PROMOTING FINANCIAL INCLUSION: AN ANALYSIS OF THE CBN GUIDELINES ON PAYMENT SERVICE BANKS
BY EMMANUEL INYADA
This article was originally written in April 2019
In its effort to promote financial inclusion in Nigeria, the Central Bank of Nigeria (CBN) introduced the National Financial Inclusion Strategy (NFIS) on 23 October, 2012 which aimed at reducing the financial exclusion rate to 20% by the year 2020. The CBN in collaboration with stakeholders have introduced several initiatives like Microfinance Banking, Agent Banking, Tiered Know-Your-Customer requirements and Mobile Money Operation (MMO) in pursuit of this objective. This has seen the financial exclusion rate reduce to 36.8% in 2018 according to the 2018 Access to Financial Services (A2F) Survey by Enhancing Financial Innovation and Access (EFInA). The CBN, however, describes this improvement as below expectation.
In a bid to further its efforts at financial inclusion, the Central Bank of Nigeria, pursuant to its powers in the Central Bank of Nigeria Act 2007 and the Banks and Other Financial Institutions Act 1991 (as amended), on 5 October, 2018 introduced the Draft Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria (the “Guidelines”). According to the Guidelines, the key objective in setting up Payment Service Banks (PSBs) is to enhance financial inclusion in rural areas by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other entities through high-volume low-value transactions in a secured technology-driven environment.
The issuance of the Guidelines has been met with mixed reactions among stakeholders. With some sections expressing views that the goal of reaching 20% financial inclusion by 2020 is unworkable by virtue of the provisions in the Guidelines and some other reasons.
WHAT IS A PAYMENT SERVICE BANK?
Broadly, Payment Service Banks are a new category of banks with smaller scale operations. Leveraging mobile and digital services and technology, these new entities offer small savings accounts and allow payment and remittance services to various sections of the society including the labour workforce, low income households, small businesses and the unorganised sector. This will fulfil the needs of marginalised segments of the population for basic financial services which had been traditionally left out of mainstream banking services owing to criteria such as large deposit size, identification documents, lack of accessibility to branches and low levels of awareness. Thus, enhancing financial inclusion and stimulating economic activities at the grassroots.
It is important to note that PSBs are markedly different from traditional banks, these distinguishing features makes PSBS what they are. First, Payment Service Banks cannot grant loans and other credit facilities, they cannot issue credit cards (which is a form of unsecured personal loan). Also, in some jurisdictions, with respect to savings accounts there are certain restrictions. For example, in India customers can only open an account with a payment bank (PSBs are referred to as payment banks in India) with a deposit of only up to 1 lakh, which is also the maximum balance allowed. This appears not to be contained in the CBN Guidelines for Licensing and Regulation of Payment Service Banks. PSBs, however, can provide ATMs and also issue debit cards. It also appears that PSBs can maintain both current and savings accounts, thus, customers will be able to make use of their cheque books in performing transactions.
AN EXAMINATION OF THE LEGAL REGIME ON PAYMENT SERVICE BANKS IN NIGERIA
With the Central Bank of Nigeria as the principal regulator, the primary regulation in Nigeria for the operation of PSBs is the CBN Draft Guidelines on Licensing and Regulation of Payment Service Banks in Nigeria. It is divided into 13 parts or sections which are; Introduction; Objectives of Payment Service Banks; Structure of Payment Service Banks; Permissible and Non-Permissible Activities; Eligible Promoters; Licensing Requirements; Corporate Governance; Business Conduct (Fair Competition); Prudential Regulation of Payment Service Banks; Supervision; Know Your Customer (KYC) Requirement; Risk Management and Revocation of License. This regulation will be examined hereunder.
Section 1 of the Guidelines is the Introduction where the CBN reiterated its commitment to promoting a sound financial system in Nigeria and to the National Financial Inclusion Strategy by enhancing access to financial services for low income earners and unbanked segments of the society. Section 2 provides for the key objective which, as stated earlier, is to enhance financial inclusion in rural areas.
Structure of Payment Service Banks (PSBs)
Section 3 provides for the structure of PSBs which, first, will operate mostly in rural areas and unbanked locations across the country, and it shall not have less than 50% access point to rural areas and as defined by the CBN from time to time. PSBs are also at liberty to operate ATMs in some of these areas, operate through banking agents, use other channels including electronic platforms to reach out to its customers, establish coordinating centres to supervise the activities of the various access points and banking agents, be technology driven and conform to the best practices of data storage, security and integrity, and also to set up consumer help desks at its main office and coordinating centres to attend to consumer-related issues.
Permissible and Non-Permissible Activities
Section 4 provides for Permissible and Non-Permissible activities. The activities which are permissible for PSBs are the: maintaining of savings accounts and acceptance of deposit from individuals and small business, which shall be covered by the deposit insurance scheme (the deposits will be insured by the FDIC); carrying out of payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria; issuance of debit and prepaid cards; operation of electronic purse; investment in Federal Government and CBN securities. In sum, all the activities they are to carry out are to be contained in the Guidelines and prescribed by the CBN from time to time.
The non-permissible activities are that PSBs shall not: grant any form of loans, advances and guarantees; trade in the foreign exchange market except as it relates to the permissible activities as contained in the Guidelines and as maybe prescribed by the CBN; engage in insurance underwriting; undertake any other transaction which is not provided for by the CBN PSB guidelines, and PSBs shall not establish any subsidiary except as prescribed in the CBN Regulation on the Scope of Banking and Ancillary Matters, No 3, 2010. It further provides that the Payment Service Banks shall use the words “Payment Service Bank” in its name to differentiate it from other banks (so there can be for example “New Horizon Payment Service Bank Plc).
Section 5 provides for the eligible promoters which are listed to include; banking agents, telecommunication companies by the establishment of subsidiaries, retail chains (supermarkets), Mobile Money Operators (MMOs) (and it appears that for MMOs it is only possible through conversion). The CBN can also from time to time consider any other entity as promoters the above mentioned not being exhaustive.
Licensing Procedure of PSBs
With respect to licensing, section 6 provides that a formal application shall be submitted by promoters to the Governor of the Central Bank of Nigeria for the grant of Payment Service Bank license. This application, however, shall be preceded by a formal presentation of proposal to the CBN’s management.
There are two compulsory levels of licenses that are granted by the CBN for the operation of PSBs. First is the approval-in-principle (AIP) and then there is the final license which is granted not less than six months after obtaining the AIP.
Grant of AIP
For the grant of the AIP, the following must accompany the application for the grant of Payment Service Bank License:
i. a non-refundable fee of five hundred thousand naira in bank draft, payable to the Central Bank of Nigeria or such other amount as may be specified by the CBN from time to time;
ii. evidence of minimum capital deposit of 5 billion naira as prescribed in section 6.6, to be verified by the CBN;
iii. evidence of name reservation with the Corporate Affairs Commission (CAC);
iv. detailed business plan and feasibility report which shall, at a minimum, include the documents and requirements listed in section 6.1 (iv) (a)-(p);
v. For corporate investors, the promoters must submit the Certificate of Incorporation and CTCs of other Incorporation documents, board resolution supporting the company’s decision to invest in equity shares of the proposed PSB, names and addresses (business and residential) of owners, directors and their related companies (if any), audited financial statements and reports of the company and Tax Clearance Certificate for the immediate past 3 years;
vi. Draft copy of the company’s Memorandum and Articles of Association (MEMART) must also be submitted containing the proposed name of the bank, objects clause and subscribers to the MEMART, procedure for amendment, procedure for share transfer/disposal, appointment of directors at a minimum;
vii. A written undertaken by the promoters that the bank will be adequately capitalised for the volume and character of its business at all times, and that the CBN shall have power to supervise and regulate its operations;
viii. For regulated foreign institutional investors, an approval or a “no objection letter” from the regulatory authority in the country of domicile;
ix. Shareholders agreement providing for disposal and transfer of shares as well as authorisation, amendments, waivers, reimbursement of expenses;
x. Statement of intent to invest in the bank by each investor;
xi. Technical Services Agreement;
xii. Detailed Manuals and Policies, particularly: Manual of Operations; Asset and Liability Management Policy (ALM); Financial Management Policy; Anti-Money Laundering and Combating Financing of Terrorism (ALM/CFT) Policy; Enterprise-Wide Risk Management Framework; Code of Ethics and Business Conduct.
The CBN may require other information from time to time in addition to the above. Furthermore, after receipt of the application with complete and satisfactory documentation, the CBN will communicate its decision to the applicant within 90 days. Where the CBN is satisfied, it will then issue an AIP to the applicant.
Again, it must be noted that the proposed PSB shall not incorporate and register its name with the CAC until an AIP has been obtained from the CBN in writing, a copy of which must be presented to the CAC for registration. Thus, it is only after the AIP has been granted that the proposed PSB can proceed to the Corporate Affairs Commission for registration/incorporation in line with the provisions of the extant laws for company registration.
Grant of the Final License
For the grant of the Final License, the promoters of a proposed PSB shall, not less than six months after obtaining the Approval-in-Principle, submit an application to the CBN for the grant of a final license. The application shall be accompanied by the following:
i. Non-refundable licensing fee of two million naira in a bank draft payable to the Central Bank of Nigeria;
ii. Evidence of capital contribution made by each shareholder;
iii. CTC of the Certificate of Incorporation of the Payment Service Bank;
iv. CTC of MEMART;
v. CTC of Form CAC 1.1;
vi. Evidence of location of Head Office (rented or owned) for the take-off of business;
vii. Schedule of changes, if any, in the Board, Management and Shareholding after the grant of AIP;
viii. Evidence of ability to meet technical requirements and modern Infrastructural facilities such as office equipment, computers, telecommunications, to perform the bank’s operations and meet CBN and other regulatory requirements;
ix. Copies of letters of offer and acceptance of employment in respect of the management team;
x. Comprehensive plan on the commencement of the bank’s operations with milestones and timelines for roll-out of key payment channels; and
Board and staff training programme.
Also, as a requirement for the grant of final license the CBN shall conduct an inspection of the premises and facilities of the proposed PSB to amongst others; check the physical structure of the office building and infrastructure provided for take-off of the PSB, sight the original copies of the documents submitted in support of the application for license, meet with the board and management team whose CV’s had earlier been submitted to the CBN, verify the capital contributions of the promoters, and verify the integration of its infrastructure with the National Payments system.
Commencement of Operations
The Guidelines also provides for pre-commencement and post-commencement requirements after the grant of the Final License. The pre-commencement requirement is that the PSB shall, through a letter, inform the CBN of its readiness to commence operations and such information shall be accompanied by one copy each of the following; Shareholder’s Register, Share Certificate issued to each investor, Opening Statement of Affairs signed by directors and auditors, Enterprise Risk Management Framework (ERMF), Internal control policy, Minutes of pre-commencement board meeting, and Evidence of integration of their infrastructure with the National Payments System.
For the post-commencement requirements a PSB shall: comply with all guidelines and regulations issued by the CBN and other sector regulators; maintain adequate accounting system and keep records that capture information which reflect the financial condition of the bank; maintain an unimpaired minimum capital at all times; always comply with the requirements incidental to the authorization to perform banking operations as stipulated by the CBN.
The financial requirements are as follows: five billion naira minimum capital; five hundred thousand naira non-refundable application fee; two million naira non-refundable licensing fee. These requirements may be varied as the CBN considers necessary.
Furthermore, in compliance with the Bank’s and Other Financial Institutions Act (BOFIA), 2007, the investment of the Share Capital Deposit shall be subject to the availability of investment instruments and upon the grant of license or otherwise, the Bank shall return the sum deposited to the applicant, together with the investment income, if any, after deducting administrative expenses and tax on the income.
Section 7 of the Guidelines provides to the effect that the provisions of the CBN Code of Corporate Governance for Banks and Other Financial Institutions shall be applicable to PPSBs. It also provides that the provision of the Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions shall be applicable to PSBs.
Under section 7.3, it further stipulates that where a PSB is a related company to an existing Infrastructure provider which provides services to other financial institutions, the PSB shall ensure that its dealings with the infrastructure provider are at arms-length.
PSBs and Parent Companies (fair competition)
In a bid to enhance fair competition, section 8 provides for conditions, where applicable, to guide business conduct between PSBs and their parent companies.
First, it provides that parent companies of a PSB which render services to its PSB shall be open to render similar services to other PSBs that so desire at the same terms and conditions. It also prohibits parent companies of PSBs from offering any preferential treatment, which negate fair competition, to its subsidiary.
It further goes out to list what preferential treatment by a Parent company to subsidiary PSB entail, which, among others, include:
Precluding its subsidiary competitor from using its infrastructure or services.
Offering lower quality of service to its subsidiary’s competitors.
Offering such infrastructure or services at differential pricing.
Precluding any specific infrastructure or service as may be prescribed by the CBN from time to time.
The license of the PSB may be revoked if a Parent company refuses to abide by the above fair competition provisions.
Under section 9 the guidelines restates the minimum paid-up capital of PSBs to be 5 billion naira. It also provides that PSBs will maintain statutory reserves as applicable to DMBs and in line with section 16 of BOFIA or as may be prescribed by the CBN from time to time. Also, the CBN may require a PSB to maintain additional capital as appropriate in respect of specific risks faced by the bank.
It further requires PSBs not to declare or pay dividend on its shares until it has: completely written-off all its preliminary and pre-operational expenses; made adequate provisions to the satisfaction of the CBN for actual and contingent losses; satisfied the minimum capital adequacy ratio requirement; met all matured obligations; obtained the approval of the CBN in respect there of; comply with all relevant CBN regulations on dividend payments.
With respect to the capital adequacy ratio (CAR), the CAR of a PSB shall be measured as a percentage of the shareholders’ fund unimpaired by losses to its risk weighted assets. For PSBs, the minimum CAR (Capital/Risk Weighted Assets Ratio) for PSBs shall be 10 percent or as may be prescribed by the CBN from time to time.
It is important to note that unlike in India where restrictions are placed on the maximum deposit that can be contained in a customer’s account, the Nigerian guidelines on Payment Service Banks does not place such restriction all that is required of the PSBs is that they comply with the provisions of the Money Laundering Act, Terrorism Prevention Act and other laws and regulations, and also that they report suspicious transactions.
Investment of Deposit Liabilities
Section 9.4 goes further to provide that PSBs further makes provision for investment of deposit liabilities where it is mandatory that PSBs maintain not less than 75% of their deposit liabilities in Treasury Bills (TBs) and other short term federal government debt instrument at any point in time. PSBs are also granted the privilege to make their investment from the CBN window. Also, all funds in excess of the PSBs operational float should be placed with any DMB.
The guidelines further goes on to make provisions for: the participation of PSBs in payment and settlement system and PSBs access to the inter-bank and CBN collaterised repo window for its temporary liquidity management; cash reserve requirement which shall be prescribed by the CBN from time to time; limit of investment in fixed assets which is as applicable to DMBs. It also provides that requirement for reevaluation in fixed assets shall be in line with Prudential Guidelines for DMBs or as may be prescribed by the CBN from time to time.
Supervision of PSBs
Section 10 expressly provides that PSBs shall be supervised by the CBN. It also stipulates that where a PSB is a subsidiary or associate of a legal entity, the entity shall be required to comply with all extant CBN Guidelines and circulars. Also PSBs shall be required to render returns to the Banking Supervision Department in a format and frequency as may be prescribed by the CBN from time to time.
Know Your Customer (KYC) Requirements
The guidelines in section 11 requires PSBs to comply with the provisions of the Money Laundering Act, 2011 (as amended), Terrorism Prevention Act, 2011 (as amended), CBN AML/CFT Regulations for Banks and Other Financial Institutions, 2013, other extant laws and regulations on KYC issued by CBN. Thus, PSBs are required to monitor and report suspicious transactions, monitor thresholds through efficient AML/CFT software solutions, and also designate and dedicate officers to monitor compliance.
Section 12 contains provisions on risk management where the guidelines repeated that PSBs are not permitted to grant any form of loans and advances, and as such the provision of credit risk management for DMBs shall not apply. However, provisions on capital measurement approach for credit risk, market, operational, liquidity, strategic and reputational risks, and provisions relating to internal controls, audit and compliance for DMBs shall be applicable to PSBs with adequate enhancements to take care of the information system related aspects and operations through agents.
Revocation of License
Finally under the guidelines, Section 13 provides to the effect that the revocation of license of a PSB shall be in line with to the provision of Banks and Other Financial Institutions Act, 1991 (as amended) or through voluntary liquidation subject to the approval of the CBN.
CHALLENGES WITH THE GUIDELINES AND RECOMMENDATIONS
The issuing of the Guidelines for the Licensing and Regulation of Payment Service Banks has great prospects. As at the time of writing this article, it is reported that about 30 institutions have applied for the approval-in-principle on track to be fully licensed as a Payment Service Bank. The innovation and use of payment service banks has been proven to improve financial inclusion. In India for example after the issuance of the issuance of their own Guidelines for the Licensing of Payment Banks PSBs are known in India) on 27 November, 2014, about 41 organisations applied for the approval-in-principle. Today, there are seven active payment banks that have been granted the final license in India which have contributed in driving financial inclusion with 78% of adults now having a bank account in 2017 compared to 54% in 2014.
With the possibilities and opportunities inherent in the establishment of Payment Service Banks, reservations, however, have been expressed by several stakeholders. Moreover, there are challenge with the legal framework for PSBs in Nigeria, as to certain insufficiencies and limitations, casting doubt as to whether it will contribute progressively to the improvement of the much desired financial inclusion. Some of these will be identified.
The Capital and Profitability Problem
One challenge that has been identified with respect to the operation of Payment Service Banks is with respect to the capital and how they intend to make profits given that they are to pay out to shareholders 95% of their profits and also to invest 75% of their capital only in government backed low-risk securities. This, according to some stakeholders, will affect the possibility of expansion given that the capital in hand are employed to major outflows leaving very little in capitalism gains to effect such expensive activities.
Also, setting up a PSB has also been said to be very expensive. The CBN Guidelines for the Licensing and Regulation of Payment Service Banks 2018 provides for a mandatory paid-up capital of 5 billion naira, it also requires the setting up of physical and technical structures, ATMs, the hiring of agents etc. Sceptics have expressed strong doubts as to whether this will make for a profitable venture given some other restrictions that has been placed on PSBs with respect to participation in lending and insurance business.
Non-Participation in Lending and Insurance Business
Another challenge with the guidelines on the operation of PSBs is that it restricts PSBs from issuing any form of credit facility and also from offering insurance packages. This is counterintuitive, especially in achieving the goal of financial inclusion. Financial inclusion is not just about opening and operating a bank account. It is about having access to a full range of financial services- including lending and insurance. There also appears no good reason why this restriction should be in place. In India, for example, though Payment Banks are restricted from lending activities they, however, engage in insurance business.
Allowing PSBs to engage in lending and insurance services especially since it is meant to operate in rural areas will have positive impact on the overall Nigerian economy. Nigeria’s rural population who are largely engaged in agricultural activities will benefit greatly in the advancement and greater profitability for agriculture. They will be able to get access to credit facilities in purchasing necessary farming implements to improve their productivity and yield. Again access to insurance services like farm insurance will enable them insure against unavoidable and unpremeditated circumstances that may occur, thus, cutting down losses.
The fundamental objective and inspiration for the establishment of PSBs is hinged on the goal to achieve financial inclusion. Regulation is a tool with which governments and agencies establish order and control in a particular endeavour. And whether or not progress is achieved depends on the attitude of the regulator.
In calculation of a comprehensive Financial Inclusion index four critical dimensions must be looked at:
In the Nigerian context, the establishment of Payment Service Banks does check the above four criteria. It appears that the current PSB framework does not fully support the financial inclusion agenda though it proclaims to do so on paper. Financial inclusion is not just about opening bank accounts. Individuals should be able to access credit facilities especially those villages and other remote areas where existing DMBs and MFBs would not readily have branches.
There also appears to be a case of over-regulation in which case every aspect of the regulation of PSBs and the kind of service and products they offer are controlled. This kills innovation especially in an era where technology is fast affecting human activities and when flexibility is needed for adaptation to be possible.
Thus, in regulating the operation of Payment Service Banks especially with the goal of achieving financial inclusion, the following recommendations are made to the CBN with respect to formulating its policies:
Reduce regulatory restrictions so as to allow for innovation.
Segmentation of banking operations into MfBN, MMO’s will not aid financial inclusion through separate licensing alone. Create a one size fits all license for operations. A single entity should be able to do all these.
The government should allow regulatory sandboxes to encourage innovation. This is in line with the financial inclusion goal and serves to entrench and achieve the financial inclusion goal.
PSBs should be able to issue small and micro credits just like microfinance banks given they are most likely to have a wider reach than most MfBNs
PSBs should be able to offer insurance services.
Allow investments but create excess reserves for PSBs like traditional banks.
In this short article, the concept of Payment Service Banks was looked at through the lenses of the Central Bank of Nigeria Guidelines for Licensing and Regulation of Payment Service Banks, challenges with the Guidelines we’re highlighted and recommendations were made.
The emergence of Payment Service Banks is a necessary innovation, especially in developing countries where the rate of financial inclusion is low. This will not only ensure that otherwise unbanked individuals are now banked, it will also facilitate the introduction of essential financial services to them.
However, regulators must bear in mind that innovation is an essential factor for progress and a necessity in achieving worthwhile objectives. They must ensure that in a need to achieve control and prevent abuse in the market place, they do not regulate out of proportion such as to hamstring development. Payment Service Banks should thus be monitored effectively but not stifled in the grand scheme of achieving financial inclusion.
Emmanuel Inyada is a Deals Lawyer in the broad aspects of commercial and corporate law. He advises on deals in the venture capital, private equity investments and finance space, and is also a consultant in sector focused areas like energy (oil and gas/power), banking, intellectual property, entertainment and technology. He is a Co-founder of Law Axis 360° and the initiator of Finance “Yoga”.
You can reach him via email at email@example.com.