NIGERIAN FINTECH STARTUPS MAY SOON NEED REGULATORY APPROVAL TO LAUNCH NEW PRODUCTS
The Central Bank of Nigeria (CBN) has released a new framework for regulatory sandbox operations in Nigeria which seeks to provide regulatory oversight for fintech innovation. The sandbox is a formal process for firms to conduct live tests of new innovative products, services, delivery channels, or business models. This will be done in a controlled environment and will be supervised by the CBN.
The CBN says the sandbox will be open to existing licensees such as financial institutions and fintech initiatives as well as other companies like telecom companies looking to test innovative financial products and services. A major point of discussion has been the tough regulatory barrier for emerging fintech companies in Nigeria. Given the sensitive nature of finance, some experts agree that tough regulations are meant to curb bad eggs in the industry.
Unfortunately, such regulations have kept out both the good and the bad. Genuine individuals and entrepreneurs with exciting ideas could not easily launch their products/services. Besides, financial fraud remains a pressing issue. This is the reason for the proposal of regulatory sandboxes to provide a safe testing environment for innovative solutions for the financial market. However, this could be provided by either regulators or private companies.
Private firms have been rolling out sandboxes
In November 2019, Financial Service Innovators (FSI), backed by the Nigeria Inter-Bank Settlement System (NIBSS) and the CBN, launched one of the first fintech industry innovation sandboxes. The sandbox gave developers access to the NIBSS’ application programming interface (API) and that of other banks. A few months later, Ecobank launched its own sandbox, a pan-African initiative cutting across several African countries. The sandbox featured the likes of Flutterwave and Africa’s Talking amongst other prominent startups. Paga also released its API for creative developers to play around and test any of their innovative ideas.
The CBN’s initiative
The CBN’s initiative seems to be building on from the provisions of the industry sandboxes. Seeing as it is only open to incorporated firms, it appears regular developers might not get access to the sandbox. The CBN states that the sandbox will accept any initiative that is not already covered by existing regulations. Any innovation that seeks to:
- Improve the effectiveness of existing financial services
- Help financial institutions manage risks
- Address gaps in or open new opportunities for investments in Nigeria
The Apex Bank will also ensure that new products do not present a threat to the activities of existing financial institutions and consumers in general. Though CBN claims the framework will reduce time-to-market for fintech products, this particular provision might hinder the launch of disruptive products.
Other regulators are proposing theirs
As pointed out by the PwC fintech report, fintech in Nigeria is still unclear. In the absence of a specific fintech law, which was initially proposed but unattended to, different regulatory bodies cover various aspects of financial services. The Securities and Exchange Commission (SEC), the Nigerian Communications Commission (NCC), the National Information Technology Development Agency (NITDA), and the CBN are all involved with fintech regulations in one form or the other.
The SEC, for example, already has a proposed sandbox for fintech companies in the country. Its effectiveness, on the other hand, remains uncertain. The NCC also recently began plans for its own regulatory sandbox which might cover innovations made by telcos; such innovations sometimes include mobile money.
By 2023, Nigeria could potentially have three regulatory sandboxes. This might either be a source of confusion or bring about collaborative regulations. Sandboxes are present in other countries of the world. In the US, respective states develop their own sandbox. The Financial Conduct Authority in the UK oversees the regulatory sandbox for financial companies.
Economist Intelligence Unit, in its State of play: Fintech in Nigeria report for 2020 highlighted the fact that new technologies besides payment are emerging in Nigeria’s Fintech space and new regulations will have to balance innovation and consumer protection. The Mastercard and MTN backed report highlighted insuretech as one of the new areas fintechs are branching towards. This trend of puzzling regulation may also continue since insurance is normally regulated by the National Insurance Commission (NIC).
However, as we discussed earlier, sandboxes are expensive to maintain, and issues they hope to address might be resolved through other effective means.