From Q3 2021, Nigerian fintechs without defined regulations must undergo incubation before operating
From Q3 2021, Nigerian fintechs without defined regulations must undergo incubation before operating
The Securities and Exchange Commission (SEC) of Nigeria has hinted at a new regulatory requirement for financial technology firms operating in the country. Beginning in Q3 2021, fintech platforms that lack a defined framework will be required to undergo an incubation program in order to operate legally.
The Commission introduced the Regulatory Incubator (RI) program on June 16, 2021, to allow fintechs with novel business models and processes to comply with existing regulations.
This will include both existing startups and those seeking to enter the fintech sector. The regulator adds that it is constantly seeking ways to accommodate innovation while maintaining market integrity and adhering to investor protection limits.
When the program begins in Q3 2021, financial businesses in the country that use full or auxiliary technology will be required to complete a Fintech Initial Assessment (FIA) form to determine whether they are exempt from the process.
If the proposed innovation does not already have a regulatory framework, the startup will apply for the RI program.
According to the SEC's terms, the application will be accepted or rejected based on whether the innovation is permitted.
The startup will be presented with guidelines covering its services ten months into the incubation program. This is to assist it in determining the most appropriate regulatory regime for it.
After the 12-month program is completed, the startup is directed to either continue operating as a registered entity or to cease operations.
One can only speculate on the extent to which this intended move will affect fintech startups, as a number of innovations in the country's fintech sector are still attempting to fit within the existing financial sector regulations.
As a result, API fintech startups, microlending platforms, investment technology, and other innovations operating outside of any specific regulatory framework may be required to cease operations until certified through the incubation program.
CBN Guidelines
CBN guidelines already exist for mobile money operators, electronic payment channels, USSD services, international money transfer, remittance, and similar services. As it stands, crowdfunding startups escaped this new directive by a hair's breadth, as a framework was recently implemented in May.
On the other hand, crypto and digital commodity investment startups may not make it through the FIA stage, as their services remain restricted.
Rather than that, this can be explained as another instance of regulations pursuing innovation. Still, it is unclear when regulations will begin to stifle innovation, despite the fact that fintechs have aided in the continent's financial inclusion.
In addition, it is unclear how this incubation program differs from the Central Bank of Nigeria's regulatory sandbox — a platform that enables fintech firms to test their products and obtain regulatory approval prior to commercialization.
A significant disadvantage of the CBN's sandbox could be widespread distrust of regulators among startup founders.
However, the SEC's incubation program has the added benefit of legitimacy, though the Commission has not disclosed how it intends to enforce it.
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