear convergence of industries (financial services and telecommunications) involved in providing FinTech services, the regulators of both sectors are yet to come up with a harmonised framework for the sector.
Nonetheless, companies are forging ahead in this cutting edge market in order to capitalize on what is a huge demand for these services with the hope that they will not be stifled by an unnecessary/inappropriate regulatory framework when one is ultimately provided.
Whilst the payments and processing segment of the FinTech sector has shown the most growth and proven to be the most lucrative in the short term, this piece will particularly focus on the lending and insurance segments — which in the author’s opinion will be the next segments to show tremendous growth — including the particular legal and regulatory considerations associated with same.
The barriers to businesses and individuals getting access to loans and credit are widely documented; such barriers including stringent collateral requirements and very high rates of interest.
This has meant that, both socially and culturally, the credit/loan requirements of citizens are usually met by family members and friends on an informal basis. This trend provides huge commercial opportunities for FinTech operators to fill this gap by commercially capitalizing on and scaling these trends and habits.
Commercial lending activities are regulated in Nigeria and as such require licensing by either the CBN (for banks and other financial institutions) or the Ministry of Home Affairs of the various states (non-financial institution lenders).
These activities can be in the form of traditional money lending on interest and/or in the form of credit and financing (i.e. obtaining or having goods/services paid for in advance and paying for/repaying same over time). Non-financial institutions money lending is primarily governed by the Money Lenders laws of the various states which provide that any person (other than a licensed bank) whose business is money lending requires a licence to do so.
These provisions are quite straightforward and unambiguous particularly in light of their effect on FinTech startups that directly engage in providing credit/loan facilities, albeit by way of modern technologies. Examples are online platforms such as Aella Credit, Paylater, and KiaKia. However, a potential area where the lines may be somewhat blurred relate to the phenomenon of peer-to-peer lending.
Peer-to-peer lending is the activity of lending and borrowing between private individuals as opposed to between a financial institution and an individual. Borrowers that require loans can borrow the money from one person or a number of different people who can each contribute small amounts to make up the aggregate loan sum.
In such a scenario, there is a strong possibility that the Money Lenders provisions will not apply save for limitations on chargeable interest thereby meaning such FinTech companies would not require a licence to operate. This of course is on the presumption that a potential operator’s business model involves the facilitation of crowd lending of some sort and such lending is not the principal business of the lenders that contribute to the loans.
This, and other considerations must be addressed and resolved in order for FinTech companies in this segment to stay on the right side of their compliance obligations, thereby reducing their exposure to penalties and allowing them to maximise their revenues.
In addition to lending, insurance is another segment in the FinTech landscape that is primed for a huge spike in growth in the near-term due to attractive market conditions. Opportunities abound for those that are able to deliver digital insurance services in a convenient and cost effective manner.
As it stands, insurance penetration in Nigeria is only at 0.6% and the growth of the middle class, alongside increased economic activity, indicates a very bright future for this sector.
The Nigerian Insurance Act provides the overarching framework for operators of all types of insurance business in the country and the National Insurance Commission (NAICOM) is the industry regulator. Under the act, one must be duly registered with NAICOM before engaging in the business of insurance.
The act provides for different classes of insurance business and sets different requirements for participants in each class. As such, all insurance business can be classed as either life insurance or general insurance and within said classes the act further provides for certain categories of insurance policy (Section 2, Supra). For life insurance business, the categories are individual life insurance, group life insurance, and health insurance.
In light of the huge market opportunity in the life insurance business — due to expensive costs of healthcare in Nigeria and the size of the country’s uninsured population — particular attention shall be given to regulatory provisions affecting companies engaged in this particular class of insurance business.
Any potential entrants into the digital insurance (and other insurance related FinTech services) market would need to ensure they are registered with NAICOM before commencing operations (if they are not embarking on the enterprise in partnerships with an existing licensed insurer).
To be eligible for registration, applicants must first be duly incorporated and registered with the Corporate Affairs Commission. The applicant must also have minimum paid up share capital of ₦150,000,000 and a suitably qualified and experienced Chief Executive/Executive Officers, amongst other requirements.
Furthermore, any person intending on carrying on insurance business must satisfy the NAICOM that its business model is based on the general principles of insurance and is feasible. The said principles being; insurable interest, indemnity, full disclosure, utmost good faith, proximate cause, and of course, no premium-no cover. Any intended business must show the NAICOM — in the form of a 5 year business plan — that based on insurance contracts encompassing the foregoing principles, they will have a viable business.
Aspects of how insurance businesses operate are also governed by the act and regulated by NAICOM. Some of these operational requirements may throw up some possible challenges for FinTech operators in this segment.
For example, the act mandates insurers to deliver policy documents — to holders that have paid premiums — within a specified period (Section 15, Supra). Given the trajectory of FinTech in Africa towards the delivery of such services by way of unstructured supplementary service data (USSD) and short message service (SMS) technologies (due to infrastructural deficiencies particularly in rural areas where significant segment of market is located), compliance with such requirements may not as straightforward as they initially seem.
It is no longer in question that FinTech is the future of the financial sector in Nigeria. With the population size of the country, the depth of mobile phone penetration, and the size of the financially excluded segment of said population there are huge opportunities for both existing/traditional financial institutions and technology startup businesses to capitalize in a significant way.
However, the heavily regulated nature of the services that FinTechs are seeking to bring innovation to mean that intending operators in this space must not only navigate the usual startup pitfalls, but must also ensure they do not run afoul of compliance requirements.
In this regard, suitably qualified and experienced attorneys can proffer various solutions to these and other challenges specific to FinTech operators in Nigeria.