Navigating The Future Of Nigeria's FinTech Landscape: Strategies For Sustainable Growth

Introduction: Overview of the Financial Technology (FinTech) Eco-System in Nigeria.

Imagine a world where you do not need to hold cash physically, where you can access your money anytime and anywhere to meet your financial needs with just a click of a button. This is the interesting world of FinTech.

The word 'FinTech' is largely culled from the two words "financial and technology". According to Investopedia¹, it is used to describe new technology that seeks to improve and automate the delivery and use of financial services. At its core, FinTech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives. FinTechs make use of specialized software that is used on computers and smartphones to perform financial operations. We have seen services provided by non-traditional financial services companies, such as companies involved in payment service banks, mobile money and wallets, non-bank payment platforms, cryptocurrency, etc.

The rise of the FinTech industry was fueled by consumers' and business owners' need for adaptability and change. FinTech is designed to challenge, and eventually take over, traditional financial services providers by being more agile, serving an underserved segment of the population, or providing faster or better service. Fintech is a wake-up call to traditional banking which was becoming complacent and slow to innovate. It is pushing the industry towards more user-friendly, efficient, and transparent services, leveraging technology to meet modern consumer demands. Examples of these disruptive technologies include but are not limited to the internet, applications, mobile phones, and other modern technological devices. Some companies have utilized these technologies to offer services such as mobile payments, payment processing, mobile lending, and personal finance.

Nigeria's FinTech sector is booming, attracting millions of customers and billions of dollars in investment. Statista reports that Nigeria is among the top African countries with the most FinTech startups. The FinTech startup scene in Nigeria grew in 2022, reaching about 217 companies². Specifically, the total cashless transactions in Nigeria rose to N39.58 trillion as of January 2023 which indicates a 45.4% year-on-year increase, according to the Nigeria Inter-Bank Settlement System's (NIBSS) reported data in 2023. This was more than the previous years, although there was a decline in global FinTech investment in 2023³.

2024 shows some promise with steady growth projected for Nigeria's FinTech sector, driven by mobile penetration and digital financial service demand. This growth was fueled by factors such as the cashless policy and the naira redesign driven by the Central Bank of Nigeria (CBN), which aims at the country's ongoing transition from a cash-dominant economy, towards an electronic payment market. But, with great opportunities come great challenges. How can the industry navigate the complex regulatory, tax, and security landscape, while ensuring sustainable growth and social impact? This article explores the strategies and best practices for building a resilient and inclusive FinTech ecosystem in Nigeria.

Tax and Regulatory authorities and framework affecting FinTechs in Nigeria

It is worthy of note that for any industry to thrive, it deserves the right mix of technical skills, capital investments, government incentives, regulatory framework, and an entrepreneurial and innovative mindset. These are the required catalysts needed to establish FinTech as a key enabler of financial services in Nigeria.

Zooming in our focus on the regulatory environment as an enabler for the thriving of FinTechs, we see that in Nigeria, we have had a plethora of regulations, that seek to not only support these FinTechs but also provide some shield for customers and investors alike. Some of these key regulatory developments within the Fintech environment in Nigeria are as follows:

The Start-up Act

The Nigeria Startup Act, 2022 was signed into law by former President Muhammadu Buhari on 19 October 2022. To place Nigeria's startup ecosystem as Africa's largest digital hub and promote technology talent development in this country, the Act lays down a legislative and regulatory framework for developing and operating Nigerian entrepreneurship. Furthermore, it precisely outlines the criteria for startups to register and obtain licenses, guaranteeing that qualified businesses have access to extensive benefits.

Specifically, the Act constitutes different sections which include the provision of incentives for companies and their investors, reforming legal precedence, and improved administrative bottlenecks for better efficiency within the sector. These provisions which should help to ensure the exponential growth of Startups in Nigeria include but are not limited to:

• Seamless approval of Pioneer Status Incentive (PSI) by the Nigerian Investment Promotion Commission (NIPC) for labeled startups.
• Tax-free holiday of 3 years in the first instance and an additional 2 years if still within the period of a startup label.
• Exemption from Industrial Training Fund (ITF) where in-house training is conducted for employees during the period designated as a labeled startup.
• 30% investment tax credit to angel investors, venture capitalists, private equity funds, accelerators, or incubators that invest in a labeled startup. The credit will only be applied to any investment gains subject to tax.

The incentives noted above, are expected to encourage the inflow of investment into the sector, improve the Nigerian business and economic landscape, and serve as a big boost to the Ease-of-Doing-Business campaign of the Federal Government. In essence, the Nigeria Startup Act is designed to foster a more efficient and encouraging environment for new businesses, a crucial factor in drawing investments and fostering creative growth.

However, the label for a Start-up is up to 10 years, only.⁴ Given the long-ish breakeven period for most such start-ups, this period may prove insufficient, and the incentive thus practically unavailable. This is particularly so if measurement of the term is predicated on date of incorporation rather than commencement of trade or business. In view of this limitation, some other jurisdictions extend period of coverage of similar incentives to 15 years.

Central Bank of Nigeria (CBN)

CBN stands as the chief regulatory authority for the FinTech industry in Nigeria. It establishes directives and grants authorizations that are essential for such entities to conduct business within the nation's legal framework. The CBN's oversight extends to multiple facets of fintech activities, encompassing the licensing of payment systems, the governance of mobile money services, and the implementation of regulatory sandbox initiatives, to name a few. Such regulatory actions are aimed at fostering a reliable and protected fiscal setting for both the entities offering the services and their clientele.

Some key developments introduced include the issuance of guidelines to monitor and strengthen the payment system of the Mobile Money Services (MMS) and the Payment Service Banks (PSB) etc. In January 2024, CBN also issued a directive that banks and fintechs are no longer permitted to engage in International Money Transfer (IMT) services and significantly increased the application fee to NGN 10 million for licensing IMT operators. Furthermore, CBN has restricted some Fintechs from opening new customer accounts till further notice due to illegal foreign exchange transactions.

This is notable as the CBN regulations for these companies seek to enable them to grow but also protect the funds entrusted in these companies by the residents of the Country. A robust payment system is vital for effective monetary policy implementation and the promotion of economic efficiency. With the introduction of FinTechs, specifically, companies engaged in payment systems, the CBN had identified the rapid growth and adoption, including the identification of person-to-person payments, and has made the adoption of these Fintechs necessary as a means of driving financial inclusion of the unbanked.

The rollout of numerous regulations which these FinTechs involved in payment services are required to adhere to, is a practical strategy for financial inclusion. Other important development by the CBN occurred within the cryptocurrency space with the circular dated 23 December 2023, which has lifted the ban on cryptocurrency transactions in the country including blockchain technology, digital assets, etc⁵. This follows an earlier circular issued by the CBN in February 2021 restricting banks and other financial institutions from operating accounts for cryptocurrency service providers, citing Money Laundering and Terrorism Financing risks and vulnerabilities inherent in their operations as well as the absence of regulations and consumer protection measures. However, banks and other financial institutions are still prohibited from holding, trading, and/or transacting in virtual currencies on their account.

Similarly, the CBN banned FinTechs and Banks from international money transfer services but will allow them to act as an agent in foreign exchange transactions⁶. This move by the CBN is aimed at curbing what it considers an excessive increase in foreign currency speculation and hoarding among Nigerian banks. This should eventually, fortify the currency and stabilize the forex market.

The Nigeria Inter-Bank Settlement System (NIBSS)

NIBSS is also a critical institution in Nigeria's financial ecosystem charged with the responsibility amongst others, to handle the efficient operation of interbank transactions. In a circular with Ref: NIBSS/BD/NI/PO/005/051223 dated 5 December 2023, the NIBSS communicated to all Deposit Money Banks (DMBs), Merchant Banks, Mobile Money Operators (MMOs), Microfinance Banks (MFBs), and others, the need to adhere to the CBN directive⁷.The directive of the CBN stated that these FinTechs can process outward transfers, but they cannot receive inflows as they are not licensed to hold customers' funds. By the referenced directive of the CBN, the banks were informed that allowing non-deposit-taking financial institutions such as Switches, Payment Solution Service Providers (PSSPs), and Super Agents (SA) to be beneficiaries, violates the CBN guidelines on electronic payment of salaries, pensions, suppliers, and taxes in Nigeria, which was issued in February 2014. Therefore, NIBSS directed the delisting of these FinTech companies from the NIBSS Instant Payment (NIP) outward transfer channels (not inward) because they do not have the proper license to do so.

Federal Inland Revenue Service (FIRS)

The FIRS, through the amendments in the Nigerian tax laws by the Finance Act of 2023 has commenced the application of Capital Gains Tax (CGT) on digital assets with the expansion of the scope of chargeable assets, to include digital assets⁸. There was an earlier debate as to whether the initial ban by the CBN on cryptocurrency transactions meant that such transactions were illegal. However, with the ban lifted by the CBN as stated above, this debate has now been put to rest.

In addition, the anticipated growth of this industry is an opportunity for the FIRS to partner with these FinTech companies. Whilst there may be some misconception by the FIRS of the model operated by FinTechs engaged in payment processing, especially in determining what is their actual revenue given the large volumes of funds passed through them, it is an opportunity for the FIRS to unlock the value hidden in these companies. Such value could be derived from collaboration with these FinTechs to expand the tax net by identifying their customers who have hitherto not been brought into the tax ecosystem. Also, the FIRS could leverage their system in the collection of taxes due from taxpayers.

The FIRS also introduced the TaxPro Max portal in Nigeria in June 2021, which is a web-based platform used to modernize tax administration and ease compliance for taxpayers, including FinTech companies ⁹. It allows for seamless registration, filing, and payment of taxes online such as the Company Income Tax (CIT), Withholding Tax (WHT), Value Added Tax (VAT), and recently added Transfer Pricing (TP), as well as automatic credit of withholding tax and other credits to taxpayers' accounts.

This means they can manage their tax obligations more efficiently, ensuring they meet regulatory requirements and benefit from any applicable incentives. However, this has not been without challenges. Some of these issues are around technical complexities such as the VAT filing and payment module where the VAT withheld by Banks, Telecommunication, and Oil and Gas companies does not reflect in the portal of the vendors that supplied the goods or rendered such services after the amount withheld has been filed and remitted to the FIRS. The vendors are left with no choice but to manually input the withheld amount in the Withheld VAT portion (line 190) of the VAT form on TaxPro-Max. The FIRS informed Taxpayers in different forums that it will continually work at improving the platform.

Securities and Exchange Commission (SEC)

SEC is the apex regulator of the capital market in Nigeria, and it has the mandate to regulate and supervise FinTech activities that fall within its purview¹⁰. Some of the regulations experienced by FinTechs in Nigeria about SEC are the SEC's introduction of guidelines for the oversight of digital assets, delineating the criteria for their categorization and management. According to these guidelines, digital assets are presumed to be securities unless proven otherwise by the entity that issues or sponsors them. Consequently, Financial Technology companies (FinTechs) that engage in activities involving digital assets, including cryptocurrencies, tokens, or coins, are required to adhere to the SEC's regulations and directives or seek an exemption from the SEC to conduct their operations.

SEC also issued a circular on the regulation of FinTech lending platforms, which requires all FinTechs that provide lending services to the public to be registered with the SEC as capital market operators and to follow the relevant rules and regulations.

National Information Technology Development Agency (NITDA)/Nigeria Data Protection Commission (NDPC)

NITDA is the apex regulator of Information Technology (IT) in Nigeria, and it has the mandate to create and enforce standards, guidelines, and policies for IT development and adoption in the country¹¹. Some of the regulatory developments experienced by FinTechs in Nigeria with NITDA and the NDPC include the issuance of the Nigeria Data Protection Regulation (NDPR), which sets out the principles and obligations for the collection, processing, storage, and transfer of personal data of Nigerian residents¹². The enactment of the Nigerian Data Protection Act (NDPA) sets up the NDPC and provides for the regulation of the processing of personal data, thereby promoting data processing practices that safeguard the security of personal data and the privacy of data subjects. The NDPR and NPDA apply to all FinTechs that manage the personal data of their customers, employees, or partners and therefore requires them to comply with the data protection principles, obtain consent, register as data controllers or processors, appoint data protection officers, conduct data protection audits, and report data breaches¹³.

Also, the regulatory environment continues to evolve with NITDA actively engaging with the FinTech ecosystem to foster development and effective IT regulations. These regulations along with others stated above underscore the commitment of Nigerian authorities to create a conducive environment for the growth of FinTechs while ensuring the security and privacy of personal data.

Jurisdictional analysis of the regulatory or tax initiatives aimed at enhancing the growth of FinTech companies.

In the fast-changing world of financial technology, innovation is more like a marathon than a quick race. As nations worldwide display their series of economic strategies, Nigeria is on the brink of a FinTech upheaval, ready to forge ahead with a blend of legislative acumen and financial incentives. Here's a glimpse into how different jurisdictions are crafting their financial landscapes and comparing same with how Nigeria's rules and tax policies compare in this global race of growth and new ideas.

1. United States

Different States in the United States have different programs that supported and still support the growth of Startups (FinTechs inclusive), and these are detailed below:

• Massachusetts¹⁴

Massachusetts encourages startups to invest in Research and Development (R&D) machinery and equipment by offering sales/use tax exemptions. If a startup in Massachusetts is buying gas, steam, electricity, or heating fuel, and has five or fewer employees, it can be exempt from sales tax through the Massachusetts Small Business Energy Exemption. Also, the Massachusetts Small Business Exemption provides a property tax exemption on commercial property that has an assessed value of less than $1 million and is occupied by a business that had a total average annual employment of less than 11 during the previous year.

• New Jersey¹⁵

New Jersey has an Angel Investor Tax Credit program available to investors in qualified emerging technology businesses in the state. The program enables individual and corporate investors to receive a refundable tax credit equal to 10% of the qualified investment in an eligible emerging technology company. Moreover, the individual or corporate investor need not be a New Jersey taxpayer to qualify for the refundable Angel Investor Tax Credit.

Comparing these incentives in the US with Nigeria, Massachusetts, and New Jersey have implemented tax exemptions and credits to foster the growth of startups, including FinTechs within the country. Similarly, Massachusetts has made progress in promoting entrepreneurialism by offering Startups including FinTechs, a sales tax exemption for tangible personal property that is only dedicated to research and development. These measures promote R&D investment and attract angel investors. In Nigeria, similar incentives to stimulate innovation, especially in financial technology, could be inspired by this approach. While the Nigerian Startup Act does not specify R&D tax breaks, it does offer investment incentives and talent development support.

2. Singapore[16]

Singapore is one of the leading FinTech hubs in the world, with a supportive regulatory environment, a vibrant ecosystem of startups, investors, and accelerators, and a strong commitment to innovation and digital transformation.

The Monetary Authority of Singapore (MAS) is the main regulator of FinTech activities in Singapore, and it adopts a balanced and risk-based approach to regulation, aiming to foster innovation while ensuring consumer protection, financial stability, and market integrity. MAS has introduced several regulatory and tax initiatives to enhance the growth of FinTech companies in Singapore. These include the FinTech Regulatory Sandbox which allows FinTech firms to test their innovative solutions in a controlled environment with regulatory reliefs and safeguards, the FinTech Fast Track Program which expedites the patent application process for FinTech inventions, the FinTech Innovation Lab, which provides a dedicated space for FinTech firms to collaborate with MAS and other industry stakeholders on innovative projects.

Also, there is the Financial Sector Technology and Innovation Scheme which provides funding support for FinTech projects that have the potential to create an industry-wide impact, and the FinTech Tax Incentive Scheme, which grants tax exemptions or concessions for qualifying FinTech firms and investors.

For Nigeria, establishing a dedicated space for collaboration, like Singapore's FinTech Innovation Lab, would be beneficial for Nigerian FinTech firms to work alongside regulators and industry stakeholders, fostering a community of innovation and facilitating cross-border collaboration in Nigeria. This will enhance the global reach of Nigerian FinTech startups.

3. South Africa

South Africa is one of the most advanced and innovative FinTech markets in Africa, with a diverse range of FinTech players, including startups, incumbents, and tech giants¹⁷. The main regulator of FinTech activities in South Africa is the South African Reserve Bank (SARB), which oversees the financial stability, prudential regulation, and payment system aspects of FinTech. SARB has introduced several regulatory and tax initiatives to enhance the growth of FinTech companies in South Africa, such as:

• The FinTech Programme aims to assess the impact of FinTech on the financial sector and the regulatory framework and to foster a conducive environment for FinTech innovation.
• The Regulatory Sandbox, which allows FinTech firms to assess their innovative solutions in a controlled environment with regulatory reliefs and guidance.
• The Innovation Hub, which provides a platform for FinTech firms to engage with regulators and other stakeholders on FinTech matters.
• The FinTech Tax Incentive Scheme, grants tax deductions for qualifying FinTech firms and investors.

Adopting a regulatory sandbox model, like those found in other jurisdictions, could encourage innovation within Nigeria's FinTech sector. While the Nigerian Startup Act already offers tax benefits, aligning with South Africa's tax incentives for small businesses could further attract investment. Initiatives like establishing innovation hubs or working groups, as seen in South Africa, would facilitate greater collaboration between startups and regulators.

The way forward: Strategies for sustainable growth for Nigerian Fintechs

FinTechs generate revenue in different ways depending on their specialty. Banking FinTechs, using their payment apps for example, may generate revenue from commissions, interest paid on loans, and financial products. They may also charge for features such as early withdrawals or credit card use. Investment apps may charge brokerage fees, utilize payment for order flow, or collect a percentage of assets under management. However, for all these to continue to happen and more, an enabling environment is required.

From the busy streets of Lagos where most Fintechs in Nigeria are located to the tech-savvy areas of Silicon Valley in the USA, the world of FinTech is growing fast. This projected growth is helped by various tax laws and benefits that different places around the world have set up. These places see that FinTech companies can change the way we handle money, so they are offering special support to help these new businesses grow. Having compared Nigeria with other jurisdictions, it is important to lay down some exciting measures that the Nigerian Government can consider that will spur growth within the FinTech space.

Firstly, the establishment of tax and regulatory rules that cater specifically to FinTechs is at the core of this transformation. The adaptive nature of these regulations will foster a nurturing environment in which FinTechs can innovate with confidence, secure in the knowledge that they are operating within a safe and supportive regulatory framework. Laws and regulations should be viewed not only as a way for the Nigerian Government to benefit but also as a strategy to support the growth of FinTech companies, while simultaneously providing a source of tax income.

The success of the FinTech sector heavily relies on the underlying digital infrastructure available within the country. In Nigeria, this translates to a concerted effort to enhance the quality and reach of internet services, which is fundamental for FinTech applications to operate efficiently and reach a wider audience. Improved internet connectivity means that more people can access financial services online, which is particularly important in regions that are underserved by traditional banking institutions particularly in rural areas, offering mobile banking solutions, microloans, and affordable insurance products, thus driving inclusive growth. Similarly, to ensure no one is left behind, financial inclusion programs are paramount to the success of these FinTechs.

Another important point to note is that in the FinTech realm, trust is the equivalent of monetary value, and the establishment of consumer protection policies serves as the foundation for generating this trust. The establishment of secure platforms for data management addresses the growing concern over data security and privacy. With the increasing amount of personal and financial data being processed online, robust security measures and dispute resolution mechanisms are necessary to protect against data breaches and cyber threats. This not only builds trust among users but also complies with international standards for data protection, making Nigeria an attractive destination for global FinTech investors and companies.

Finally, the mere possession of functional tools is insufficient without the right blend of talent, as talent is the driving force that leverages these tools effectively. The right talent can harness the potential of technological tools to innovate, streamline processes, and create solutions that meet market needs. The Technical Talent Training program, unveiled in October 2023 by the Minister of Communications, Innovation, and Digital Economy- Dr Olatunbosun Tijani, is a step in the right direction as it aims to train 3 million technical talents over the next four years. Tijani believes Nigeria has a good pipeline of talent that is motivated and proactive and can form a tech-enabled workforce with a global impact comparable to India, which offers a strong example of tech-enabled growth.¹⁸

Conclusion

In the world of FinTech which is always changing and advancing, the key to long-term success involves three main elements: innovative ideas, wise investment strategies, and supportive regulations. Nigeria has made commendable progress by introducing measures that stimulate the rapidly expanding FinTech sector. However, to ensure the enduring success of these companies, it is crucial to extend support beyond their initial startup phase and throughout their entire development process.

The Nigerian government is already helping FinTech companies to develop and come up with new ideas, and it has the potential to do even more. Changes brought by the Nigerian Start-up Act are a step towards better support. While there are other initiatives that the government can adopt from other jurisdictions to better support the sector as indicated, the government needs to invest more in the basics that these companies need to succeed, like better internet, stronger online security, and easier ways to send and receive money both in Nigeria and abroad. By improving these areas, Nigeria is not only boosting its own FinTech industry but also showing the world that it is a place where innovation and economic progress are happening. This could put Nigeria on the map as a leader in financial tech and a great example of working together across borders.

To attract more investors to Nigeria, it is important to think about extra perks that work well in other places, like the USA. For example, giving tax breaks and not taxing certain things can attract angel investors. These are the people who give money to new companies for a share of the company or the promise of payback later. Offering these kinds of benefits can help startups grow from being little businesses to big names in the market.

In conclusion, Nigeria has made good progress in making a supportive space for FinTech companies. But there is more to be done. For these companies to reach their full potential and become key parts of the economy, everyone needs to work together—this includes the government, people who invest money, and the FinTech industry itself. By joining forces, Nigeria can stay up to date with worldwide FinTech trends and even lead the way in new ideas and expansion in this field.

Footnotes

1. Financial Technology (Fintech): Its Uses and Impact on Our Lives (investopedia.com)

2. Nigeria: number of fintech startups 2017-2022 | Statista

3. NIBBS' tough stance on Fintechs...what it means for banks - The Nation Newspaper (thenationonlineng.net)

4. A startup is defined as a company in existence for not more than 10 years with its objectives being the creation, innovation, production, development or adoption of a unique digital technology innovative product, service, or process.

5. CBN lifts ban on cryptocurrency transactions - Vanguard News (vanguardngr.com)

6. CBN bans banks, fintechs from international money transfer services | The Guardian Nigeria News - Nigeria and World News — Nigeria — The Guardian Nigeria News – Nigeria and World News

7. Letter-to-Disconnect-Switches-PSSPs-and-Super-Agents-from-NIP-Outwards-System.pdf (nibss-plc.com.ng)

8. The Finance Act 2023: Highlights Of Changes To Tax Legislation And The FIRS' Comments On The Changes - Sales Taxes: VAT, GST - Nigeria (mondaq.com)

9. Public notice – Introduction of FIRS' Tax Administration Solution (TAXPRO-MAX) – FIRS

10. The Securities and Exchange Commission, Nigeria

11. https://www.mondaq.com/nigeria/sales-taxes-vat-gst/1243618/an-overview-of-the-tax-and-regulatory-issues-faced-by-financial-technology-companies-in-nigeria

12 An Overview of the Tax and Regulatory Issues Faced by Financial Technology Companies in Nigeria (andersen.com)

13 Tax And Regulatory Issues Financial Technology Companies In Nigeria Are Facing (Overview) – QUICK BILLS

14Directive 94-9: Qualifying Small Business Exemption for Certain Sales and Use of Gas, Steam, Electricity and Heating Fuel | Mass.gov

15 NJ Division of Taxation - Notice – Angel Investor Tax Credit Act

16 Singapore achieves its highest fintech funding in three - KPMG Singapore

17 The Fintech Landscape of South Africa | The Fintech Times

18. https://african.business/2024/02/technology-information/bosun-tijani-nigerias-tech-sage-turned-minister-on-ai-innovation-and-the-role-of-government

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.