Nigeria’s Fintech, disruptions and appropriate regulation

Since the global financial crisis of 2007, several banking regulatory reforms have been instituted in a bid to increase trust in the Nigerian banking sector and maintain stability in the financial industry.

These regulatory reforms, however, did not anticipate the intrusion of technology in the delivery of financial services.

Indeed, the advent of technology in our daily activities has provided varying models and peculiarities in its engagement by various users, yet evolving.

Technological innovation has, however, taken the front seat, as it revolutionises the financial sector service offerings with a commonly known cliché “Financial Technology” (Fintech).

Fintech is a contraction of the words ‘financial’ and ‘technology’, which is broadly used to describe any technological innovation in the delivery of financial services.

It covers a wide range of areas including financial literacy, wealth/asset management, lending and borrowing, retail banking, fundraising, money transfers, payments, investment management, digital insurance, and cryptocurrency.

The Fintech innovation has been ongoing, and various jurisdictions have adopted or are adopting and testing multiple regulatory and adaptive business models in ensuring a sustainable environment for their Fintech boom and the ultimate growth of the FS industry.

Nigeria has seen remarkable growth in the technological sector, including exponential growth in FinTech companies, encompassing start-ups and more established businesses.

Consequently, the Nigerian government has been inquiring into the financial services sector and focusing on FinTech as one of the key impetus for growth in the Nigerian financial services industry.

For this reason, and as part of a national strategy for the development of the FinTech industry in Nigeria, there has been significant interest from policymakers in implementing new regulations for the FinTech industry.

In the tech space, testing applications and software can sometimes be a daunting task- especially in Nigeria where tech start-ups are cropping up by the minute.

Usually, it takes a great deal of time for FinTechs to test their solutions and ensure that they are ready for the market, after which several of those FinTechs then realise that they are in breach of the regulation that they were not aware of.

New innovative technologies are driving fundamental changes in the financial ecosystem. As with any new idea, there is the potential for things to go wrong – inadvertently, as well as intentionally – and this is what drives the need for regulatory oversight.

Regulators in the financial ecosystem play an important role in establishing safety and trust in the financial system, and the products and players that are active in that system, in an effort to maximise opportunities and ensure Fintech compliance.

Nigeria, despite the much-propagated writings of various thought leaders in their outburst for a collaborative and proper regulatory structure in the Fintech space, a proper approach by stakeholders in allaying their concerns is yet to be seen

The CBN and the financial services industry have also been responsive to the emergence of Fintech due to the predominantly cash-driven market, as the cash-less policy and exponential growth in mobile money operations rose from an average monthly transaction value of $5million in 2011 to $142.8 million in 2016.

Additionally, the Securities and Exchange Commission (SEC) has just launched a regulatory sandbox. A ‘Regulatory Sandbox’ is a controlled environment that offers a ‘safe space’ in which start-ups and other businesses can test innovative products, services, business models and delivery mechanisms relating to the financial and capital markets in a live environment without immediately satisfying all the necessary regulatory requirements

But stakeholders that gathered at the on going Nigeria Fintech Week organised by Fintech providers, in partnership with Fintech Association of Nigeria (FinTechNGR) in Lagos, insisted that more needed to be done in the areas of regulation to ensure that FinTech apps comply with regulations stipulated by the companies running the application’s underlying infrastructure to mitigate risks.

The Corporate Innovation and Fintech Adviser, Ambassador, Stone and Chalk Australia, Andrew Davis, said some regulators in various markets are not actively supporting fintech due to their shallow knowledge of the ecosystem.

He stressed the need for Nigerian regulators to accelerate the ecosystem through collaborative engagements and continuous education on both the impact and risks associated with the ecosystem.

“Regulators are finding it difficult and challenging all over the world. Fintech is indeed disrupting many financial markets. Regulators have to educate themselves, they can not afford to sit on the sideline because the market is moving faster,” he said.

The Deputy Director, Financial System Stability, CBN, Hassan Ibrahim Umar, said the strong partnership between regulators and operators would help to stay ahead of the rapid pace of technological disruption.

He pointed out that regulators must play a careful balancing act in finding appropriate ways to regulate fintech to avoid completely stifling innovation.

“In CBN, we believe Fintech can help us achieve a lot. The 80 per cent inclusion target by next year cannot be achieved without fintech innovations.

“We must leverage fintech to achieve a lot but this comes with along with risks, not only on the prospective of the institution but consumers of the financial system. We must play the balancing part and ensure we did not stifle innovation,” he said.

The Acting Director-General of the Securities and Exchange Commission, Ms Mary Uduk said the SEC believes that the driver to transforming Nigeria into a smart financial centre is the provision of a regulatory environment that is conducive for innovative use of technology.

She noted that there must be strategic alliance amongst regulators and other stakeholders within the ecosystem in order to improve the penetration of investment products, SEC is looking to adopt regulatory and supervisory practices for orderly development and stability of the system, as it will pay close attention to sustaining confidence and safeguarding the integrity of our market.

“Our policies will facilitate the safe entry of new products, activities, and intermediaries. In addition, we will ensure that regulation does not stand in the way of innovation” she added.

The Chief Executive Officer of NASD OTC Exchange, Bola Ajomale said Nigeria must harmonise its rules and laws o accommodate new ones like crowd funding.

According to him, there is a need for regulators to adopt a framework that would make it easy for startups to raise funds and access capital for sustainable growth.

“Setting a framework for capital to come in is paramount. It gives investors the confidence and opportunity to know the environment to move their capital for investment.

“We need to create rules and put appropriate policies in place to accelerate the growth of the ecosystem in Nigeria. A lot of projects in Nigeria are not ripe for public capital buy ripe for crowd funding but we do not have rules for capital funding to operate,” he added.