Nigeria's new financial services law will increase regulatory demands on financial technology companies, place greater scrutiny on bank executives and deter unsecured lending to small businesses — and industry experts are divided over how well it will work.
Signed into law in November 2020, the Banks and Other Financial Institutions Act 2020 follows the collapse of eight Nigerian banks in the past decade, a widespread recapitalization of the sector and the creation of a state-owned "bad bank" to assume control and ownership of banks' nonperforming loans.
Declining real GDP growth and a fluctuating naira-to-dollar exchange rate caused by unstable oil prices have put pressure on banks. Oil and gas provide more than 85% of Nigeria's exports and about 10% of nominal GDP. Meanwhile, coronavirus-related lockdowns led to temporary mass unemployment in 2020.
According to S&P Global Ratings, the country's economy could shrink by 3.5% in 2020, and banks' nonperforming loan ratio may have surged to 12% by the end of last year, from 6% in 2019.
"Each time there's a market shock, asset quality volatility increases, which shows that part of the sector is still vulnerable," said Samira Mensah, director for financial institutional ratings at S&P Global Ratings. "The aim of the law will be to increase the stability and resilience of the banking sector."
The law requires all banks and financial institutions — other than those engaged in certain activities such as insurance and pension fund management — to be incorporated locally and hold a Nigerian license. These include money brokerages, credit bureaus, money transfer services, mortgage companies and banks. Punishments may involve corporate fines of up to 10 million naira, plus individual fines and lengthy imprisonment.
Under the new law, high-ranking banking executives will be personally liable for their banks' infractions and could be imprisoned for up to three years. This follows long-standing concerns about senior bank staff issuing loans to friends and allies, a practice that was a big factor in bank failures.
"The central bank believes banks have been too reckless in their lending, especially to well-connected wealthy people, so the new law seeks to ensure that if things go wrong, banks' management are held personally responsible," said Joachim MacEbong, senior analyst at geopolitical research company SBM Intelligence. "There will be much more oversight. The law is heavy on compliance."
MacEbong suggested that enforcing the regulation could put people off wanting to go into banking as a career. He added that forcing companies to register in Nigeria rather giving incentives could hinder the growth of the financial sector, because it may deter foreign investors who are uncomfortable investing in fintechs registered locally.
"These are fast-growing start-ups and are normally in need of access to foreign capital, which usually has certain conditions including target companies being registered in certain jurisdictions," he said.
Nigeria is home to more than 200 specialist fintech companies that, combined, raised $600 million in funding between 2014 and 2019, according to a September 2020 report by McKinsey & Co., and which have sought to outperform banks in terms of providing digital-based financial services.
"Global tech companies like IBM, HP and Google have incorporated in Nigeria, so why can't international fintechs? They should get local partners to work with them," said Yele Okeremi, managing director and CEO of Precise Financial Systems, a financial software development company.
Fintechs are starting to take market share by not charging the same kind of fees that banks do, Okeremi said.
Central bank changes
The final version of the law has yet to be published, but draft versions include a clause that compels the central bank to explain why it has refused to grant a banking license within 60 days. If included in the law's final iteration, this would increase accountability, MacEbong said.
"The law gives the central bank greater powers and also increases the instances in which those powers can be applied," said MacEbong, noting banks must now obtain regulatory approval to open or close branches and cut staff.
Nigeria has belatedly introduced Basel II rules on bank capitalization, but has yet to implement Basel III, which is the international standard.
"The law could be a way to address existing gaps and to recognize the transformation of the financial sector, which has been shifting towards a non-funded, transaction-based model," said S&P Global Ratings' Mensah. "Banks are still lending but have managed to stay profitable and remain resilient during these crises despite higher credit losses because of their focus on non-interest income."
Banks levy various fees including current account maintenance charges and advanced payment guarantees. Lenders have comfortable capital adequacy ratios and some have maintained interim dividend payments.
"The new law brings regulatory clarity and will strengthen confidence in the industry," said Gbadebo Adenrele, director and head of investment banking at Lagos, Nigeria-based investment bank Vetiva Capital Management. "It increases regulatory compliance obligations. The financial services sector is critical to the economy and greater regulation should reduce any systemic risk."
As part of this expanded oversight, banks may have to obtain regulatory approval for unsecured loans of more than 3 million naira.
SBM Intelligence's MacEbong sees this as a problem.
"There are many well-run businesses which meet banks' risk management criteria and have proven to be reliable borrowers but don't have that collateral," MacEbong said. "Now they have to await central bank approval to access unsecured loans. It will add costs and delays — if the central bank doesn't respond quickly, businesses will come under a lot of pressure."
"The regulator has to find the right balance between ensuring it has the right regulations ... and also allow innovation within financial services," added Vetiva's Adenrele. "It remains to be seen how the market receives the law. The opportunity remains enormous."
As of Jan. 13, US$1 was equivalent to 379.9 Nigerian naira.