Considerations for the implementation of the African Free trade Area Agreement (AfCFTA)

Africa Bulletin
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By Adetayo Adetuyi LLM, Senior Consultant, Brooks & Knights Legal Consultants And Nnanke Williams LLM, Senior Consultant, Brooks & Knights Legal Consultants[1]

  1. Introduction

The African Continental Free Trade Area Agreement (AfCFTA Agreement) was signed by African countries in Kigali, Rwanda, on 21 March 2018. It became effective on 30 May 2019. Ratification by 22 countries was required for the AfCFTA Agreement to enter into force. As of July 2019, 54 states have signed the AfCFTA Agreement and only Eritrea is yet to append its signature to the trade document. The start date of trading under the AfCFTA Agreement has been slated for 1 July 2020.

However, there still exists a number of challenges to implementation across Africa, from issues of ratification versus signing and the implications of persisting protectionist policies on the continent to the success of the agreement. These issues are further compounded by the impact of the recent outbreak of the novel coronavirus (COVID 19) on global trade and business. Presently, the World Health organisation (WHO) has stated that countries should be in a state of preparedness for a possible COVID 19 pandemic[2] and the United States Centre for Disease Control (CDC) has advised American businesses, hospitals and communities to prepare for the possible spread of the virus.[3] Africa currently has only one recorded case of COVID 19, in Egypt.

These issues make it pertinent for law makers and policy analysts to consider the path to successful implementation of the AfCFTA Agreement and to analyse the roadblocks to successful intra-African trade. This article therefore intends to carry out an analysis of the implementation of the AfCFTA Agreement.

 

  1. The African Continental Free Trade Area Agreement

The AfCFTA Agreement was created to expedite the political and socio-economic integration of the whole of Africa to allow for free movement of persons, capital, goods and services between the countries making up the African economic bloc. It aims to promote in Africa, agricultural development, food security, industrialization and structural economic transformation by creating a single continental market governed by the free movement of business, people and investments. Considering that there are 55 countries in Africa, the AfCFTA Agreement has the ambitious aim of being the largest single continental market in the world. It was signed by African countries in Kigali, Rwanda, on 21 March 2018 and became effective on 30 May 2019.

As of July 2019, 54 states have signed the AfCFTA Agreement agreement and only Eritrea is yet to append its signature to the trade document. Of this number, only 29 countries have ratified the AfCFTA Agreement and submitted their instruments of ratification with the depositary (Chair of the African Union Commission).

The AfCFTA Agreement was supposed to enter into force upon the ratification of the document by 22 countries. The 22-country threshold was reached on 29 April 2019 when Sierra Leone and the Saharawi Republic deposited their instruments of ratification with the depositary. Kenya, Ghana, Rwanda, Niger, Senegal are amongst the countries that have ratified the AfCFTA Agreement while Nigeria, Benin, Kenya are amongst the countries that have not ratified the AfCFTA Agreement.

 

  1. Ratification versus Signing

It is important to understand the difference between ratifying a treaty and merely signing a treaty as this has implications on the implementation of such a treaty by an independent state.  UNICEF’s Introduction to the Convention on the Rights of the Child[4] defines signature of a treaty to mean an act by which a country provides preliminary endorsement of the instrument. It further states that signing does not create a binding legal obligation but does demonstrate such a country’s intent to examine the treaty domestically and consider ratifying it. While signing does not commit a country to ratification, it does oblige the country to refrain from acts that would defeat or undermine the treaty’s objective and purpose.[5]

On the other hand, ratification, acceptance or approval, as the case maybe, refers to an act by which a country signifies an agreement to be legally bound by the terms of a particular treaty.[6] To ratify a treaty, the country first signs it and then fulfils its own national legislative requirements with regard to ratification. This is done by the appropriate national organ of the country following well-laid constitutional procedure and making a formal decision to be a party to the treaty.[7] Usually, the president of a country makes a representation internationally that the country has ratified the treaty.[8]

It is important to consider the implication of the AfCFTA Agreement’s entry into force on parties that have either signed or ratified the agreement. ‘Entry into force’ has been explained to mean that a legislation, regulation, treaty and other instrument has legal force and effect and becomes legally binding on parties.[9]  UNICEF’s Introduction to the Convention on the Rights of the Child explains that a treaty enters into force for those countries which gave the required consent[10] or at such time and upon such conditions set out in the agreement or treaty.[11]

In the case of the AfCFTA Agreement, we believe that the provisions of the AfCFTA Agreement has only entered into force (i.e. become legally binding) for those countries that have submitted their instruments of ratification with the depositary in accordance with the provisions of the AfCFTA Agreement. For countries like Nigeria and Kenya, they are only obliged to refrain from acts that would defeat or undermine the treaty’s objective and purpose.[12]

 

  1. Implication of AfCFTA Agreement for Africa’s economy

The AfCFTA Agreement consists of three (3) Protocols vis: Protocol on Trade in Goods, Protocol in Services and Protocol on Rules and Procedures on the Settlement of Disputes. These Protocols contain provisions on tariff concessions, customs co-operation, mutual administrative assistance, elimination of technical barriers to trade amongst other provisions, and are binding on signatory countries. It will also be governed by five operational instruments – the Rules of Origin, the online negotiating forum, the monitoring and elimination of non-tariff barriers, a digital payments system and the African Trade Observatory.[13]

By signing the AfCFTA Agreement, African countries who are signatories to the AfCFTA Agreement have committed themselves to a progressive elimination of import duties and other non-tariff barriers on imports within the African continent to aid the interaction of trade and investments between member nations of the African Union.

If the objectives of the AfCFTA Agreement are achieved, it will be easier for African countries to trade with each other in the absence of current barriers. Also, countries will have access to a larger market of around 1.2 billion people. This will potentially trigger industrialization and manufacturing across the continent and, in turn, create vast employment opportunities on a continent which is home to the world’s fastest growing labour force. The United Nations Economic Commission for Africa (UNECA) estimates that if signatory countries follow through with policies that spur local productivity, the free trade argument could boost intra-African trade by 52% by 2022.[14] Thus, with free trade under attack in much of the developed world, Africa is forging a new path for itself to foster sustainable wealth and development for the continent.[15]

While the AfCFTA Agreement promises to unlock Africa’s economic potential, the AfCFTA Agreement still faces an uphill battle for implementation and must surpass a number of challenges before it can be considered a success. Inefficient bureaucracy, poor infrastructure, persistent non-tariff barriers and other protectionist measures, heavy dependence on traditional export crops and commodities, little cross-border harmonisation of rules and regulations, long delays at road border crossings for cargo trucks and poorly functioning rail systems are amongst the myriad problems militating against a successful implementation of the AfCFTA.[16]

Commentators[17] are however hopeful and have explained that there are several things that African countries stand to benefit from the economic integration which will result from the emergence of the AfCFTA Agreement including but not limited to:

A larger market:

The mission behind AfCFTA Agreement is to turn the whole of Africa into a very large economic bloc so that trade, people and investment can move from one part of the continent to the other with little or no barriers. The implication of this for each African country that ratifies the agreement is that their locally produced goods and services may freely compete in international African markets without any corresponding trade restrictions from recipient countries, thus, boosting each country’s Gross Domestic Product (GDP).  In a market economy, there are three main players: consumers, producers and exporters: the benefit of a larger market to the consumers is that healthy trade competition is encouraged. This means that consumers have access to more goods and at relatively cheaper prices. Exporters gain more traction in the sale of their products as they have access to a larger market for their goods. Producers also have access to affordable and skilled labour as there will be mobility of labour between African countries thereby leading to increase in productivity.

More jobs:

As noted above, AfCFTA Agreement will result in increased mobility of labour across markets. This means that there will be more job opportunities for Africans as people will be able to move freely from one country to the other in the pursuit of job opportunities they are better suited for. With the promotion of more labour-intensive trade, AfCFTA Agreement will generate more employment and create opportunities.

The Supply chain:

Small and Medium-Term Enterprises will find it easier to connect to regional companies by making it easier for SMEs to connect to regional companies thus bringing faster and deeper development.

Women in Business:

It is estimated that in Africa, women account for around seventy percent (70%) of the informal cross-border trade.[18] The AfCFTA Agreement is poised to reduce tariffs and facilitate movement and trade. This will enable the informal sector to operate through formal channels and will result in increased participation of women in formal business sector.

 

  1. African trade in a time of COVID 19

China, the country where COVID 19 originated is the world’s second largest economy and leading trading nation. China is also the biggest oil importer.[19] In 2019 alone, China’s exports to Africa was valued at US$113 billion while its trade with Africa was valued at US$208 billion.[20] The IEA stated in its latest monthly report that, “Global oil demand has been hit hard by the novel coronavirus (COVID-19) and the widespread shutdown of China’s economy. Demand is now expected to fall by 435,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years.”[21]

With the outbreak of COVID 19, if the virus is not contained as quickly as possible, companies in many African countries will experience shortage of products and parts. This shortage is already underway due to the delayed opening of factories in China after the Lunar New Year and workers being mandated to stay at home to help reduce the spread of the virus. Bloomberg reports that the outbreak of COVID 19 has “shut down entire swathes of the Chinese economy, threatening world economic growth and curbing appetite for oil and metals that are the lifeline of many African nations.”[22]

As African countries plan to start trading under the AfCFTA Agreement on 1 July 2020, it is important to understand that most African countries have trade relationships with China. As the Chinese economy grapples with the effects of COVID 19, the slow trade coming out of China at this time gives African nations an opportunity to create trading partnerships with one another and strengthen their trade relations aimed towards a successful take off of trade under the AfCFTA Agreement in July, 2020.

One challenge to this successful development of intra-African trade under AfCTA Agreement is the sheer number of countries who have ratified the agreement versus the number of countries that have not ratified it. This could mean a low level of implementation and could be an indication that some countries are apathetic towards a successful implementation of the AfCFTA Agreement. For example, since October 2019, three months after signing the AfCFTA Agreement, Nigeria shut its borders to its neighbours effectively banning all trade with countries it shares land borders with – Benin, Niger, and Cameroon. This action goes against the spirit and letter of the AfCFTA Agreement – the creation of a continental market with the free movement of persons, capital, goods and services[23] and is an indication of what happens when a country merely signs but does not ratify a treaty.

Although the Nigerian government has given its reasons for the closure of its border, with no end in sight to the continued border closure in one of Africa’s foremost economies, the implementation of the AfCFTA Agreement seems poised for a turbulent take off, especially in light of the effects of the outbreak of COVID 19 on China’s trade into Africa. Africa is ready and poised for intra-African trade and the COVID 19 situation grants it an opportunity to reassess its marketing strategies and trading partners and emphasize cross border trade with its neighbours so as to reduce the effects of an over reliance on China’s economy and avert any direct impact on its economies from similar outbreaks in the near future.

  1. Conclusion

The signing of the AfCFTA Agreement by African countries has come at a time when some countries on the continent are grappling with a rising debt profile, increase in inflation and massive unemployment. Despite obvious hurdles, ratification and subsequent implementation of the AfCFTA Agreement by all African countries would give the AfCFTA a huge chance of becoming a successful regional trade agreement.   Thus, even though the AfCFTA Agreement has been signed by 54 countries, implementation will be gradual as countries continue to negotiate tariff schedules, rules of origin, and commitments for service sectors.

[1]                  Brooks & Knights Legal Consultants (BKLC) is a law firm established in Lagos, Nigeria to provide bespoke legal advisory and policy consulting services to individuals, corporates, government agencies and NGOs.

[2]              BBC News, Coronavirus: World must prepare for pandemic, says WHO, 25 February 2020, available at https://www.bbc.com/news/world-51611422, accessed on 26 February 2020.

[3]              Eliott C. McLaughlin and Steve Almasy, CDC Official Warns Americans it’s not a question of if coronavirus will spread, but when, CNN Health, 25 February 2020, available at https://edition.cnn.com/2020/02/25/health/coronavirus-us-american-cases/index.html, accessed on 26 February 2020.

[4]                  Retrieved from https://www.unicef.org/french/crc/files/Definitions.pdf accessed on 25 February 2020.

[5]                  Article 18(a) of the Vienna Convention on the Law of Treaties signed at Vienna 23 May 1969 obtained from https://www.oas.org/legal/english/docs/Vienna%20Convention%20Treaties.htm accessed on 25 February 2020. The Vienna Convention on the Law of Treaties is an international agreement regulating treaties between states, adopted and opened to signature on 23 May 1969 and entered into force on 27 January 1990. As at January 2018, it has been ratified by 116 countries.

[6]                  Article 2 of the Article 18(a) of the Vienna Convention on the Law of Treaties signed at Vienna 23 May 1969 obtained from https://www.oas.org/legal/english/docs/Vienna%20Convention%20Treaties.htm accessed on 25 February 2020.

[7]                  UNICEF’s Introduction to the Convention on the Rights of the Child. Retrieved from https://www.unicef.org/french/crc/files/Definitions.pdf accessed on 25 February 2020.

[8]                  What is the difference between signing and ratifying a treaty? Retrieved from https://www.institut-fuer-menschenrechte.de/en/topics/development/frequently-asked-questions/3-what-does-signature-of-a-treaty-entail-and-what-is-the-difference-to-ratification/ accessed on 25 February 2020.

[9]                  Entry into Force Law and Legal Definition. Retrieved from https://definitions.uslegal.com/e/entry-int-force/

[10]                Retrieved from https://www.unicef.org/french/crc/files/Definitions.pdf accessed on 25 February 2020.

[11]                 Article 24 of the Vienna Convention on the Law of Treaties signed at Vienna 23 May 1969 obtained from https://www.oas.org/legal/english/docs/Vienna%20Convention%20Treaties.htm accessed on 25 February 2020.

[12]                Article 18(a) of the Vienna Convention on the Law of Treaties signed at Vienna 23 May 1969 obtained from https://www.oas.org/legal/english/docs/Vienna%20Convention%20Treaties.htm accessed on 25 February 2020.

[13]                 African Continental Free Trade Area (AfCFTA Agreement) Legal Text and Policy Documents. Retrieved from https://www.tralac.org/resources/by-region/cfta.html accessed on 25 February 2020.

[14]                Onwuka, O.N. and Udegbunam, K.C., The Africa Continental Trade Area: Prospects and Challenges. Retrieved from https://www.accord.org.za/conflict-trends/the-african-continental-free-trade-area/   accessed on 26 February 2020.

[15]                 Campbell, J. African Continental Free Trade Area: A New Horizon for Trade in Africa. Retrieved from https://www.cfr.org/blog/african-continental-free-trade-area-new-horizon-trade-in-africa accessed on 26 February 2020.

[16]                Is Africa really ready for the AfCFTA? Retrieved from www.independent.co.ug/is-africa-really-ready-for-the-afcfta/ accessed on 27 February 2020.

[17]                 In the Guardian of 11 February 2020, the President/Chairman of the Board of Directors, African Export-Import Bank (AfreximBank) Professor Benedict Oramah stated that the AfCFTA Agreement is the cornerstone of Africa’s economic independence. According to him, AfCFTA Agreement will help African economies to industrialise and improve Africa’s share of global manufacturing output and increase the continent’s annual economic growth, create more wealth and reduce poverty. Also, in The Sun of 3 February 2020, Senior Partner of KPMG Nigeria and Chairman of KPMG Africa, Kunle Elebute disclosed that the AfCFTA Agreement agreement, if well implemented, has the potential to industrialise the African continent.

[18]            In Nigeria, for instance, the International Monetary Fund (IMF) estimates that the informal sector constitutes about sixty per cent 60% of the Nigerian economy and is worth about $270bn. Please see Business a.m. live, Nigeria’s informal economy accounts for 65% of GDP – IMF, 8 August 2017, available at https://www.businessamlive.com/nigerias-informal-economy-accounts-65-gdp-imf/, accessed on 26 February 2020.

[19]                Celemente, J. China is the world’s largest oil & gas importer. Retrieved from https://www.forbes.com/sites/judeclemente/2019/10/17/china-is-the-worlds-largest-oil-gas-importer-/amp/ accessed on 26 February 2020.

[20]                Nyabiage, J. China’s trade with Africa grows 2.2. per cent in 2019 to US$208 billion. Retrieved from https://www.scmp.com/news/china/diplomacy/article/3046621/chinas-trade-africa-grows-22-per-cent-us208-billion accessed on 26 February 2020.

[21]                Rosamond Hutt, The economic effects of the COVID-19 coronavirus around the world, Retrieved from https://www.weforum.org/agenda/2020/02/coronavirus-economic-effects-global-econmy-trade-travel/ accessed on 25 February 2020

[22]                Alonso Soto, Even without a case, Africa may be a big victim of coronavirus, Retrieved from https://bloomberg.com/amp/news/articles/2020-02-23/even-without-a-case-africa-may-be-a-big-victim-of-coronavirus

[23]                Article 3 of the AfCFTA Agreement

Derivatives trading in Nigeria: the new SEC rules amendment

Africa Bulletin
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0

By Nnanke Williams LLM, Senior Consultant, Brooks & Knights Legal Consultants And Adetayo Adetuyi, LLM Senior Consultant, Brooks & Knights Legal Consultants[1]

1.                Introduction

The Nigerian Securities and Exchange Commission (SEC) has decided to develop a derivatives trading market in Nigeria. To this end, the SEC issued an amendment to its Rules and Regulations in December 2019, providing for new rules on the regulation of derivatives trading and on central counter party (CCP).[2] In February 2020, the Central Bank of Nigeria (CBN)  in collaboration with FMDQ Holdings Plc offered its first long-term Naira settled OTC FX Futures Contracts to hedge against foreign exchange (FX) risk, with a maximum tenor of 5 years and to be traded on the FMDQ OTC Securities Exchange.[3] This combination of new rules and products is opening up derivatives trading in Nigeria to new investors and participants as both regulators seek to bolster the market and offer new risk management products.

This article will consider derivative contracts and its different forms as well as the provisions of the newly issued SEC Rules on derivatives trading in Nigeria.

2.               Derivative Contracts

A derivative is a bilateral contract whose value is derived at a future date from an underlying asset, such as a commodity, currency, interest rate, property value, company share, etc.[4] Derivatives are financial instruments used for hedging and risk management. Through a derivative contract, the value of an underlying asset is locked[5] for a future date (settlement date) to protect the risk of price fluctuation and speculate the future value of the asset. This locked price, known as the strike price, is the value reference or consideration upon which the contract will be settled and the underlying asset will be transferred to the buyer on the settlement date.[6] A derivative contract may be cash settled or physically settled.  Under a cash settled derivative contract, settlement of the derivative is completed through a cash payment, usually the difference between the strike price and the market value at the settlement date.[7] In the case of a physically settled derivates contract, the underlying asset is physically transferred to the buyer on the settlement date in consideration for the strike price.[8]

Derivatives may be used by trading companies to protect them from risks that are peculiar to their business interests (e.g. currency risk, interest rate risk, commodity risk), by lenders to redistribute their risk exposure on a transaction or by institutional investors to manage their investment portfolios.[9]

3.                Forms of Derivatives

Vanilla Derivatives vs. Exotic Derivatives

Derivative products may be vanilla or exotic. A vanilla derivative is a standard derivative product whose features are well defined and traded actively.[10] They are commonly encountered derivatives with basic features such as strike price and settlement date, and having no special features.[11] An exotic derivative is an unusual derivative, structured and developed to meet the specific requirements of the parties to the contract.[12] They contain more complicated features as they are usually structured to meet a particular transaction’s requirements.

OTC Derivatives vs. Exchange Traded Derivatives

Derivative contracts may be privately traded over-the-counter (OTC) or exchange traded through specialized exchanges. An OTC derivative is a privately negotiated derivate contract, which is structured according to the requirements of the contracting parties.[13]  The contracting parties do not go through any intermediary or exchange and thus, each party takes on the counter party’s credit risk by entering into the contract. Exchange traded derivatives are standardized derivative contracts entered into through an exchange, which acts as an intermediary between the parties. The Exchange’s clearing house acts as the central counterparty and takes on a limited credit risk from each counterparty. As exchanges are regulated entities, parties trading exchange traded derivatives are usually registered members licensed to trade on the exchanges. Credit risk is managed under exchange traded derivatives, through margin payments[14] deposited by the contracting parties, making them less risky than OTC derivatives.

 

 

4.               Types of Derivatives Instruments

Forwards and Futures

A forward is a classic derivative contract, where a buyer agrees to purchase an underlying asset at a future date for a fixed price.[15] Forwards are OTC derivatives where each counterparty bears the credit risk of the other. Futures are standardized forwards that are exchange traded.[16] Buyers under forwards and futures are obligated to purchase the underlying asset at the strike price, irrespective of the market price of the asset on settlement date.[17]

Swaps

Swaps are OTC derivative contracts under which parties agree to exchange future cash flow obligations from different financial instruments.[18] The most common form of swap derivatives are currency swaps and interest rate swaps.

Options

Option derivatives grant an option holder the right but not the obligation to buy or sell the underlying asset.[19] The option may either be a call option, which grants the option holder a right to buy the underlying asset at the strike price on the settlement date, or a put option, which obligates the option holder to sell the underlying asset to the option writer (party granting the option) at the strike price on the settlement date. Depending on the timing for the exercise of the option, the option may be either be a European style option, where the option holder may only exercise the option on a particular date; an American style option, where the option holder may exercise the option at any point during the term of the option; or a Bermudan style option, where the option holder may only exercise the option on certain dates during the term of the option.[20]

Equity and Credit Derivatives

An equity derivative is a financial instrument whose value is referenced from the price performance of an underlying equity asset or index unit.[21] Examples of equity derivatives include equity options, equity futures, equity swaps or other structured equity products. A credit derivative is a financial instrument that protects a party against the credit risk inherent in the debt obligations of a third-party borrower, by transferring that risk to a counterparty.[22]

5.                Framework for Derivatives Trading in Nigeria: New SEC Rules Amendment

In December 2019, the SEC issued amendments to its Rules and Regulations to include:

  1. Rules on the Regulation of Derivatives Trading (Derivatives Trading Rules); and
  2. Rules on Central Counterparty (CCP Rules).

The Derivatives Trading Rules

The SEC Derivatives Trading Rules apply particularly to exchange traded derivatives, however, some reporting requirements exist for OTC derivatives.[23] The Derivatives Trading Rules require that a Derivatives Contract be registered with the SEC in the prescribed manner, and its approval granted before such contract is introduced on any exchange.[24] The SEC shall charge fees for the registration of derivatives contracts and shall issue guidelines for the trading and clearing of contracts in the secondary market.[25] An exchange must have a regulation framework for its derivatives trading.[26] The rules shall include provisions for general requirements, membership requirements, reporting requirements, risk management requirements and any other requirements determined by the SEC.[27]

The Rules provide for the participants in the derivatives trading markets. Under the Rules, no person shall trade on exchange traded derivatives for proprietary or client accounts except they are registered with a recognized exchange and/ or a CCP as a dealing member or a derivatives clearing member.[28] Only CBN-licensed commercial and merchant banks are eligible to register as derivatives clearing members under the Rules.[29] A derivatives clearing member is defined as an entity authorized by a CCP to perform  clearing services either on its own account or behalf of dealing members or clients. [30] A dealing member is a SEC registered entity who is also a registered member of an exchange and has obtained a dealing licence to execute trades for proprietary accounts or on behalf of its clients.[31]

Exchange traded derivatives may only be traded on exchanges that are recognised by the SEC[32] and shall only be cleared by a CCP registered and recognised by the SEC.[33] All standardized OTC derivatives contracts shall be traded on an exchange.[34] The SEC shall issue guidelines from time to time on the trading, clearing and settlement of OTC derivatives.[35] The Rules further provide that only registered derivative clearing members may clear exchange traded or OTC derivatives.[36] The clearing of derivatives shall comply with the provisions of the Investments and Securities Act, 2007 (ISA), the SEC Rules and the rules of the relevant CCP.[37]

Exchanges shall be responsible for market surveillance to ensure that derivatives contract prices reflect demand and supply and deter market manipulations.[38] Market surveillance shall include the sharing of relevant information where an underlying asset is traded in more than one exchange or participants are members of more than one exchange.[39] Exchanges shall set position limits to prevent participants and clients from holding positions large enough to control and/ or manipulate the underlying asset and shall notify the SEC on its prescribed position limits, as well as the methodologies and rationale used to determine the limits.[40] A position limit is a level of ownership or control of derivative contracts that a participant or group of participants, client or group of clients shall not exceed.[41]

A CCP is required to receive and maintain an initial margin[42] from participants before accepting to clear contracts from them. They shall also pay variation margins to participants and clients for gains resulting from mark to market of positions and receive variation margins from participants and clients for losses resulting from mark to market of positions.[43]

The Rules make general provisions for leverage,[44] disclosure and risk management. Exchanges are required to liaise with CCPs to determine the applicable leverage relevant to each type of derivatives contract and such leverage shall be disclosed to the SEC within 24 hours.[45] Participants are mandated to make certain disclosures to the SEC and to develop risk management units and frameworks within their organizations.[46]

The accompanying sanctions for breach of the Rules provide that a person in violation shall be liable to a penalty of not less than NGN1 million and a further sum of not more than NGN25,000 for every day of default.[47]

Generally, the Derivatives Trading Rules provide for the registration, membership and reporting requirements by exchanges, derivatives clearing members, CCPs and dealing members. The Rules anticipate that the exchanges will provide a further direct framework to regulate their derivatives trading.

The CCP Rules

The CCP Rules provide for a more detailed regulation framework for central counterparties. They are required to register with the SEC[48] and must have sufficient assets, resources and effective and reliable infrastructure to perform their functions including their clearing operations.[49] The Rules provide for the development of governance procedures by CCPs[50] and the composition of a CCP Board.[51]

The Rules provide for the functions of a registered CCP[52] which includes acting as intermediary between counterparties through a process of novation, a legally binding agreement or an open offer system. The CCP is also expected to facilitate post trade management functions and implement a margin system that establishes margin levels commensurate with the risks and attributes of each product, portfolio and the market. The CCP shall collect and manage collateral held for the due performance of the obligations of clearing members[53] and maintain a default fund[54] to mitigate the risk of default by a clearing member and ensure that the obligations of that clearing member continue to be fulfilled where possible.

CCPs are required to make rules to govern their operations and clearing members.[55] They are also required to develop a framework for the comprehensive management of risks.[56] They are mandated to manage their liquidity risks by, among other things, having highly liquid resources and a committed line of credit to enable them meet their financial obligations and ensuring that they have a diversified portfolio of liquid resources to avoid undue concentration with respect to any relevant asset class and issuer.[57] They are also required to develop frameworks, policies and procedures to manage their operational, business and credit risks.[58]

The CCP Rules provide collateral requirements for a CCP,[59] including that they shall only accept highly liquid assets with low credit and market risks; and they shall avoid concentrating collateral in one class of asset with the exception of Federal Government Securities. They are also expected to develop a collateral management system that complies with the requirements of the CCP Rules.[60]

CCPs shall have a system that stipulates margin requirements proportionate to the risks and attributes of the relevant products and markets. They shall also have a reliable source of timely price data for exchange traded and OTC derivatives. They are to adopt more conservative margin models for OTC derivatives. They are to ensure that market conditions are considered when setting initial margin requirements.[61]

CCPs have reporting requirements to the SEC[62] including daily transaction reports on clearing activities, monthly reports, quarterly financial statements and operational reports, annual reports and audited financial statements, quarterly assessments of risks from its operations and any other SEC required information. They are also expected to maintain records of all activities and services and all contracts cleared for a period of not less than 10 years.[63] Other required records to be maintained include transaction records, position records, business records and record of reports made to a trade repository.

6.               Conclusion

The recently issued SEC Rules amendment for derivatives trading provide a framework for the trading of derivatives products in Nigeria. Parties and participants are clearly defined and the responsibilities of central parties like exchanges and CCPs are detailed with further expectations that they will develop rules to govern their operations. The Rules are an important step in the right direction for the expansion of the Nigerian financial markets and the diversification of portfolio options in favour of derivative products. While its implementation is yet to be seen, the rules clearly anticipate issues of arbitrage and important risks that undermine the market such as credit and operational risks and provides for reporting requirements to watch for and prevent those risk events.

Going forward, it is expected that specialized derivative exchanges will be developed and rules issued to further define the derivatives trading market in Nigeria. It is also expected that more products beyond CBN FX Futures will be introduced and traded in the market as a framework for trading has been developed. The Rules provide for more detailed provisions for Exchange traded derivatives than for OTC derivatives, which are the riskier derivatives products. They however imply the development of more detailed regulations for OTC derivatives.

[1]                   Brooks & Knights Legal Consultants (BKLC) is a law firm established in Lagos, Nigeria to provide bespoke legal advisory and policy consulting services to individuals, corporates, government agencies and NGOs.

[2]                  SEC, New Rules and Amendments to the Rules and Regulations of the Commission, 23 Dec 2019, available at https://sec.gov.ng/wp-content/uploads/2019/12/SEC-New-Rules-and-Ammendments-23-December-2019.pdf

[3]                   Lolade Akinmurele, In Boost to Foreign Inflows, CBN, FMDQ Launch Long-Term Naira Contract, Business Day, 14 Feb 2020 at p.1.

[4]                  Practical Law Finance, Derivatives: Overview (UK), <Practical Law>, accessed on 24 February 2020.

[5]                   A strike price is the value of the underlying asset fixed at the time the contract is entered into. Id.

[6]                  The Nigerian Stock Exchange, Glossary of Common Derivatives Terms, available at http://www.nse.com.ng/investors-site/becoming-an-investor/FAQs/NSE%20Glossary%20Of%20Common%20Derivatives%20Terms.pdf, accessed on 25 February 2020.

[7]                   Practical Law Finance, Derivatives: Overview (UK), <Practical Law>, accessed on 24 February 2020.

[8]                  Id.

[9]                  Id.

[10]                 ‘Vanilla Option’, The Financial Encyclopedia, 8 Novemberr 2017, available at https://www.investment-and-finance.net/derivatives/v/vanilla-option.html, accessed on 25 February 2020.

[11]                 Practical Law Finance, Derivatives: Overview (UK), <Practical Law>, accessed on 24 February 2020.

[12]                 Id.

[13]                 Id.

[14]                 A Margin is a good faith collateral deposit, specified as a percentage of the value of the financial instrument in question. It is usually paid in cash and held by the central counterparty in order to manage counterparty risk associated with every position and ensure the integrity of the derivatives market. ‘Margin’ Nigerian Stock Exchange, Glossary of Common Derivatives Terms, Supra at note 6.

[15]                 ‘Forward Contract’, Nigerian Stock Exchange, Glossary of Common Derivatives Terms, Supra at note 6. See also Practical Law Finance, Derivatives: Overview (UK), Supra at note 7.

[16]                 Id.

[17]                 Id.

[18]                 James Chen, Swap, Investopedia 4 February 2020, available at https://www.investopedia.com/terms/s/swap.asp,accessed on 25 February 2020.

[19]                 Practical Law Finance, Derivatives: Overview (UK), <Practical Law>, accessed on 24 February 2020.

[20]                 Id.

[21]                 James Chen, Equity Derivative, Investopedia 20 April 2020, available at https://www.investopedia.com/terms/e/equity_derivative.asp, accessed on 25 February 2020.

[22]                 Practical Law Finance, Derivatives: Overview (UK), <Practical Law>, accessed on 24 February 2020.

[23]                 Rules 2 and 15 of the Derivatives Trading Rules.

[24]                 Rule 3(1) and (2) of the Derivatives Trading Rules.

[25]                 Rule 14 of the Derivatives Trading Rules.

[26]                 Rule 3(4) of the Derivatives Trading Rules.

[27]                 Rule 5 of the Derivatives Trading Rules.

[28]                 Rule 7(1) of the Derivatives Trading Rules.

[29]                 Rule 4 of the Derivatives Trading Rules.

[30]                 Rule 1 of the Derivatives Trading Rules.

[31]                 Id.

[32]                 Rule 5(3) of the Derivatives Trading Rules.

[33]                 Rule 6(1) of the Derivatives Trading Rules.

[34]                 Rule 6(2) of the Derivatives Trading Rules.

[35]                 Rule 6(3) of the Derivatives Trading Rules.

[36]                 Rule 7(2) of the Derivatives Trading Rules.

[37]                 Rule 6(4) of the Derivatives Trading Rules.

[38]                 Rule 8(1) of the Derivatives Trading Rules.

[39]                 Rule 8(4) of the Derivatives Trading Rules.

[40]                 Rule 9(1) of the Derivatives Trading Rules.

[41]                 Rule 1 of the Derivatives Trading Rules.

[42]                 An initial margin is the collateral collected upon the execution of an order to buy or sell a derivatives contract to cover potential changes in the value of each participant’s position over the appropriate close-out period in the event that the participant defaults. Rule 1 of the Derivatives Trading Rules.

[43]                 Rule 13 of the Derivatives Trading Rules.

[44]                 A leverage is the total outstanding position of a participant in derivatives in relation to its initial outlay. Rule 1 of the Derivatives Trading Rules.

[45]                 Rule 10 of the Derivatives Trading Rules.

[46]                 Rules 11 and 12 of the Derivatives Trading Rules.

[47]                 Sanctions, Derivatives Trading Rules.

[48]                 Rule 3 of the CCP Rules.

[49]                 Rule 4 of the CCP Rules.

[50]                 Rule 7 of the CCP Rules.

[51]                 Rules 8 and 9 of the CCP Rules.

[52]                 Rule 6 of the CCP Rules.

[53]                 A clearing member is an entity authorized by a CCP to perform clearing services either on its own account or on behalf of other dealing members or clients. Rule 1 of the CCP Rules.

[54]                 A default fund is a fund established and administered by a CCP to protect against exposure resulting from default of a clearing member.

[55]                 Rule 10 of the CCP Rules.

[56]                 Rule 15 of the CCP Rules.

[57]                 Rule 17 of the CCP Rules.

[58]                 Rules 18, 19 and 20 of the CCP Rules.

[59]                 Rule 21 of the CCP Rules.

[60]                 Id.

[61]                Rule 22 of the CCP Rules.

[62]                 Rule 32 of the CCP Rules.

[63]                Rule 33 of the CCP Rules.

Demystifying ship arrests in Nigeria

Africa Bulletin
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By Mr Emeka Akabogu, Principal Partner Akabogu & Associates

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

Introduction

A ship is not arrested in a police station nor by shackle-bearing marine police on the sea. Lawyers and courts must be involved via a series of specific procedures and conditions.

Claims involving ships can be resolved faster than many other commercial claims if both parties understand and abide by established practice and procedure. This advantage is due to a unique feature of maritime law, which – in applicable situations – permits claimants to obtain pre-judgment security through ship arrest. Ships are arrested by legal action in court instituted by lawyers familiar with the applicable procedures. The action must be instituted in the Federal High Court – not a state high court, national industrial court, customary court or Sharia court.

Arrest application

In order to arrest a ship, an action against it must be undertaken in rem in the judicial division where the ship is located.

An ex-parte motion disclosing a strong prima facie case for a ship’s arrest must be filed together with the originating process. An arrest application must be accompanied by:

  • exhibits supporting the claim;
  • an undertaking to indemnify the ship against wrongful arrest;
  • an undertaking to indemnify the admiralty marshal for the expenses of the arrest; and
  • an affidavit of urgency stating why the application must be heard expeditiously.

An arrest application will fail if the claim is not made against a relevant person. A ‘relevant person’ is defined in the Admiralty Jurisdiction Procedure Rules (AJPR) as essentially the person who is primarily liable on the claim, which must be a valid maritime claim as defined in the AJPR. If it transpires that an arrested ship is not owned by or otherwise has its interests locked in as required with the relevant person, the arrest should not happen. Where it does, the arrest will be wrongful, with the likelihood of liability in damages.

Warrant of arrest

Where a motion is heard and granted, a warrant of arrest will be issued. A warrant of arrest is usually served alongside a writ of summons and statement of claim by affixing sealed copies of the processes to a mast or some other conspicuous part of the ship. Copies of said processes must also be served on the appropriate officers of the Nigerian Ports Authority (eg, the harbour master, port manager and traffic manager).

All claims enforceable in rem can be brought by way of arrest, including:

  • claims for the possession, ownership and mortgage of a ship or its freight; and
  • maritime liens.

These enforceable claims may also include claims arising in connection with a ship where the person who would be liable for the claim in an action in personam is the owner or charterer of or in possession or in control of the ship when the cause of action arose (Section 2, Admiralty Jurisdiction Act and Order 7, Rule 1(1) of the Admiralty Jurisdiction Procedure Rule 2011).

Comment

Persons claiming against ships should be careful to comply with the detailed procedural requirements, otherwise valid claims may be compromised by the additional possibility of liability in damages. Ship interests equally need not go into panic mode on the arrest of the ship. A detailed review of the processes filed for compliance or non-compliance with arrest procedures should be the first step, possibly coupled with other extenuating measures.

Over 50 million pounds for clean energy projects across Africa

Africa Bulletin
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The UK has invested millions in clean technology across Africa, to support the continent’s growing energy needs.

Green energy supply in Africa is set for a major boost after the UK government announced winners of an investment package for the continent’s clean energy infrastructure at the African Investment Summit today.

Solar farms in Kenya, geothermal power stations in Ethiopia and clean energy storage across sub-Saharan Africa will receive funding and see leading UK scientists and financial experts working with their African counterparts to realise the continent’s huge potential for renewable energy.

With African energy demand set to rise by 60% by 2040, UK experts will help deliver green solutions for the continent’s growing energy needs, bringing clean energy to thousands of people and creating jobs and increased prosperity.

Business and Energy Secretary Andrea Leadsom said:

“Our world-leading scientists and financial experts will work hand in hand with African nations to support their quest for energy security, powering new industries and jobs across the continent with a diverse mix of energy sources while promoting economic growth.”

Speaking at the summit, Ms Leadsom emphasised the opportunity for many African countries to leapfrog coal power to cleaner forms of energy but stressed that more needed to be done to unlock investment.

A world-leader in reducing carbon emissions at home, today’s investment in global clean energy comes after the Prime Minister, Boris Johnson, announced the 1 billion pounds‘Ayrton Fund’ for British scientists last Autumn to help developing nations reduce reliance on fossil fuels and reduce their carbon emissions.

As part of the initiatives announced today (21st January 2020), the UK will support African countries with the technical skills and expertise they need in order to attract investment in renewable projects, getting innovative projects like wind and solar farms up and running. Close collaboration with African countries will be key as the UK gears up to host the UN climate talks (COP26) later this year.

UK funded projects in Africa include winners of the Energy Catalyst Competition, which has seen solar plants, energy storage batteries and hydro-power built in countries such as Botswana and Kenya; a 10 million pounds programme which matches UK based green finance experts with project developers from developing countries to facilitate investment in clean energy projects; and the Nigeria 2050 calculator, a modelling tool designed by UK scientists to support the Nigerian government’s sustainable development planning.

Kenya is also set to benefit from a 30 million pounds government investment in affordable energy-efficient housing which will see the construction of 10,000 low-carbon homes for rent and sale. This will support the creation of new jobs in Kenya’s green construction industry and help tackle climate change.

Over 50% of the UK’s energy production came from renewable sources last year, and with London’s expertise as the global hub for green finance, the UK is best placed to be Africa’s leading partner and help it harness its wealth of renewable sources as it moves away from coal power.

SOURCE UK Department for International Development

New Bank of Tanzania Regulations on Financial Consumer Protection

Africa Bulletin
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By Tenda Msinjili, Partner and Michaela Marandu, Partner, Clyde & Co LLP Tanzania Office

In this article, we provide an overview of the new Bank of Tanzania (Financial Consumer Protection) Regulations 2019 (the Regulations) which were published in Government Notice No. 884 on 22 November 2019.

In summary the Regulations:

  1. Introduce a variety of protections for consumers in terms of how financial service providers offer, market and deal with complaints related to the financial services that they offer to consumers; and
  2. Set out the powers that the Bank of Tanzania has in terms of enforcing non-compliance with the Regulations.

Key definitions under the Regulations

  • Financial education means imparting financial knowledge, skills and influencing financial behaviour of consumers to enable them to manage their personal financial matters and make informed decisions
  • Financial consumer protection means laws, institutions, practices and policies to safeguard consumer rights, enable consumers to make informed financial decisions and ensure fairness in the provision of products and services by financial service providers
  • Financial service provider means an institution licensed, regulated and supervised by the Bank of Tanzania
  • Senior management for the purpose of Regulation 6 includes the chief executive officer, head of function, any other senior officer reporting to the chief executive officer and any other person other than members of the Board of Directors who participates in making decisions that affect the whole or substantial part of the business of the financial service provider

Governance by Financial Service Providers

Regulation 4 provides for a general provision that every financial service provider shall have in place a structure of governance that will ensure the effective implementation of consumer protection in accordance with the provisions of the Regulations.

Furthermore, Regulation 5 imposes responsibilities on the board of directors of the financial service provider (to include the overseeing of the implementation of a compliant financial consumer protection policy, ensuring that senior management has adequate processes in place for providing information necessary for the monitoring of these initiatives and to employ or appoint staff with sufficient knowledge in this regard. Regulation 6 also sets out the responsibilities of the senior management which are similarly wide ranging and include monitoring the compliance of the financial service provider in all aspects of its operations and identifying any financial products offered by the financial service provider that are a particular risk from a consumer protection compliance perspective.

In addition, the Regulations place an obligation on a financial service provider to adopt policies that are consistent with its own size and risk profile, which simultaneously allows it to discharge its obligations under the Regulations. Attached to this at Regulation 7(2) is the requirement that the financial service provider put in place adequate information management systems for measuring, monitoring, controlling and reporting any consumer protection issues.

Regulation 8 requires that appropriate financial consumer protection policies are in place and that these policies would include:

  • the roles and responsibilities for consumer protection at all levels
  • compliance risk management practices for consumer protection that facilitates the identification, measurements, monitoring and control of risks
  • information sharing of consumer protection among functional units including complaint statistics, fraud reports and legal claims
  • disclosure in respect of accountability, transparency, complaint handling process and other redress channels
  • review of financial products or services to identify, monitor and control consumer protection risks
  • adequate control mechanisms to safeguard consumers’ assets against incidences of fraud, misappropriation and misuse
  • procedures that aim to protect consumers’ deposits and other assets against internal and external fraud or misuse regarding consumers’ accounts
  • periodic audit for control systems to ascertain consumer protections adequacy and effectiveness to guard against breaches
  • regular update systems to guide against possible security lapses and
  • periodic internal risk assessment to identify and assess data security risks on systems and appropriate control to restrict and monitor access to the database containing the consumers’ information

It is required that a financial service provider annually reviews its consumer protection policies and submits to the Bank of Tanzania the revised policies (indicating all changes) not later than thirty days after the Board of Directors approved the new policy. Regulation 9 also requires that every financial service provider reports consumer protection matters to the Bank of Tanzania in the form and at the time prescribed by the Bank of Tanzania.

Fair and Equitable Treatment of Consumers

Regulation 10 requires that financial service providers do not discriminate consumers. Regulation 11 sets out that every financial service provider or, importantly, its agent does not employ unfair business practices in dealing with its consumers. Regulation 11(2) defines what could be considered unfair business practices including abusive debt recovery practices (as defined within the Regulations), granting overdraft services and charging fees without prior opt-in by the consumer and any bundling or tying of its products.

Regulation 16(1) sets out that the financial service provider shall provide a consumer contract that clearly sets out the rights and obligations of all parties to the transaction. Whilst the Regulations do not require the contract between the financial service provider to be “fair”, Regulation 16(2) sets out when the contracts will be considered “unfair” and this is where there is a significant imbalance between the two parties’ rights and obligations. Regulation 16(2) then sets out a non-exhaustive list as to the type of provisions that would be considered “unfair” and these include limitation of liability of the financial service provider in the event of total or partial non-performance of contractual obligations, providing for termination without notice to the consumer or excluding or limiting the right of the consumer to pursue legal action.

There is also a requirement for financial service providers to have greater governance and control over its agents. Regulation 17 places the following two obligations on financial service providers in respect of agents requiring the financial service provider to (a) enter into a formal agency agreement; and (b) continuously monitor the performance of the agent.

Disclosure and Transparency

Regulation 23 requires that a financial service provider provides agreements to consumers that include certain key terms and conditions which includes:

(a) the rights and responsibilities of the consumer and financial service provider, including those conditions that may lead to termination

(b) all interest rates, costs, fees and charges

(c) notification to consumers of any changes to the agreement

(d) the penalties and other remedies in the event of breach

(e) the contact information for the financial service provider’s consumer service and for dispute resolution services

The Bank of Tanzania will, as per Regulation 25, issue guidelines in relation to any charges or fees imposed on products or services offered by financial service providers. Regulation 25(2) requires that any financial service provider takes note of these guidelines and does not impose any charges that exceed this amount. The Bank of Tanzania must also approve any charges intended to be imposed on any new financial products to be introduced by the financial service provider.

Financial service providers will also be required to provide a key facts statement for its products or services to the consumer through a convenient channel. The consumer will also have to sign the key facts statement and any financial service provider must retain this signed version.

Regulation 30 requires that a financial service provider shall notify a consumer in writing any changes to the following: (a) interest rates to be paid or charged; (b) any non-interest charge on any account of a consumer; and (c) any other key product features or previously agreed terms or conditions such as procedures for cancellation, prepayment of loans and transfers of loan servicing.

Protection of Consumers’ Assets and Information

Regulation 35 sets out that every financial service provider is liable for a consumers’ loss that occurs through fraud, misappropriation or misuse of a consumers’ assets that are held, administered or controlled by the financial service provider. The financial service provider will then also have to:

  • take disciplinary action against the employees involved in the fraud, misappropriation or misuse
  • promptly refund a consumer for the actual amount lost, unless it is proved that the consumer was negligent or fraudulent
  • require consumers to update their details within the timeline specified by the Bank of Tanzania
  • create a convenient avenue through which consumers can update their details
  • continuously create awareness as to fraudulent practices and the consumers’ responsibility to guard against threats
  • require consumers to update their records as and when the need arises to ensure data accuracy and enhance protection

Regulation 36 also requires that financial service providers ensure that appropriate security and control measures are put in place to protect consumers’ financial and personal information. Financial service providers cannot share consumers’ information with a third party except with the consumer’s consent or as is required by law.

Complaints Handling and Redress Mechanism

The Regulations give every consumer the right to file a complaint against a financial service provider. Regulations 43 and 44 then require that the financial service provider establishes a mechanism for receiving and processing consumer complaints and requires that the financial service provider provides information of this mechanism to the consumer.

Regulation 45 requires that every financial service provider develops a fair redress mechanism and compensation policy for an aggrieved consumer. The compensation policy must also be in line with the guidelines issued by the Bank of Tanzania and include details of compensation for erroneous debits, excess charges and financial loss to consumers due to staff negligence or fraudulent activities. Importantly Regulation 47 requires a financial service provider to avoid conflicts of interest when handling consumer complaints. The officer of the financial service provider shall not be involved in processing of the complaints if they are party to or have an interest in the complaint.

A consumer may also escalate its complaint to the Bank of Tanzania if the complainant has not received a response from the financial service provider (provided the time limit, which varies between six (6) hours to fourteen (14) days depending on the type of product that is the subject of the complaint, has expired) or if the complainant is dissatisfied with the decision provided that the complaint is escalated within 14 days of the complainant receiving the notification of the resolution from the financial service provider. Regulation 52 however sets out that in order for the Bank of Tanzania to intervene it must be satisfied that the financial service provider had handled the complaint to its finality and only if the complainant has suffered financial loss or material inconvenience. Regulation 53(1) dictates that a determination by the Bank of Tanzania shall be binding and conclusive on the parties, subject to the complainant or financial service provider having the option to judicially review the decision.

Enforcement and Sanctions

Regulation 60(1) provides that the Bank of Tanzania has a clear supervisory mandate in relation to the objective of financial consumer protection. This provides for powers to take pre-emptive measures to address non-compliance and Regulation 60(5) grants powers to the Bank of Tanzania to investigate any potential breaches of the Regulations through means including onsite examinations and complaint handling. The Bank of Tanzania can also impose a variety of penalties and sanctions on non-compliant financial service providers including a fine not exceeding TZS 20 million (approximately USD 8700) or a suspension of operations for a period not exceeding one year, amongst other severe penalties.

Whither is the Electric Power Sector in Nigeria Bound?

Africa Bulletin
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By Dr Ayodele Oni, Partner, Bloomfield Law 

Proem

One often hears the phrase, “motion without movement”. The term is typically used to depict a lot of activity without any real effect. As far as the electric power sector in Nigeria is concerned, there have been several stakeholder events, conferences and talk shows/ talk shops on moving the power sector forward. However, it appears that, apart from substantially privatizing the sector, not much progress has been made.

There have been emotions and energies, at times, dissipated on several programs which are either not well implemented or suspended mid-way into being implemented. At some point, there was a lot of talk and motion around the grid, but recently it has been mostly off-grid, solar and mini-grids.

The writer believes that (and research has confirmed this) no country can truly industrialize without sufficient, stable, efficient and high quality grid electric power supply and since energy insufficiency has been linked with poverty, we may be in for a long lasting battle with poverty in the country. Herein, lies the tragedy!

Even if most people try to emigrate, only a handful compared to the total population of poor people, can actually achieve this and where people do, they would still have relations who just can’t afford the cost of emigrating or do not have the wherewithal, to do so.

Also, considering that the rule of thumb is that, on the average 1mw of power should serve a thousand people, we may be quite far from economic prosperity and the toga of having the World’s highest number of extremely poor people. Mind the words, not the highest number of poor people, but the highest number of ‘extremely’ poor people!

The Blame Game and Plausible Considerations

So far, almost every stakeholder or participant in the sector, is or has in the past blamed the other for the lack of sufficient progress made in the electric power sector. The Transmission Company of Nigeria (the “TCN”) is being blamed by the electricity distribution companies (the “Discos”) for not being able to deliver the volume of power demanded daily by each Disco at the periods same is required. The Discos contend that the System Operator (a part of the TCN) misconstrues energy readings by miscalculating drops in electricity demand (load) from customers at night as load rejection. The Discos also contend that the TCN seeks to ‘dump’ load by delivering electricity to substations in network areas that Discos know are not commercially attractive, with the customers in such areas not willing to pay their electricity bills or indeed, for the electricity they consume.

On the flip side and not totally inaccurately, the TCN accuses many Discos of rejecting power load. Specifically, customers/ consumers, who severally complain about the lack of efficient power supply are a part of the problem as electricity theft is more prevalent than thought. From the writer’s experience, a lot of people steal electricity via various means.

Another part of the problem is that there is no synchronized power system planning between the Discos, (the Bulk Trader) and TCN such that there is a coordination in expenditure, load delivery and general power supply. Simply put, power system planning is the establishment of goals and objectives, by seeking to predict environmental and other factors within the electricity supply market, and then selecting actions that result in the accomplishment of these goals and objectives.

Good and coordinated power system planning makes it possible to supply electric power from the most economical sources and to operate generating stations elastically, allowing for optimization of the overall reliability of the electricity supply industry in Nigeria. System planning will allow for more load during the day in different areas, divided along the lines of commercial, residential and co-residential and commercial. It will help understand what optimal and cost-efficient investments can be made, despite the insufficiency of funds. Funds that will then be spent will be efficiently expended.

With good power system planning, the very minimal investments that can be done will then be given priority and same aligned to allow consumers feel the impact of the reforms undertaken in the electric power supply industry. Interestingly, very recently, the Nigerian Electricity Regulatory Commission (“NERC”) issued a set of guidelines around Integrated Power System Plans and we hope that same will be well utilized to generally improve the availability of electric power where and when same is needed.

The Nigerian Electricity Regulatory Commission and Disco Conundrum

NERC, exercising its power pursuant to Section 74 of the Electric Power Sector Reform Act (“EPSRA”) and the terms and conditions of electricity distribution licenses issued by it to the DisCos, issued a Notice of Intention to Cancel Electricity Distribution Licences, dated 8th of October 2019 to eight (8) Discos, for the breach of their respective distribution licenses and the 2016 – 2018 Minor Review of the Multi Year Tariff Order (“MYTO”) and Minimum Remittance Order for the Year 2019 (hereinafter called the “Order”).

It is pertinent to note that, before exercising its powers under the EPSRA, NERC is obliged to allow the licensee an opportunity to demonstrate, within sixty (60) days of said notice, that conditions have changed such that the proposed cancellation of license is no longer requisite. The EPSRA also empowers NERC to allow the license remain in force, instead of revoking it, subject to imposing further terms and conditions which shall form part of the license.

The Discos acknowledge (albeit do not admit complicity) that they are actually in breach of the MYTO and Order mentioned above but claim that this has been as a result of several reasons outside their control, including the failure of ministries, departments and agencies of the federal government of Nigeria. An easy way to have this reasonably resolved is to have the federal government of Nigeria make deductions from source (to the extent feasible under the Treasury Single Account Policy).

Furthermore, the lack of cost reflective tariffs has also been a good explanation by the Discos. The cost of distributing each unit of electricity, in the perspective of the Discos, is higher than the tariffs they have been forced to receive. Although tariffs have been adjusted upwards recently, the argument of the Discos is that this should have been done a few years back and the current tariff is outdated and would have only worked if same had been the case much earlier. In addition to this argument is the fact that the Discos believe that the remittance level set by NERC is unrealistic and cannot be sustained. They further claim that same is to ensure only the benefits of NERC without really taking into consideration NBET’s costs, those of fuel suppliers and the TCN. Some progress is now being made as regards the ongoing conversations.

The Bright Spot of Off-Grid

Currently, a lot is being done regarding the provision of support to off-grid and mini-grid electric power solutions with policies geared towards encouraging renewables. The challenges with grid extension alongside current government policy which encourages off-grid power supply make off-grid alternatives such as mini-grids homes systems which are yet to fully penetrate the rural market attractive. It is also the case that as a result of poor grid power supply, domestic and commercial consumers spend an estimated 40% of running costs on power supply. Research has shown that up to 64% of people living in rural areas, who spend 70 cents to 1 dollar per kWh on small generating sets for their electricity needs, are better served via off-grid means such as microgrids and solar homes systems at rates up to 60% of the cost of using small generating sets run on fossil fuels.

Many business owners list electricity supply challenges as their most significant impediment to doing business in Nigeria and research has further shown that nearly US$30 billion economic loss is suffered annually from poor power supply in Nigeria. Considering the reduced costs, interest of development finance institutions and several donor agencies, mini-grids appear to provide an alternative to the costly grid expansion projects and a relatively quick fix to the rural electrification challenge.

It must be said that the Rural Electrification Agency (“REA”) is not doing badly in this respect. Such projects can provide more cost-effective options to the grid and small generating sets and provide viable opportunities for investment and the development of the economy.

In addition to the case made above, rural consumers already spend so much on self-generation of electricity and can therefore pay for mini-grid and other cheaper off-grid options, provided that they can be shown that those are cheaper options for them. Based on research by GIZ of Germany, there are already 30 solar mini-grids with a total installed capacity of 1mw serving 6,000 customers. The Nigerian mini-grid market is estimated to have the potential of N2.8trillion (approx. $8 billion) in annual revenues. This is, indeed, a bright spot in the Nigerian Electricity Supply Industry. However, the writer is of the belief that off-grid power cannot replace substantial power supply from the grid, especially where industrialization is being considered.

The Conclusion- Where headed and Way Forward

Despite the challenges in the power sector in Nigeria, the mini-grid space is not doing badly. However, there have been accusations and counteraccusations which have been the lot of the Nigerian Electricity Supply Industry post-privatization. Nonetheless, it is germane to note that every participant in the sector, including consumers, are atfault in having the power sector remain in this state. From consumers who steal electricity, to the regulator not doing enough in ensuring substantial attractiveness of the sector, to the government not keeping some of its promises and the Discos, not showing enough discipline in the use of limited resources, we are all to blame.

To make progress and take us out of the doldrums, there is an urgent need for serious alignment, alliance and co-operation throughout the value chain with a view to ensuring that every constraint adversely affecting the adequate and efficient demand and supply of electricity becomes a thing of the past.

Partners for Prosperity: Ghana at the UK-Africa Investment Summit 2020 in London

Africa Bulletin
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For Ghana, the Summit will provide a platform to secure investment opportunities, more exports and jobs that will benefit both Ghanaian and British businesses.

His Excellency The President of the Republic of Ghana Nana Akufo-Addo will lead a ministerial delegation of several Cabinet Ministers and key officials at the UK-Africa Investment Summit in London on 20 January 2020.

The Summit, hosted by the UK Prime Minister, Rt Hon Boris Johnson MP, is a major milestone for the UK, and for our enduring partnership with Ghana. It brings, for the first time, UK and African leaders, businesses and entrepreneurs, alongside international finance institutions, to showcase new partnerships that create jobs and boost mutual prosperity.

The Summit will strengthen the UK-Ghana partnership that is building a secure and prosperous future for all our citizens. Through economic development, trade and investment we are increasing jobs, addressing security needs and meeting global challenges.

Ghana is driving discussions at the UK-Africa Investment Summit. President Akufo-Addo will address world leaders on the importance of securing sustainable finance for Africa’s infrastructure, discuss investment opportunities, and how we can mobilise future partnerships that meet the needs of modern African nations. In the margins of the Summit, President Akufo-Addo will hold talks with the Prime Minister and meet UK Government Cabinet Ministers, including the Foreign Secretary and the Development Secretary.

Leading the Way: The UK-Ghana Partnership

The UK-Ghana partnership will be at the centre of the Summit discussions on how we are building enduring economic ties. Through our government-to-government UK-Ghana Business Council (UK-GBC), a six-monthly ministerial dialogue co-chaired by Vice President His Excellency Alhaji Dr. Mahamudu Bawumia, we have harnessed the UK’s clear offer to achieve long-term prosperity in Ghana. Together, our governments have agreed on six priority sectors (agri-processing; financial services; textiles/garments; pharma; digital; and extractives); and we are working side-by-side on critical areas: infrastructure development, tax and the ease of doing business.

Together, we are making a real difference. Global finance, through The City of London is crowding in more investment; and supporting innovative finance opportunities such as the first London-listed ‘Cedi Bond’. UK firms are major investors in Ghana, bringing state-of-the-art technology and supporting thousands of skilled jobs for Ghanaians.

In the margins of the UK-Africa Investment Summit 2020, President Akufo-Addo will be the keynote speaker at the Ghana Investment Promotion Centre hosting the Ghana Investment & Opportunities Summit, a Government of Ghana event focused on the theme “Accessing the African Common Market through Ghana: Technology, Digitisation & Industrialisation”.

Speaking ahead of the Summit, the British High Commissioner to Ghana His Excellency Iain Walker said:

“Ghana is at the forefront of the UK’s trading relationship with African nations. The UK-Africa Investment Summit will create new mutually beneficial partnerships that move Ghana – and Africa – beyond aid, by attracting quality investment to drive growth and create jobs. As we look beyond the European Union, my priority is to create an even closer partnership between our countries and for the UK to be the investment partner of choice for years to come.”

SOURCE UK British High Commission Accra

Alok Sharma heralds green cities of the future on Kenya visit

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International Development Secretary pledges new UK aid to help build green cities across Africa with quality infrastructure.

The International Development Secretary today (Tuesday 14 January) pledged new UK aid support to build the African cities of the future, so the continent can continue to thrive and reach its economic potential.

Alok Sharma, on a visit to Kenya, announced he would set up a UK Centre for Cities and Infrastructure, which will turbo-charge investment in fast growing cities across the developing world.

The Centre will provide British expertise to African governments and city authorities to improve the way cities are planned, built and run, including making them more environmentally-friendly. It will focus on improvements to infrastructure, including water and energy networks.

During his trip, Mr Sharma also announced an expansion of the Department for International Development’s (DFID’s) Cities and Infrastructure for Growth programme to Ghana, Rwanda and Sierra Leone.

The programme helps UK businesses invest in quality, resilient infrastructure, boosts access to reliable and affordable power and creates construction jobs.

International Development Secretary, Alok Sharma said during his trip to Kenya:

“Our new UK aid support, announced ahead of the UK-Africa Investment Summit, will contribute to creating the African cities of the future, using British expertise to provide quality, green infrastructure across the continent.

“Infrastructure is the backbone of economic growth. It helps the poorest people access basic services such as clean water and electricity, creates jobs and boosts business.

“I’ve seen this first hand as I’ve travelled across Kenya and am proud to see British companies thriving here. This will benefit people and businesses across Africa, but also back at home in the UK, creating a successful future for all of us.”

Mr Sharma’s trip came ahead of the UK-Africa Investment Summit next Monday (20 January), which will create new lasting partnerships to deliver more investment, jobs and growth, benefitting both Africa and the UK.

African cities produce more than half of the continent’s income, but too many suffer from poor connectivity and congestion which continues to hinder growth.

The continent’s urban population is 472 million and set to double over the next 25 years. This growth provides an opportunity for African cities to prosper if the right infrastructure and jobs are available with UK support.

On Sunday, Mr Sharma visited Kisumu, in western Kenya, where British businesses such as drinks company Diageo and solar power provider Azuri Technologies operate.

Diageo makes beer in its modern, environmentally-friendly brewery in the city, using sorghum plants from nearby farms. This in turn boosts incomes of Kenyan farmers and helps them provide for their families.

Azuri, whose UK base is in Cambridge, provides pay-as-you-go solar energy systems to off-grid homes across Africa, including in the Kisumu area. This is helping families to store food in fridges and providing light for children to do their homework.

Yesterday, The International Development Secretary opened the Securities Exchange in Nairobi. He was there for the listing of East Africa’s first green bond, which DFID supported Acorn Housing to develop, by providing British expertise.

Later, Mr Sharma visited a climate-friendly student housing complex in Nairobi, which the bond is helping Acorn to build.

Yesterday evening, he met female entrepreneurs and tech start-ups in the Kenya capital, which are attracting international interest and investment.

At the event it was announced new UK company Circle Gas is investing 17m pounds to scale up clean cooking technology, which DFID helped to develop.

SOURCE UK Department for International Development

Kenya: Changes in Merger Control

Africa Bulletin
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By Lerisha Naidu, Partner and  Sphesihle Nxumalo, Associate, Competition and Antitrust Practice, Baker McKenzie Johannesburg

In November 2019, Kenya introduced The Competition Rules, 2019 (Rules) to govern the Competition Authority of Kenya’s (CAK) functions under the Competition Act No 12 of 2010. Some of the key changes in relation to merger control are set out below.

Merger thresholds

Notifiable mergers

A merger must now meet any of the following thresholds to be mandatorily notifiable to the CAK:

  • the undertakings have a minimum combined turnover or assets (whichever is higher) in Kenya of KES 1 billion and the turnover or assets (whichever is higher) in Kenya of the target undertaking is above KES 500 million
  • the turnover or assets (whichever is higher) in Kenya of the acquiring undertaking is above KES 10 billion and the merging parties are in the same market or can be vertically integrated (unless the transaction meets the COMESA Competition Commission (COMESA Commission) Merger Notification Thresholds
  • in the carbon-based mineral sector, if the value of the reserves, the rights and the associated assets to be held as a result of the merger exceed KES 10 billion
  • where the undertakings operate in the COMESA region, if the combined turnover or assets (whichever is higher) of the merging parties does not exceed KES 500 million and two-thirds or more of their turnover or assets (whichever is higher) is generated or located in Kenya

Excluded transactions requiring approval of the CAK

Mergers that meet any of the following thresholds may be considered for exclusion from notification, but an application for exclusion and approval of the application by the CAK is required prior to implementation of the transaction:

  • the combined turnover or assets (whichever is higher) in Kenya of the merging parties is between KES 500 million and KES 1 billion
  • if the firms are engaged in prospecting in the carbon-based mineral sector, irrespective of asset value

Excluded transactions not requiring approval of the CAK

Mergers that meet any of the following thresholds will be excluded from notification altogether:

  • the combined turnover or assets (whichever is higher) in Kenya of the merging parties does not exceed KES 500 million
  • the merger meets the COMESA Commission Merger Notification Thresholds and at least two-thirds of the turnover or assets (whichever is higher) is not generated or located in Kenya

Having said that, the CAK may require parties to an excluded transaction to notify such excluded transactions, even if it falls below the exclusion thresholds set out above, where it is likely that the transaction will substantially prevent or lessen competition, restrict trade or raise public interest concerns. In such situations, parties to the merger may seek an advisory opinion from the CAK on whether the transaction requires notification or not.

Merger Filing Fees

The merger filing fees have also been changed. The merger filing fees now payable for merger notifications in Kenya are reflected below:

MERGER FILING FEES
Threshold (Combined value of
assets/turnover)		 Fee
KES 0 – KES 500 million Nil
KES 500 million and one – KES 1 billion Nil
KES 1 billion and one – KES 10 billion KES 1 million
KES 10 billion and one – KES 50 billion KES 2 million
≥ KES 50 billion KES 4 million


Domestic Kenya Filing versus Regional COMESA filing

Historically, the CAK insisted on domestic merger filings even where a merger met the COMESA regional dimension thresholds and a merger filing had been submitted to the COMESA Commission. However, in terms of the Rules, where a merger meets the COMESA regional dimension merger thresholds, undertakings shall merely inform the CAK in writing that a transaction has been notified to the COMESA Commission within 14 days of filing the notification to the COMESA Commission.

Abandonment of a merger

In terms of the Rules, parties to a notified merger shall be deemed to have abandoned the merger if they fail to respond to the CAK’s request for additional information within 21 days from the date of request. Of course, parties may also formally withdraw a merger in writing to the CAK. The filing fee paid to the CAK would not be refunded in such a situation.

Mergers implemented without the CAK’s approval

The Rules set out the factors that the CAK will take into account in determining whether a merger has been implemented without the CAK’s authority. In particular, the CAK will consider whether:

  • there has been an actual integration of any aspect of the merging parties, including, but not limited to, the integration of infrastructure, information system, employees, corporate identity or marketing efforts
  • there has been placement of employees from the target undertaking to the acquiring undertaking
  • there has been an effort by the acquiring undertaking to influence or control any competitive aspect of the target undertaking’s business, such as setting prices, limiting discounts or restricting sales to certain customers or certain products
  • there has been an exchange of strategic information between the merging parties for purposes other than valuation, or on a need-to-know basis during due diligence, or in ways compromising the strategic independence of each of the parties

What remains to be seen is the manner in which these amendments will be interpreted and implemented in practice by the CAK.

 

 

 

How should Nigeria regulate its fintech industry?

Africa Bulletin
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Contributed by Aluko & Oyebode

Introduction

The financial services and products offered in Nigeria have changed significantly in recent years as a result of scientific and technological innovation and ever-evolving consumer behaviour and needs. In turn, this has resulted in a proliferation of new fintech companies.

‘Fintech’ generally refers to the various technologies and innovations used to provide financial services to consumers in competition with traditional banking services. The term also refers to companies that employ technology, software and algorithms to create innovative financial products that provide consumers with access to cheaper, faster and more efficient financial services. Such companies are essential if Nigeria is to achieve 100% financial inclusion, as they:

  • provide financial services to the unbanked part of society;
  • offer new and alternative products and services to consumers; and
  • offer new investment opportunities to entrepreneurs.

Due to the value of the fintech sector and the impact that fintech companies and products have had on society, financial services regulators worldwide have been left to determine how best to regulate this industry in a way that encourages innovation while protecting consumers, investors and the economy. Areas of concern include data protection, cybersecurity, cross-border transactions, principles of contract, exchange control, taxes, money laundering, fraud and terrorism financing.

Current regulatory framework

Like many other countries, Nigeria must decide how to regulate its growing fintech sector. The Nigerian regulators have reiterated their commitment to encouraging innovation and recognise that fintech could be a major driver of economic growth as well as job and wealth creation. As such, they have been cautious in their approach to regulation. For example, in response to the significant interest in cryptocurrencies in 2015 and 2016, the Nigerian Securities Exchange Commission and the Central Bank of Nigeria (CBN) issued public statements and circulars advising the public to take care when investing in cryptocurrencies and barring Nigerian financial institutions from engaging in cryptocurrency transactions. In addition, the Nigerian Securities and Exchange Commission has suggested that crowdfunding activities could be illegal.

The most popular fintech products and services in Nigeria are:

  • payment solutions;
  • online lending;
  • personal saving solutions;
  • mobile money and fund transfers; and
  • online betting.

There has also been significant interest in crowdfunding, blockchain, cryptocurrency and digital banking.

The CBN has issued various regulations that set out the licensing regime pursuant with which businesses offering the above products and services to clients must adhere. For example, in 2014 the CBN issued the International Money Transfer Services Guidelines to regulate indigenous and international money transfer service operators in Nigeria. Further, in 2018 it issued the Guidelines for the Licensing and Regulation of Payment Service Banks.

Nigeria’s regulatory framework can, at best, be described as ad hoc and is still dependent on regulations and legislation that were passed during the Third Industrial Revolution to regulate traditional financial services institutions and products. The principal laws that regulate the financial services and securities sectors, as well as the associated businesses and products, are the Banks and Other Financial Institutions Act 1990 and the Investment and Securities Act 1999, both of which were enacted before these technologies and products gained traction in Nigeria.

The challenge with Nigeria’s existing regulatory environment is that most of the existing laws, regulations and licensing regimes that apply to fintech companies and their products and services were initially designed for traditional financial services and are not fit for the purpose for which they are now sought to be used.(1) Thus, while the current laws offer some protection and regulatory guidance to consumers and market participants, they do not adequately cover legal issues that may arise from fintech products, such as crowdfunding, blockchain technology, cryptocurrencies and robo-advisers.

For instance, fintech companies in the payment service space must maintain a minimum capital requirement and implement infrastructure which, depending on the type of licence sought, can be significant and expensive.(2) As such, start-ups are often discouraged from the outset. In addition, to deliver their services and products, companies must apply for a variety of licences or partner with traditional financial institutions in order to deploy their products and services.

Possible approaches

There is a clear need for a dynamic approach and rethinking of the Nigerian legislative framework to regulate products and businesses of the Fourth Industrial Revolution. The CBN has decided to use the fintech sector to realise its commitment to improving and promoting financial inclusion and digital innovation in Nigeria. In collaboration with the Nigeran Interbank Settlement System (NIBSS), the CBN has announced that it will create a joint regulatory sandbox to facilitate the development of the sector through an innovative approach to regulation. The Financial Service Innovators Association of Nigeria (FSI) was recently created to facilitate the implementation of a regulatory sandbox.(3)

Regulatory sandboxes
Regulatory sandboxes have been adopted by several countries (eg, the United Kingdom, India, Australia, Canada and Denmark). The UK regulatory sandbox generally refers to a limited test ground or environment for new business models that are not protected by existing regulations or are seeking authorisation to operate within the United Kingdom.

Regulatory sandboxes enable participants to test products and services on a small scale in a controlled environment, reducing innovation costs and barriers to entry. They also allow regulators to collect important information about innovative products before deciding which regulatory action to take. Thus, Nigeria’s regulatory sandbox will facilitate the necessary dialogue between market participants and regulators to develop regulatory actions that strike the right balance between facilitating innovation and mitigating new risks.

If the regulatory sandbox is implemented properly, companies and entrepreneurs will have access to an environment in which to test their products and work with regulators to design the necessary regulations and consumer protections. This will help to create a much-needed balance in the Nigerian regulatory environment and provide the CBN with a better understanding of the fintech products to be introduced to the market.

Other regulators, such as the Nigerian Securities and Exchange Commission, are also taking steps to set up a regulatory sandbox that offers a safe space for start-ups and other businesses to test innovative products, services, business models and delivery mechanisms relating to capital markets in a live environment without having to immediately satisfy existing regulatory requirements.(4) The Nigerian Securities and Exchange Commission’s action will no doubt help fintech companies to design products that can be deployed in areas such as asset management and crowdfunding. The question is whether there is a need for multiple regulatory sandboxes or whether it would be advisable for the Nigerian Securities and Exchange Commission and the CBN to jointly establish and oversee a single sandbox.

SRO structure
Another approach that the regulators may consider is a self-regulatory organisation (SRO) structure. Although this concept might be of interest to fintech companies, it is unlikely that the Nigerian regulators will pursue it. An ‘SRO’ is a private organisation which can create and enforce standalone industry and professional regulations and standards. SROs often regulate part of a given market and often have a narrower focus than national regulators. Where an SRO approach is adopted to regulate fintech, there is a risk that the regulations may be lopsided and favour fintech companies more than their consumers and counterparties. Because these regulations will be formulated by key participants in the industry with a clear understanding of the various products and the associated risks, they will be better designed to formulate appropriate regulations that address issues such as cybersecurity, data protection and consumer protection.

The Nigerian regulators may wish to consider the SRO approach in conjunction with the regulatory sandbox. This would foster fintech innovation while creating a balance with respect to consumer protection.

Comment

Whatever the solution, it is clear that the present regulatory environment is not conducive and that the relevant regulators are taking necessary steps to address the concerns of the industry, consumers and business counterparties of fintech companies. The regulators have recognised that the current regulatory framework is inadequate and made a strong commitment to ensuring that these promising innovations can develop, potentially making Nigeria the fintech capital of sub-Saharan Africa.

For further information on this topic please contact Oludare Senbore, Ina Arome or Chioma Obuka at Aluko & Oyebode by telephone (+234 1 462 8360 71) or email ([email protected], [email protected] or [email protected]). The Aluko & Oyebode website can be accessed at www.aluko-oyebode.com.

Endnotes

(1) Further information is available here.

(2) The different types of fintech licence (and how they apply in Nigeria) are as follows:

  • Payment licences – these depend on the actual services provided (see list below). Licensees include payment service banks (PSBs), payment solution service providers (PSSPs) and payment terminal service providers (PTSPs).
  • Online lending licences – the exclusive legislative list in the Constitution 1999 (as amended) does not provide for online lending, which is distinct from banking. The CBN has also confirmed that an institution that disburses loans only to its customers and does not engage in deposit taking is not under the supervisory purview of the CBN. On the other hand, the concurrent legislative list provides for states to make laws with respect to the commercial development of the state which, although broad, is likely to cover consumer loans. Thus, a company seeking to engage in online lending can do so pursuant to a licence granted at the state level under the moneylending, cooperative society or pawnbroking laws of the various states. If the proposed activities are broad enough, the institution can also obtain a finance company licence pursuant to the Banks and Other Financial Institutions Act and other relevant regulations issued by the CBN. Permissible services for finance companies include the provision of consumer and business loans to individuals and micro, small and medium-sized enterprises, fund management, asset finance, project finance, local and international trade finance, debt factoring, debt securitisation, debt administration, financial consultancy and loan syndication.
  • Personal savings solution licences – issued to microfinance banks (MFBs) and deposit money banks (DMBs). Separate licensing could be avoided if the entity uses the services of existing banks.
  • Mobile money licences – issued to mobile money operators (MMOs).
  • Money transfer licences – issued to money transfer services operators (MTSOs).
  • Online betting licences – licences are issued by the National Lottery Regulatory Commission (NLRC) pursuant to the National Lottery Act, which vests in the NLRC nationwide jurisdiction with regard to the regulation of lotteries and related activities, including sports betting. The Lagos state government has, through the state Lotteries Law, established a separate licensing regime for lottery operators within the state. As part of its mandate, the Lagos State Lotteries Board is empowered to grant licences, set appropriate standards, monitor and inspect lottery operators and impose penalties thereon in Lagos state. In a bid to protest this dual licensing regime, the NLRC took Lagos state to court in 2005 (NLRC v Attorney General of Lagos State, Suit FHC/ABC/CS/07). The court was called on to determine which party had the power to license lottery businesses in Nigeria. In reaching its decision, the Federal High Court considered Item 62(a) of the Exclusive Legislative List of the Second Schedule to the Constitution (as amended) and held that national lotteries fall within the purview of ‘interstate trade and commerce’, over which the federal legislature has legislative competence. The court further stated that any grantee of a national licence can carry on trade between states without having to obtain additional approval or another licence from the relevant state government. The Lagos state government filed an appeal, but swiftly withdrew it. Nonetheless, several media publications have reported that lottery operators in Lagos state with NLRC permits have decried the alleged actions of Lagos state government officials who have claimed that they are illegal gaming centres as they do not possess a Lagos state lotteries licence.
  • Crowdfunding licences – unavailable. The Nigerian Securities and Exchange Commission has warned that reward or equity crowdfunding is in breach of the Investment and Securities Act.
  • Cryptocurrency licences – unavailable. The CBN has discouraged cryptocurrency business.

Types of financial service provider in Nigeria are as follows:

  • MFBs – smaller banks which provide microfinance services, such as savings, loans, domestic fund transfers and other financial services to micro, small and medium-sized enterprises.
  • DMBs – financial institutions which are licensed by the CBN to mobilise deposits from the surplus unit and channel the funds through loans to the deficit unit and perform other financial services activities.
  • PSBs – these provide financial services to the last mile by facilitating connectivity and payments through physical points or digital interfaces, including mobile or internet-enabled platforms. PSBs are permitted to accept deposits, carry out payment and remittance services, issue debt and pre-paid cards, operate electronic wallets and carry out retail payments and international transfers, among other things.
  • MMOs – service providers that develop and deploy financial services primarily through mobile phones and networks. Any non-bank institution providing infrastructure for mobile payment systems must be licensed by the CBN and obtain a unique short code from the NCC, as well as unique scheme codes from the NIBSS.
  • PSSPs – service providers that design and develop the underlying e-payment infrastructure for financial institutions in Nigeria.
  • PTSPs – these deploy, customise, support and maintain point-of-sale terminals on behalf of banks (acquirers).
  • Card schemes – payment networks that are linked to payment cards, such as debit or credit cards, which banks and other eligible financial institutions can join.
  • Super agents – agents that have been contracted by the principal and can subcontract other agents in a network while retaining overall responsibility for the agency relationship.
  • Switches – switching companies facilitate the electronic circulation of money and the exchange of value between individuals and organisations.
  • Third-party processors – companies that help to facilitate payments for small businesses.
  • MTSOs – no person or institution can provide international money transfer services unless they have been duly licensed by the CBN. Permissible activities include the acceptance of funds for the purpose of transmitting them to persons resident in Nigeria or another country and cross-border personal money transfer services.

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