Tech capital flight looms on CBN’s order to freeze accounts

Capital controls the Central Bank of Nigeria (CBN) is enforcing lately, such as the freezing of accounts of some fintechs, could dampen interest in Nigerian startups.

It risks triggering capital flight as startups relocate their operations outside the country in order to protect their investment.

About 80 percent of tech companies in Nigeria have incorporated mainly abroad with branch offices located in the country. Recently, some companies have even relocated their main physical offices outside Nigeria leaving skeletal operations in the country. Patricia for example relocated to Estonia in 2021 due to the CBN prohibition on accounts owned by operators in the cryptocurrency market.

While they still have to secure a licence to operate their branch and pay tax in Nigeria, the bulk of their operations, taxes, and investments are directed from their new headquarters incorporated in countries like the United States of America and the United Kingdom. For companies like Patricia, relocating from Nigeria means running a leaner team in Nigeria – mostly remote – and investing new capital in their host countries.

“Having business operations only in Nigeria is now a massive liability. All those who plan to build pan-African businesses need to start from elsewhere,” said Victor Asemota, Growth Partner at AnD Ventures.

In fairness, the CBN has a legal right to regulate the foreign exchange market but the apex bank may also be exploiting a lack of clarity over what constitutes asset management in the age of the digital economy. Despite the new fintech licence created by the Securities and Exchange Commission (SEC), the services rendered by companies like Chaka, Risevest, Trove, and Bamboo are not properly defined, at least for the CBN.

The new fintech licence approved and issued by the Securities and Exchange Commission a few months ago was not enough to stop the Central Bank of Nigeria (CBN) on Tuesday from securing a court order to freeze the accounts of Bamboo, Chaka, Trove, and Risevest for a period of 180 days. Experts say the move could push investors, especially those interested in investing in tech, further away from the country.

Read also: How tech companies can help reverse talent erosion in rural communities

Enyioma Madubuike, a legal tech expert told BusinessDay that the choice of an ex parte motion by the CBN suggests that the regulator was not interested in dialogue before carrying out the decision.

In civil procedure, ex parte is used to refer to motions for orders that can be granted without waiting for a response from the other side. Generally, these are orders that are only in place until further hearings can be held, such as a temporary restraining order. Depending on the rules, a judge can grant between 7 to 14 days for a successful motion.

Usually, a court would hesitate to grant an ex parte motion because of a possible violation of the right to a fair hearing of the excluded party. It is only granted when the urgency is such that would put others in danger. The CBN not only got its motion granted, but it also got a 6 months restraining order.

“What has happened is an abnormality in the justice system,” Madubuike said.

“The more the CBN damages investor confidence, the less dollar flow to Nigeria. The fewer dollar flows to Nigeria, the more the CBN damages the investor confidence in Nigeria. It is hard to build a business in Nigeria,” tweeted Kalu Aja, a financial expert. “The naira is weak because supply if dollars cannot meet the demand for the dollar. It’s basic economics.”

The affected platforms are mostly wealth management companies that provide access to foreign investment assets like US stocks, real estate, and bonds denominated mainly in dollars. Over time, they have become popular with Nigerians looking to hedge their investments against the weak local currency. On Risevest, Trove, Chaka, or Bamboo an investor can fund their wallet through a local bank account, he or she can then place an order for a foreign company’s stocks or other foreign assets as the case may be. The assets are held in dollars.

In a motion filed on August 4, the CBN which claimed it was conducting an investigation into the operations of these startups, said the fintech companies are responsible for making the naira weaker to US dollars as they were involved in illegal foreign exchange transactions.

“There is a grave allegation that the defendants/respondents are engaged in illegal foreign exchange transactions, accessing/procuring of foreign exchange via their banks from the Nigerian foreign exchange market via several bureaux de change, international money transfer operators and have transferred cash deposit of more than S10,000.00 (Ten thousand dollars) to various accounts overseas contrary to provisions of extant laws and regulations and also traded in foreign securities and cryptocurrencies in contravention to CBN Circular,” the CBN wrote.

This is not the first time wealth management companies are being targeted by regulators. In 2020, the SEC suspended their operations declaring them illegal for providing foreign securities on their platforms.

According to the SEC then, only foreign securities listed on any exchange registered in Nigeria may be issued, sold, or offered for sale or subscription to the Nigerian public. Also, capital market operators who work in concert with unregistered online platforms were advised by the SEC to desist.

Following a series of engagements with the fintech firms, in July 2021, the SEC issued the first fintech licence to Chaka Technologies, a platform that provides investment opportunities in local and foreign stocks.

The licence titled Digital Sub-Broker/Sub-Broker Serving Multiple Brokers had the objective of increasing the number of Nigerians that are financially included and are investing in the Nigeria capital market.

After Chaka, Cowrywise also received the licence raising operators hopes that a new era was taking place.

Unfortunately, the CBN’s freeze order raises a fresh dimension for the licensing regime. The CBN wants the companies to get licenced as asset management companies. This would improve the apex bank does not recognise the new Digital Sub-Broker/Sub-Broker Serving Multiple Brokers approved by SEC.

Importantly, an asset management licence in Nigeria is equivalent to the fund/portfolio managers licence being issued by SEC.

“We’ll engage with regulators as we always have to ensure that any issues raised are dealt with properly. But this does not impact or affect our users or their investments which are managed via regulated third parties across all jurisdictions we operate,” said Eke Eleanya,  Risevest CEO in a statement addressing the CBN order.

Bamboo also issued a statement to allays investors’ fears over their funds.

“We’re aware of the recent reports about us. Our legal and government relations teams are looking into it but we thought it was important to let you know that your money remains safe with Bamboo and will always be readily accessible,” the company said

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