DIGITAL BANKING IN NIGERIA

With the increased popularity of digital banks like Kuda, VBank, Sparkle etc., in Nigeria and the various fund-raising announcements, there has been a growing interest amongst FinTech Founders and investors to offer digital banking services. As a result, FinTech founders are majorly interested in knowing the type of legal entity that is best suited for a digital bank. Generally speaking, there is no specific licencing regime for digital banks in Nigeria. Consequently, potential founders must work with one of the existing financial licences.

The most suitable types of entities for digital banking services are:

Payment Service Banks: The capital requirement for this licence is N5,000,000,000 (five billion naira). The holder of a Payment Service Bank licence is permitted to accept deposits from customers but cannot issue loans.

Commercial Banks: A commercial bank can be incorporated and proffer digital banking as a product offering; ALAT by Wema Bank PLC is an example of this model. Standard Chartered Bank PLC also allows its customers carry out all their services -from opening bank accounts to requesting for debit cards- online. The capital requirement is N10,000,000,000 (ten billion naira) for a regional banking licence, N25,000,000,000 (twenty-five billion naira) for a national banking licence, and N50,000,000,000 (fifty billion naira) for an international banking licence.

Finance Companies: A finance company is a company that offers financial services to individuals and organisations. The services it provides include consumer loans, funds management, asset finance, project finance, local and international trade finance, debt factoring, debt securitisation, debt administration, financial consultancy, loan syndication, warehouse receipt finance, covered bonds and issuing vouchers, coupons, cards and token stamps. The disadvantage of this model is that a Finance company is not permitted to receive deposits. The capital requirement to obtain this licence is N100,000,000 (one hundred million naira).

Microfinance Banks: Digital banks are most commonly incorporated as Microfinance Banks (MFBs). It has the advantage of being cheaper to start and it is malleable to fit a number of the product offerings that FinTech founders may want to offer. The major disadvantages are: 80% of its total loan portfolio cannot be more than be more than N500,000 (five hundred thousand naira) for Tier 2 Unit MFBs and N1,000,000 (one million naira) for other categories of MFBs; and it is prohibited from engaging in foreign exchange transactions.

How do I Start a Digital Bank in Nigeria ?

Obtaining a Microfinance Bank license depends on the type/category of Microfinance Bank one wishes to run. Here are the types of microfinance bank licenses available in Nigeria, along with the financial requirements:

1. A Unit Microfinance Bank. There are two Tiers of Unit MFBs – Tier 1 (urban authorisation) and Tier 2 (rural authorisation). Whilst Tier 1 Unit MFB licence allows a holder to operate not more than four (4) branches outside the head office within five (5) contiguous Local Governments Areas, Tier 2 Unit MFB licence allows a holder to operate one branch outside the head office within the same Local Government Area subject to the approval of the Central Bank of Nigeria (CBN). The minimum capital requirement for Unit MFBs is N50,000,000 (fifty million naira) for Tier 2 Unit MFB, and N200,000,000 (two hundred million naira) for Tier 1 Unit MFB.

2. A State MFB is licensed to operate within a specific state or Federal Capital Territory and can open branches and cash centres within that state or territory with the prior written approval of the CBN. N1,000,000,000 (one billion naira) is the minimum capital requirement for this category of MFBs.

3. A National MFB is licensed to operate across more than one state, including the Federal Capital Territory (FCT), and it can open branches in all states in the Federation and the FCT with prior written consent from the CBN. The CBN restricts their operation to not more than ten (10) branches. For this category of MFB, the minimum capital requirement is N5,000,000,000 (five billion naira).

To acquire a Microfinance Bank licence, the applicant must submit a formal application to the Governor of the CBN specifying the exact type of MFB that will be established. Additionally, the applicant must also pay a non-refundable application fee of N100,000, N200,000 and N300,000 for Unit, State, and National MFBs respectively in bank drafts or e-payment, in favour of the Central Bank of Nigeria. Upon getting the approval in principle, the applicant must pay a non-refundable licencing fee of N250,000, N500,000 and N1,000,000 for Unit, State and National MFBs respectively.

The Procedure for Registering a Microfinance Bank in Nigeria is as Follows:

• Submit a written application together with the required documents and make payment of the fees to the CBN, specifying the category (Unit, State, or National) you are applying for. A deposit of the required share capital must also be made with the CBN through an escrow account. After the license is issued, this amount will be refunded;

• Upon receipt of the application and being satisfied with the proposal’s overall quality, the CBN grants an Approval-in-Principle (AIP) within three (3) months;

• AIP must be granted as a prerequisite to becoming registered with the Corporate Affairs Commission (CAC). Without the grant of an AIP, the proposed MFB cannot be registered with the CAC. The name of the company must include Microfinance Bank;

• When the MFB with AIP submits the required documents (i.e., the certified incorporation documents, the share certificates of the shareholders, the membership register, and an opening statement of affairs), the bank will receive its operating license. Microfinance Bank's premises must be inspected by the CBN before operations can begin.

It is advisable to consult a lawyer on the legal entity that best suits your needs.

Hedging Against Regulatory Uncertainty

Due to the lack of a licensing regime for digital banks, the founders of Digital Banks have had to devise ingenious alternate solutions to circumvent the lack of a direct licensing regime. There is a risk associated with these solutions because the CBN may restrict access to microfinance banking licences for digital banks that do not fully align with the purpose and objectives of microfinance banking. It is therefore important that proper risk management policies are incorporated into the overall business strategy of Digital Banks.

HOW ACORN & MUSTARD CAN HELP

Acorn & Mustard's Business Advisory team can assist startup founders by advising on the best model that suits their needs and providing the required legal assistance with securing the required licenses. In addition, our team is well-positioned (through collaborations with international firms) to assist tech companies with incorporating politically sensitive risks into their risk management policies and give tech companies alternative plans and strategies they need.