Nigerian Central Bank Unveils Sandbox Operating Guidelines: Key Insights for Fintech Companies

Financial technology companies in Nigeria that do not have the financial capacity to go for any of the license categories recently introduced by the Central Bank of Nigeria can now heave some sighs of relief. This is because the central bank has finally released a framework for regulating sandbox operations in the country. Unlike other fintech categories, such as agency banking or mobile money that require thousands of dollars in application fees to obtain licenses, no such fees are required for the grant of the regulatory sandbox license. 

“The Sandbox encourages innovation that can improve the design and delivery of payment services and is therefore, also suitable for proposed products, services or solutions that are either not contemplated under the prevailing laws and regulations, or do not precisely align with existing regulation,” the new framework states.

“Innovative products or services previously rejected shall be considered for sandbox trials on a case by case basis. However, products and services that are outrightly unlawful under the laws of the Federal Republic of Nigeria shall not qualify for sandbox trials,” it adds.

Who Do The Rules Apply To?

Two categories of innovations are considered under the licensing regime.

• First are innovative payments product or service produced by companies (fintech) already licensed by the central bank as well as other local companies (technology or telecom). The license given under this group will enable them to test a new product or service outside the purview of the existing financial regulations already put in place by the CBN.
• Secondly, the rules will apply to companies proposing non-regulated financial products and services using emerging technologies, that is, innovators whose proposed solutions involve technologies which are currently not covered under any existing CBN regulations. This is where startups that have not been previously regulated by the Central Bank of Nigeria fall under.

Applications will be accepted on a yearly basis and the participating startups will be grouped into cohorts. Fintech solutions granted the license can choose, in any case, the duration of their operations in the sandbox, subject, of course, to the approval of the Central Bank of Nigeria. CBN has, to this effect, given a hint that the Regulatory Sandbox license can last for as long as 5 years. In any case, the testing period is subject to extension upon application by the fintech company. However, it should be noted that a regulatory sandbox license is not a permanent ticket to escape CBN’s regulatory eyes as upon completion and on exiting the sandbox, the successful entity is expected to meet relevant legal and regulatory requirements to still remain in business.

What Do The Rules State On Qualification For The License?

The rules state that to be considered qualified to obtain the license, the product or service of innovation must be so innovative as to improve accessibility, customer choices, efficiency, security and quality in the provision of financial services; or enhance the efficiency and effectiveness of Nigerian Financial Institutions management of risks; or address gaps in or open up new opportunities for financial benefits or investments in the Nigerian economy. It should be noted that this requirement is entirely subjective and will thus, depend on the whims and caprices of Nigeria’s central bank.

Once the above conditions have been established, the fintech solution must then proceed to show:

1. A business plan which will disclose that the product, service or solution can be successfully deployed after exit from the sandbox.
2. An assessment report to show the usefulness and functionality of the product, service or solution and the associated risks which should be devoid of adverse effect to existing structures and consumer experience.
3. Evidence (bank statement, etc.) that the fintech solution has resources and expertise to mitigate and control potential risks and losses arising from offering of the product, service or solution;
4. A statement that the fintech solution will provide the proposed project within a limited transaction (value and volume) for better risk management and mitigation. The limits shall not be exceeded during the testing period

In Summary, What Can A Holder Of A Regulatory Sandbox License Do And Not Do?

In summary, the sandbox regime will enable fintech startups to mostly “test” their products, and no more. Basically, the testing will include doing a range of activities done by established fintech companies, including dealing with customers, transacting with customers or even holding customers’ cash. However, since the license covers only testing, the extent to which the fintech startup may go with customer acquisition, transaction or holding of cash may be severely limited. Fintech startups relying on the sandbox license will also have to vigorously report on their operations, as failure to do so may lead to their disqualification from participating in the sandbox regime.

How To Apply For The License

Applications to the sandbox process would involve an invitation placed on the CBN website, and local newspaper advertisement. The details of the advert would include the minimum eligibility criteria to shortlist applicants who qualify to be absorbed into the sandbox. Receipt of application shall be acknowledged to applicants within 5 working days after submission.

Firms wishing to enter into the CBN’s Regulatory Sandbox shall apply to the CBN through the Regulatory Sandbox online application platform accessed via the CBN’s official email address — Sandbox@cbn.gov.ng .The application must be submitted with a cover letter signed by an authorised signatory of the entity and addressed to the Director, Payments System Management Department, Central Bank of Nigeria, Abuja.

The Bank will inform an applicant of its eligibility and approval to participate in the sandbox, 45 working days after the closure of the application window. A Letter of Approval (LoA) would be issued to the Innovator which would allow Sandbox participants to test their innovation upon entry into the sandbox.

Click here to find out more, including documents to submit and other procedures.

New license categories introduced by the CBN in December, 2020
1 Dollar=₦380 (official), December 11, 2020.

What Are The Implications Of Acquiring The Regulatory Sandbox License?

• On the surface, it looks like a regulatory sandbox license is the cheapest of all the licenses rolled out by the CBN, but it is not. The only cheap thing about it is that it has no official licensing application fees. Holders of this license would still have to heavily spend on meeting application requirements as well as on reporting and on meeting CBN’s other requirements while the testing lasts.
• A regulatory sandbox license is not a permanent license like other CBN licenses which can only be revoked once compliance is not made on extant laws. A holder of a Regulatory Sandbox license would still have to apply and obtain other CBN licenses (if then applicable) upon the expiration of the sandbox license.
• A regulatory sandbox license appears to be the final bait from the country’s central bank on fintech startups that are still dodging its regulatory fangs. Hence, with a Regulatory Sandbox license, the stage may be set for the full-flung regulation of Nigeria’s financial ecosystem by the CBN. Therefore, it is safe to say that the era of “unregulated fintechs” may be over in Nigeria.
• In essence, for technology companies building financial products or services not yet regulated by the CBN, this is the right path to toe towards appending some legitimacy or legality to their operations.
• Finally, this is probably the only rules from the CBN currently in place in Nigeria which has tried to encourage technology-enabled innovations within the financial services industry.