The pace of innovation in Nigeria’s fintech space in the past few years has been swift. From traditional banking institutions a few decades ago, the financial sector now has technology players.
Most of the innovation in the sector has happened without the input of the government. It has led to the creation of forward-looking companies like Paystack, Flutterwave, Remita and so on.
While these companies have become fintech giants , regulations guiding their activities continue to evolve. It is an interesting balancing act for regulators who are trying to combine the rigidity of regulating traditional financial services with the flexibility needed for new innovation to thrive.
It is this attempt at some measure of flexibility that has led to the Central Bank’s new draft regulations for sandbox operations in Nigeria (PDF). The Central Bank has stayed around conversations in the last few years about creating a sandbox: a controlled testing environment where innovators can test their ideas and business models.
How the sandbox could work
At present, there are a lot of regulations around the payments and remittances space. Some of these include PSB Guidelines, the Guidelines on Operations of Electronic Payment Channels in Nigeria and the Guidelines on International Money Transfer Services in Nigeria (IMTS) Guidelines.
There are also separate regulations for wealthtech, personal finance and crowdfunding. It means that to test a new product, innovators would have meetings with banks, fintechs or pilots. This could take months as navigating numerous regulations are tough.
This is why a sandbox is important. It will allow them to test their products, services or business in a live environment without needing to satisfy all the regulatory requirements. Registered members of the sandbox will leverage the APIs to build a solution within the sandbox environment and test it. It is only after this they can begin to worry about navigating regulations.
FSI lead the way
In 2019, the Financial Services Innovators (FSI), a community of Fintech enthusiasts launched the Nigerian Industry Innovation Sandbox. The effort was backed by over ₦250 million ($644,000) in multi-year grants and set the goal of lowering the barriers to innovation in the financial services ecosystem.
Although the FSI was ideated by the CBN and NIBSS, the apex bank is taking a more hands-on approach to controlling financial innovation with the new sandbox regulations. It is a nod once again to its regulatory paradox of trying to be rigid and flexible at the same time.
According to the CBN’s draft: “the framework details the requirements for conducts of live tests on innovative products, services and solutions in a controlled environment.” It also states that the process is open to existing CBN licensees as well as other local players.
Eligibility for the sandbox also appears straightforward. In addition to company registration details, applicants will detail their strategy for the sandbox trials.
One of the more positive aspects of CBN’s draft is its focus on risk management which is especially important to prevent bad actors from taking advantage of the public. Section 1.5.2 of the draft states that the bank will prioritise “preserving sound financial and business practices consistent with monetary and financial stability.
Despite this positive note, there are aspects of the draft which will be worrying to players and prospective innovators in the fintech space.
Section 3.3 of the draft regulation says that: “upon the completion of the sandbox test, the Bank will decide whether to allow the product, service or solution to be introduced into the market.”
It goes further to add that: “the bank may also prohibit the deployment of the product, service or solution in the market upon the completion of testing due to the following reasons.”
It means that fintech innovators, who could pilot some products without the approval of the CBN may need to when the draft regulations are passed. It could slow down innovation within the space.
It is also important to note that the CBN only plans to take one cohort per year, creating what may be a slow process in an industry that is moving fast.