Legal Framework For Starting A Digital Bank In Nigeria

A digital bank is a technology platform that provides financial services similar to a bank. A digital bank operates as a full blown financial technology company that doesn’t require customers to visit its brick and mortar offices. Hence, a digital bank can also be regarded as a virtual bank that enables financial transactions through the use of technology. 

Although traditional brick and mortar banks also provide their services through the use of mobile technology and internet banking, what differentiates a digital bank from the traditional bank is that digital banks don’t serve their customers physically at their office. Digital banks are usually 100% virtual. Even though most digital banks have brick and mortar offices, those offices are usually required for the operation of staff who work on the backend of the technology. 

Some popular digital banks in Nigeria are Alat, Kuda Bank, Sparkle, VFD, Prospa and Mintyn. 

This article focuses on the legal framework for registering and operating a digital bank in Nigeria. We would explore the types of digital bank and what promoters need to be aware of while taking steps to establish a digital bank in Nigeria.  

Regulatory Framework For Registering A Digital Bank 

A digital bank can be registered either as a bank or other financial institution. The Central Bank of Nigeria through the Bank and Other Financial Institutions Act (BOFIA) gives periodic guidelines to institutions within its purview. 

Hence, the CBN regulates all institutions in Nigeria that provide banking or other financial services including Digital banks. It is therefore important in all cases to obtain a CBN license or approval in principle before operating a digital bank. The only exception to obtaining a license or approval in principle is in cases where the CBN regulatory sandbox is applicable. 

Besides the BOFIA, Digital banks are also bound by the Nigerian Deposit Insurance Corporation (NDIC) Act.  The Nigerian Deposit Insurance Corporation was established to ensure that all depositors funds are duly insured. Hence digital banks that accept deposits from customers are required to have an insurance plan with the NDIC. 

Who Can Establish A Digital Bank In Nigeria 

A digital bank can be established by new or existing institutions licensed to carry on the banking or financial services. However digital banks being banks that are designed to operate virtually are usually best operated either through a Microfinance bank, a payment service bank or by a licensed financial institution. 

How To Register A Digital Bank 

In order for us to operate a digital bank, the promoters must first take steps to register the bank with the Corporate Affairs commission after which it must apply for an Approval in Principle which is effective for six months and the final license. 

Below are details we usually request for when registering a digital bank on behalf of our clients. 

1. Two name options for the Digital Bank 
2. Name, address, phone number, email address, occupation, valid mean of ID and signature specimen of the proposed directors, secretary and shareholders. 
3. Shareholding structure of the proposed shareholders
4. Physical, email address and objects of the digital bank 
5. Resident permits of non-Nigerian directors and shareholders who are based in Nigeria
6. Any other information required 

Kindly note that the registration intricacies and costs would be dependent on the type of financial company to be registered. This is because each type of company that can operate as a digital bank has different share capital requirements.

Share Capital Requirement For Registration of Digital Banks

1. Microfinance Bank is often used as the most suitable vehicle for establishing Digital banks in Nigeria. This is because a microfinance bank license enables the bank’s customers to open accounts, make deposits and access sme loans. The share capital for a microfinance bank is between 100million to N5 Billion depending on the tier of microfinance bank. 
2. Payment Service Banks: The payment service Bank is a vehicle established by the CBN as means of providing financial services to the unbanked people especially in the rural areas of Nigeria. Hence, a company with a PSB license can operate a digital and agency banking. However, the majority of the bank’s customers must be from rural areas. The minimum share capital of a PSB is N5 Billion. 
3. Financial Technology Companies: Technology Companies that provide financial services are also required to be licensed. These companies once they obtain a finance license can provide a limited number of financial services. However some of these companies have partnered with other financial institutions in order to provide a variety of financial and banking services. Financial companies are required to have a minimum of N100 million share capital.