Mass adoption of digital services in Nigeria is consistent with the growth of the local fintech industry. However, the immense potential of this segment cannot be fully revealed without overcoming a number of the regulatory and financial challenges.

Fintech startups have sprung up across Nigeria in recent years due to the low penetration of traditional banking services, an explosion in smartphone ownership, especially among the local youth, and an increasing number of cashless transactions. Although the financial industry as a whole constitutes a small part of the national GDP in Nigeria, fintech growth is the ultimate reason this share has started to grow in recent years.?

Moreover, the fintech market in Nigeria is growing notably faster than in other African countries, with the number of fintech companies surging by 50% over 2021-2022. A recent Disrupt Africa report “Finnovating for Africa” found that Nigeria has the largest concentration of fintechs on the continent, occupying the majority of the market share (32%) with 217 startups in 2022. In Q2 2023, Nigeria was the most active fintech country on the continent, with 25 deals, a 42% share of the total industry investment activity in Africa.?

At the same time, a recent report produced by Regtech Africa, highlighted not only the opportunities but also numerous challenges that exist in the Nigerian fintech market.?

Funding Shrinkage

Following the global investment decline trend, fintech funding activity has notably recoiled in Nigeria. During the first half of 2023, Nigerian fintech startups secured only $170 million in funding, while in 2022, Nigeria’s payment service provider Flutterwave alone raised $250 million in Series D funding round.?

If we analyse funding data between 2019 and H1 2023, Nigeria has been the biggest recipient of fintech funding across Africa. During that period, the West African country secured nearly half of all fintech investment in the region. However, when one considers only the H1 2023 data, Nigeria drops to fourth place in the pan-African fintech investment ranking.?

Emerging fintech projects heavily depend on the consistent funding inflow to grow and expand. The need for fresh investment is especially vivid at the time when the sector is maturing and becoming more diversified. While only a few years earlier Nigerian fintech startups focused mainly on basic payments, today other verticals are emerging.?

As local consumer spending is steadily growing, the need for supplementary financial services such as investing, savings, long-term loans, and more is pressing. Besides, Nigerians display an extraordinary interest in cryptocurrencies, calling for the rise in respective services.?

At the same time, all the efforts of local fintechs to increase the versatility of their services and expand to remote regions where financial inclusion is still low are stifled due to the cautious global investment strategies.?

Lack of Regulatory Clarity

While the country is experiencing some political and regulatory changes, the fintech sector is still lacking explicit guidelines and regulations covering all scope of their activities. For instance, there is currently no legal framework governing new business models and technologies such as blockchain and cryptocurrencies. Uncertain circumstances make the operational landscape risky and obscure both for fintech companies and their customers.

The Central Bank of Nigeria (CBN) had initially taken a cautious approach to cryptocurrencies. In February 2021, the regulator issued a circular directing banks to close accounts of all entities involved in cryptocurrency transactions.?

However, in a fresh circular sent to banks on Dec. 22, 2023, the CBN admitted that the stringent restrictions imposed on Nigerian financial institutions in 2021 don’t meet the increasing global demand and adoption of crypto. Moreover, the Central Bank of Nigeria went further and approved the Africa Stablecoin Consortium (ASC) to pilot cNGN (a stablecoin pegged to the value of Nigerian Naira) in its innovative Regulatory Sandbox. This bold move signifies a growing level of embracing financial innovations and crypto services.?

Although the regulator lifted the ban and allowed local banks to engage with digital currency operators, the local regulator recognises the need for clear guidelines, strict KYC and AML policies, as well as other well-defined standards and requirements for establishing banking relationships with virtual asset service providers (VASPs) in Nigeria.?

CBN emphasises that financial institutions interacting with licensed VASPs must maintain robust risk management policies and refrain from holding, trading or conducting transactions in cryptocurrency using their own accounts. However, creating a solid policy without a certain legal foundation is challenging.?

Besides crypto issues, the overall regulatory landscape of Nigeria has multiple regulatory bodies overseeing different aspects of the financial sector. This fragmentation leads to challenges in creating a cohesive and comprehensive regulatory framework for fintech in general and boosting consumer protection, data privacy, and security.

Poor Network Quality

On one hand, Nigeria has been experiencing significant growth in the mobile banking sector, driven by the increasing adoption of smartphones and a growing tech-savvy population.?

The internet penetration rate in Nigeria reached 55.4% in 2022, giving consumers a chance to engage with brands and other entities digitally. The share of the country’s internet users is expected to grow to 60% by 2026.

The population share with mobile internet access in Nigeria has also grown from 27.27% in 2019 to almost 40% in 2023. It is forecast to continuously increase between 2024 and 2028 by a total of 9.8 percentage points.

With the increasing affordability of smartphones and a growing cohort of confident internet users, more Nigerians have gained access to smart mobile technologies. This has created a vast market for mobile banking services in the country.

Nevertheless, Nigeria still suffers from inadequate Internet penetration, poor network quality and overall infrastructure deficits. Unstable and inconsistent power supply is another significant problem for Nigeria. This affects the operation of data centres, network equipment, and Internet service providers, leading to disruptions in Internet connectivity.

When it comes to rural and remote areas, digital access and online financial operations here remain low.?The overall financial exclusion rates in Nigeria continue to exceed official targets. Besides, an uptake of digital financial services, notably mobile money, is still lower than in peer African countries. Mobile banking plays a crucial role in bringing affordable and accessible banking services to unbanked and underbanked populations, largely located in the regions with poor Internet infrastructure. The lack of adequate network connection makes it challenging for startups to build and expand fintech services.

Consumer Trust Issues

Due to the lack of comprehensive regulation set regarding the fintech services, local consumers have concerns over data security and privacy, while online fraud and cyberattack incidents are rising, further eroding public trust.?

In addition, in 2022, Nigeria was ranked 3rd among top 10 countries with the highest levels of occupational fraud (fraud committed by an organisation’s employees), according to research by Proxyrack. Most reported cases of fraud in the country were related to the banking industry.?

One must admit that Nigeria has made significant progress in recognising the importance of fintech in its various aspects. However, there is still a lack of specific regulations designed to address the unique aspects of fintech services and the sensitive data they handle. This lack of clarity may result in gaps and uncertainties regarding consumer protection measures.

The lack of stringent regulations may expose consumers to potential risks such as fraud, scams, and unscrupulous practices by certain fintech entities. On the contrary, transparent and comprehensive rules help establish effective dispute resolution mechanisms between consumers and fintech providers. This includes dealing with unauthorised transactions, service disruptions, or other disputes that may arise.

Fintech Challenges in Brief

The fintech market in Nigeria is growing notably faster than in other African countries, with a significant growth in the mobile banking sector, lending and financing, as well as blockchain and cryptocurrencies. The market growth is driven by the increasing adoption of smartphones and a growing tech-savvy population. However, the fintech development in Nigeria is also facing a row of obstacles including decreased funding inflows, lack of regulatory clarity, eroding consumer trust, and numerous infrastructural issues.?