As at 31 May, 2018 there were 76 finance companies, which include non-bank mobile money providers, credit companies, microfinance investment firms, and wealth management services with a licence from the Central Bank of Nigeria (CBN).
A list released by the apex bank in June showed that 65 of the licenced companies are located in Lagos, while six states including Delta (1), Edo (1), Anambra (2), Abia (1); Kwara (1); Cross River (1); and Abuja (4) account for the remaining. By implication, financial services firms operating in twenty-nine states do not have licences.
Fintech start-ups have upturned and transformed the old system of doing banking in Nigeria, as well as other countries around the world. They are generally seen as more flexible, less bureaucratic, efficient, and faster than the traditional banks. Their innovative approach to banking services and creative products have become so renown that banks are fast shedding their old skins to look like these startups – if not in size at least in style.
Fintech startups have also consistently attracted significant foreign investment, to help them expand their services to millions of Nigerians who need them. Despite the market potential and the increased attraction to investors, most start-ups find it difficult to survive much less exist to the point where they begin to make profit for their investors lack of an operating licence.
Acquiring the CBN licence comes at a very high cost in terms of documentation and finance. Requirements for a mobile money licence for instance include 3 years tax clearance of each of the founders, draft agreements with technical partners, participating banks, switching company, merchants, telcos and any other party; payment of non-refundable application fee of N100,000 to CBN; and evidence of shareholders’ fund of N2 billion before a licence is issued.
The initial capital requirement used to be N500 million.
Should a mobile money start-up even manage to provide the tax clearance, draft agreements from banks, telcos, partners, merchants and pay the N100,000 non-refundable application fee, where would it get the N2 billion shareholders’ fund? Would its investors be willing to give enough to satisfy what the CBN is requesting?
The requirements may also explain why over 80 percent of the licenced companies are based in Lagos. It will be easier for a telco for instance to sign a memorandum of understanding with a startup base in Lagos. In terms of investment also, Lagos based fintechs have always had an edge over those based outside the commercial city.
In January 2018, the CBN threatened to revoke the licence of more than 15 mobile money operators for failing to meet up with the N2 billion capital requirements. The operators grace period will end on July 1, 2018.
Currently, Nigeria has just 21 mobile money operators. If the CBN make good on the revocation threat, the country will be left will less than 10 licenced operators servicing the over 60 million unbanked population in Nigeria.
According to the latest World Bank Global Findex report, Nigeria is among the list of seven countries that make up 1.7 billion adults that are unbanked. Digital financial services like mobile money are expected to help bridge the gap. However, the regulatory environment must be right for big and small players who will provide these services. A regulatory environment that encourages both small and big players will also inspire new confidence in investors.
Recently, some of the players have come together to form the Association of Financial Service Innovators (FIS), with an objective to chart a course for enabling payment innovation within the Nigerian payment space.
One of their recommendations is for the apex bank to create a multi-tier licence process. The process, which could be on three levels, will require that there is a category with appropriate capital requirement for big players, middle players and small players. It will give small fintechs which are not based in Lagos a chance to contribute their innovativeness in the space.
