Regulatory Evolutions in Nigeria – Way forward for Fintech and Other Tech Sectors

On February 1 2020, Lagos State Government (LASG) , riding on the Lagos State Transport Sector Reform Law of 2018, re-enacted the ban of motorcycles, tricycles and others from operating in most parts of Lagos State (the State). While the initiative was termed by LASG as a move to secure the property and lives of people within the State, the ban however led to the fall of major technology companies such as GoKada, Opay, Max.ng etc. who were deepening the capacities of their motorcycle ride-hailing businesses.

Recall that earlier in May 2019, GoKada which was founded by Fahim Saleh, had raised about US$5.3 million in a series A funding round led by Rise Capital. According to the CEO, as captured by TechCrunch, Gokada intended to use the financing to increase its fleet and ride volume. Opay on the other hand, in August 2018, had benefited from a series A and series B funding of US$50 million and US$120 million respectively. According to Opay’s CEO, Zhou Yahui, as captured by Techpoint, Opay’s rides had tripled and the company made over US$10 million in daily revenues after putting the Series A fund to good use.

Similarly, the Central Bank of Nigeria (CBN) announced the re-enactment of the ban of cryptocurrency trading in Nigeria using the official banking system. This move was indeed targeted at start-ups involved in cryptocurrency. CBN in a circular dated 7 February 2021, reiterated that CBN circular of February 5, 2021 did not place any new restrictions on cryptocurrencies but rather all banks in Nigeria had been earlier forbidden from using, holding, trading and/or transacting in cryptocurrencies, through a circular dated 12 January 2018.

In a recent move by Securities and Exchange Commission (SEC), in a circular dated 8 April 2021, SEC noted that all capital market operators (CMOs) involved with online trading platforms that give Nigerians the opportunity to invest in foreign traded equities, should desist and put an end to it. Citing the provisions of Sections 67-70 of the Investments and Securities Act (ISA), 2007 and Rules 414 and 415 of the SEC Rules and Regulations, SEC noted that only foreign securities listed on any Exchange registered in Nigeria may be issued, sold or offered for sale or subscription to the Nigerian public. Again, this move was targeted at the likes of Bamboo, Trove, Chaka etc. It should be noted that Bamboo had raised about US$150,000 in funding since commencing business in 2019 as documented by Crunchbase.

Worthy of mention is the fact that CBN in a recent move, banned all Fintechs and third-party partners from accessing the BVN validation service. This was aptly put in Paystack’s communication to its customers which said “We’ve recently been made aware of a regulatory directive from the primary custodian of Nigeria’s BVN service to all their partners to suspend the provision of the BVN validation service to their third-party partners. In light of this news, we’re hereby informing you that the BVN Resolve service will be temporarily unavailable starting at midnight, April 8”. Given the onerous nature of the KYC requirements for financial institutions, this suggests that Fintechs may be unable to fulfil the KYC requirements imposed on them by the regulators.

The way forward for Fintechs and other techs:

In the light of the recent turn of events occasioned by the regulators in Nigeria, one could clearly see that the biggest challenge to Fintechs and other technology companies in Nigeria is not necessarily access to finance but regulations. While there seems to be a perfect product-market fit for the services churned out by techs, product-regulation fit appears to be largely non-existent. Consequently, the following are recommended:

1. Increased need for regulatory modelling and forecasting: An examination of the moves made by regulatory authorities reveal that they rely on existing laws and regulations to squash the activities of these tech companies. Seeing that laws already in place cannot be wished away, it is therefore pertinent that techs, as part of their market research efforts, invest in understanding the existing laws that may disrupt their activities, and take steps ahead of the regulatory authorities to ensure that they are better able to withstand any re-enactment or regulatory blow. The result of these would be a “What-if analysis” with respect to the technology regulatory universe in Nigeria.
2. Increased need for ‘co-opetition’ amongst tech companies: As described by Harvard Business Review (HBR) in its article titled “the rules of co-opetition”, HBR noted that co-opetition is simply the mix of competition and cooperation. Hence, co-opetition is the act of cooperating or collaborating with a competitor to achieve a common goal. For techs, particularly Fintechs, more than ever before, they need to come together in a common front, to engage the regulators either through legal means or roundtable discussions, in a bid to resolve the issues that may be fuelling the activities of the regulators which are eroding their businesses.
3. Increased need for lobbying and presence of political heavy-weights on their Boards: A clinical look at the outcomes of the recent regulatory quagmire suggests that these may be the result of lobbying by various interest groups whose businesses are being challenged by Fintechs. Thus, it is important that Fintechs respond appropriately by employing the services of political lobbyists who would be able to influence political and regulatory decisions in their favor. This technique has been historically employed in business and proven to be very effective especially in climes like Nigeria. The appointment of political heavy-weights to their Boards would give them leverage to influence the lawmakers to update old laws, and enact new laws that would favor their course.

There are several arguments that suggest that regulation stiffens innovation. As this gradually appears to be the case in Nigeria, there is now a heightened need for Fintechs to approach things differently. Paul Tudor Jones noted that we must adapt, evolve, compete, or die. I expect that these few recommendations put forward would enable the Fintechs to adapt, evolve, and compete but not die.