Fintechs, financial inclusion and regulatory challenges

The meteoric expansion of Nigeria’s financial services industry and the evolving nature of modern banking in the last ten years due to the rapid advancement of technology has led to unexpected regulatory and legal challenges. The fusion of traditional banking with fintechs offers many growth opportunities for the sector and enhances financial inclusion in a scale unimagined a generation ago. Even as a retired banker, I am amazed to see traditional banking being gradually replaced by digital platforms, with electronic payments, mobile banking and online transactions gaining prominence. Today, a bank is more likely to close a branch than open a new one due to massive deployment of technology, a radical departure from the trend at the turn of this century when I joined the industry.

The rapid growth of technology and the consequential shifts in the banking landscape has also led to financial inclusion and improved earnings in the banking industry. For some banks, digital products and services are at the core of their future growth strategy. At the annual general meeting of Access Holdings Plc, the parent company of Access Bank, late May, the Group CEO, Herbert Wigwe, announced that the company’s growth ambitions in the next five years would be supported by seven key enablers, one of which is Digital and Technology. The bank hopes to transform its operating model to deepen digital penetration, according to Roosevelt Ogbonna, its managing director, in his report to shareholders.

Other institutions are placing equally high emphasis on digital banking and technology as growth drivers. While traditional banking methods are still relevant, they have been significantly influenced by the rise of digital products and services. Mobile banking apps, online payment systems and contactless transactions have become the new normal, transforming our interactions with financial institutions.

As we all know, every innovation brings a new set of challenges that must be addressed. The adaptation of modern banking practices has given rise to numerous legal issues in Nigeria. These challenges include privacy concerns, data protection, cybersecurity and fraudulent transactions. For instance, in the three months ending September 2022, total amount of money lost to fraudulent activities in Nigeria surged by 207.9%, according a report published by FITC.

These challenges must be addressed systematically by the judiciary and the monetary authorities. Another aspect of the digital revolution in the financial services industry is the emergence of Payment Services Bank (PSB) and other digital payment services. PSBs are licensed financial institutions providing banking services to the unbanked and underbanked populations through digital technological devices. They operate with lower capital requirements compared to traditional banks, thus making them available to those who are financially excluded.

As the CJN noted, the emergence of PSBs ‘’necessitates a delicate balance between fostering innovation and ensuring consumer protection. Judicial officers must strike this balance by interpreting and applying the law to encourage financial inclusion while safeguarding consumer interests,” said the Chief Justice of Nigeria, Justice Olukayode Ariwoola at a workshop organized by the CBN. These innovative services have done a lot to bring banking services to the masses, foster financial inclusion and drive economic growth. At the same time, they present regulatory challenges to the authorities. Just as example, the volume of Nigeria’s electronic payment transaction jumped by 298% to N135.52 trillion year-on-year (YOY) in the first quarter of 2023 as cash crunch pushed more Nigerians onto online transactions.

Striking the right balance between promoting innovation and safeguarding financial stability requires carefully calibrating the legal framework, and this is the main reason the Central Bank of Nigeria has, for many years now, been working with the judiciary to train judicial officers on banking and financial services issues. This year, the CBN focused on the emerging landscape of the nation’s financial services. In collaboration with the National Judicial Institute (NJI), the CBN organized a capacity-building workshop to brush up our justices and judges on the new face of banking and the problems associated with it. It was held on May 24 in Abuja. CBN Governor, Godwin Emefiele, said the workshop was necessitated by the need to keep our justices ‘’abreast of current trends in the banking and financial services sectors and important developments on economic matters’’. The subthemes for this year also covered a wide range of issues like the mandates and operations of the CBN; malpractices in Nigeria’s foreign exchange market; payment systems Vision 2025 as well as the Bank Verification Number Framework and its impact on electronic fraud. The Chief Justice of Nigeria, Justice Olukayode Ariwoola (who is also the Chairman of NJI) and Justice Salisu Abdullahi, the Administrator of NJI, presented papers.

Justice Abdullahi argued that blockchain technology, which has over the years, emerged as a transformative force in banking and across various industries, is also of great interest to the monetary and judiciary authorities. The potential of blockchain to enhance transparency, security and efficiency in financial transactions is growing rapidly. But with the rapid growth of blockchain, legal and regulatory frameworks must adapt to accommodate the unique characteristics of blockchain. It is therefore critical for our judicial officers to understand the legal implications of smart contracts, digital assets and decentralised finance.

It is important for the judiciary officers to be continuously trained on all facets of our economy and the financial sector. An efficient judicial system helps to strengthen confidence in our economy, which is an important factor in attracting both domestic and foreign investments. Such investments help to reduce pressures on our foreign reserves, enhance monetary and price stability and reduce exchange rate volatility. Investors are more willing to invest in jurisdictions where the rule of law takes prominence in shaping business and investment decisions. The judiciary also ensures that all parties adhere to legal and ethical standards, and individuals and businesses can seek relief through the law courts on violations of agreements. Investors can also be sure that disputes would be treated swiftly and fairly in accordance with the law.

With regular trainings, our judges and justices will better understand the issues affecting the financial sector and this will greatly help in the resolution and adjudication of related matters. Judicial officers will also learn a lot in such areas as legal instruments governing digital financial challenges and the judiciary’s role in ensuring compliance and safeguarding the interests of all stakeholders.