The Securities and Exchange Commission (SEC) of Nigeria is taking steps to enforce stricter regulations within the fintech ecosystem as a move to address growing concerns around funds mismanagement and the protection of investor interests. With fintech banks like Opay, Palmpay and Moniepoint rapidly expanding in Nigeria in the areas of mobile payments, digital lending, and cryptocurrency trading the sector has experienced a rise in financial mismanagement and fraudulent activities. These risks are linked to the formerly unregulated nature of many digital financial platforms, where investors’ funds can be exposed to losses. An example was the MMM Ponzi scheme, which operated as an unregulated online investment platform. Thousands of Nigerians lost their money when the platform collapsed. MMM promised high returns without proper investment backing, and its lack of regulatory oversight allowed it to operate as a fraudulent scheme until its eventual crash. Another example was QuadrigaCX, though based in Canada but affecting Nigerian investors, collapsed in 2019 after its founder died, and it was revealed that substantial client funds were lost due to poor management and fraud. Unregulated Lending Platforms too have raised concerns.
By implementing these regulations, the SEC aims to increase oversight of fintech companies, ensuring transparency, accountability, and security for investors. The enforcement of such rules will likely involve regular audits, reporting requirements, and possibly stricter compliance for operators of digital financial services.
This regulatory framework could help restore confidence in Nigeria’s fintech industry, as the country has become a major hub for digital finance across Africa. However, it also presents challenges for smaller fintech startups that may struggle to meet the stringent requirements. While the regulations aim to curb fraud and enhance security, they may also slow innovation in the sector, as firms adjust to new legal obligations.
Operations and Licensing
Licensing by CBN means meeting up with certain requirements like: Minimum Capital Requirements, by which Digital banks are required to maintain specific capital thresholds based on their classification. Payment Service Banks (PSBs) must have a Minimum of ₦5 billion, Mobile Money Operators (MMOs) must also have a Minimum of ₦2 billion. For Fintech Startups, it will depend on their services, (minimum capital base may vary). The CBN must be satisfied the bank’s executives and directors are fit to manage financial institutions, including background checks and professional qualifications. This process also involves Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements involving biometrics, National Identification Numbers (NIN), and Bank Verification Numbers (BVN) to ensure legitimate customer identities.
In 2023, the Central Bank of Nigeria (CBN) temporarily suspended the operations of some popular fintech companies, including Opay and PalmPay, over concerns regarding their compliance with regulatory requirements. Some of these companies were flagged for potentially failing to adhere to the country’s AML policies, which require them to monitor and report suspicious transactions, Increasing incidents of fraud and submission of Audited Financial Statements.
Fintech companies must comply with the Nigerian Data Protection Regulation (NDPR), CBN’s Consumer Protection Framework, Payment Card Industry Data Security Standard (PCI DSS) and Regulatory Reporting.
At the launch of fintech companies, the CBN and other bodies like the SEC were supposed to enforce strict guidelines to ensure compliance with financial laws. However, gaps in enforcement allowed some fintechs to operate without full adherence to these standards. Fintechs have faced resistance from commercial banks that see them as competitors. There have been instances of lobbying by traditional banks to limit the growth of fintechs. One notable case involved Godwin Emefieler, former CBN governor, who reportedly navigated pressure from both fintech advocates and commercial banks, ensuring that fintechs met regulatory standards while also addressing banks’ concerns.He was replaced by Folashodun Adebisi Shonubi who held various leadership roles in several financial institutions at prominent banks like FCMB and Union Bank, where he served as Executive Director of Operations, Technology, and Services. His broad experience across multiple banking institutions demonstrates his deep connections within Nigeria’s financial sector. Although Olayemi Michael Cardoso assumed office in September, his professional network includes strong ties with various key figures in the financial sector, though specific friendships with CEOs of major commercial banks are not publicly documented, so such allegations of lobbying aren’t certsim In some cases, commercial banks lobbied for tighter regulations, arguing that fintechs were not held to the same stringent rules as they were.
These regulations might be seen as an attempt by commercial banks against Fintech banks but till then these digital banks might just have to do their part. The long-term goal of the SEC is to strike a balance between fostering innovation in fintech and protecting investors, ensuring sustainable growth for Nigeria’s digital economy.
