MERCHANT BANKING IN NIGERIA: CBN GUIDELINE FOR OBTAINING BANKING OPERATING LICENSES IN NIGERIA

Introduction  

Investment is an essential part of growth in every business and plays a significant role in evolving the financial ecosystem of an industry, sector, or the government.   

Financial institutions in Nigeria can operate in various capacities based on the licenses obtained, which could be a commercial banking license, merchant banking license, specialised banking license depending on the sector, microfinance banking license, switching and processing license, Payment Solution Service Provider (PSSP) License, or Mobile Money operators, and so on.  

On 9^th January 2017, the Central Bank of Nigeria (CBN) confirmed the existence of licensed representative offices for foreign Banks. As a case study, JP Morgan Chase & Co has operated in Nigeria primarily through its representative office, advising governments and companies on Eurobond issuances and other financial transactions. However, the Bank has shown monetary interest in expanding its financial operations in Nigeria as a merchant Bank by paying N50,000,000,000 (equivalent to $38M) to CBN. A merchant banking licence would give JPMC & Co a platform to deepen its involvement in corporate finance, lending, and trade-related services. 

This newsletter briefly introduces the concept of merchant banking in Nigeria, the laws regulating its operation in Nigeria, and how a merchant banking license can be obtained.  

Merchant Banking  

A Merchant Bank is a Bank whose business includes receiving deposits on deposit accounts, provision of finance, consultancy and advisory services relating to corporate and investment matters, and making or managing investments on behalf of any person. Merchant banking in Nigeria plays a pivotal role in economic development by supporting industrial and infrastructural projects.  

A merchant banking license gives a merchant bank the authority to take deposits from any natural or legal person, provide finance and credit facilities to non-retail customers, deal in and provide foreign exchange services, provide treasury management services, asset management services, financial consultancy and advisory services, amongst others. (Section 3 of the guideline 2010). A merchant bank is prevented from carrying out business activities that include depositing withdrawable by cheques, granting retail loans, holding equity interests for more than 6 months, providing insurance underwriting services, and any other activity that may be restricted by the CBN. (Section 4 of the Guideline 2010 and Section 21 BOFIA 2020). A breach of these prescribed services could expose the merchant Bank to monetary liability. (Section 21(2) BOFIA 2020) 

Regulatory framework 

1. CBN Guidelines and Regulations: The CBN Scope, Conditions & Minimum Standards for Merchant Banks Regulations 2010 (‘the Guideline 2010’) defines the operational scope, minimum capital requirements, and prudential ratios.

2. Securities and Exchange Commission regulations: They govern securities-related activities, investment advisory, capital markets and fund management in the Bank. For example, SEC Rule 45.

3. Banks and Other Financial Institutions Act (BOFIA) 2020: As the overall statutory framework, it provides the legal framework for banking operations.

4. Financial Reporting Council (FRCN): Ensures proper financial disclosure and auditing standards of financial statements.

Licensing Procedure & Requirements 

Generally, the CBN maintains the power to issue and approve licenses for finance companies or financial-related services. Alongside the relevant regulatory frameworks, CBN regulation provides the process and requirements for obtaining a merchant banking license, including the following: 

1. An application to be made to the Governor for an Approval-in-Principle (AIP) license.

2. The application is to be accompanied by a non-refundable application fee of N500,000.00.

3. A submission of a feasibility report/business plan addressing the bank’s projected activities, management, and projected revenues, the memorandum and articles of association (MEMART) of the bank, the bank’s organisational structure, and such other information, documents, and reports as the CBN may, from time to time, specify.

4. A deposit of the minimum capital requirement (MCR) of N50,000,000,000 (at the national level) with the CBN upon application, with evidence of deposit by each shareholder (which supersedes the previous N25,000,000,000 requirement).

5. An application will be made for the grant of a final license not later than six (6) months after the grant of AIP, with a deposit of N5,000,000 non-refundable licensing fee in a bank draft payable to CBN.

Challenges Faced by Merchant Banks  

1. Market Awareness: Many businesses and investors may be unaware of the services offered by merchant banks.

2. Economic Instability: Huge economic fluctuations such as inflation and foreign exchange shortages may affect long-term investment decisions.

3. Regulatory Pressure: Merchant banks are expected to maintain strict regulatory compliance and requirements to continue operations.

4. Technological Disruption: Fintech start-ups offering digital investment platforms, which are usually easier and more accessible, could challenge the conventional business model of merchant banks.

5. Limited Domestic Investment Pool: A low savings culture and limited pension fund access reduce the amount of investable funds in the domestic market.

Potential Benefits of Foreign Bank Participation  

1. Increased Participation in Foreign Direct Investment (FDI) Prospects: This could attract foreign capital into the Nigerian financial sector and strengthen investor confidence to invest in other sectors.

2. Increased Regulatory Initiatives from Regulatory Bodies: Efficient financial regulations, guidelines and regulatory control/oversight could facilitate foreign bank participation and vice versa, creating a cycle of regulatory evolution and advancement for the financial/banking industry.

3. Employment Generation and Skills Development: Foreign Bank participation could create employment opportunities for Nigerians while providing opportunities for knowledge transfer, professional training, and development of specialised expertise in the sector.

4. Transfer of Technology and Banking Innovation: Foreign banks may introduce banking technologies, digital financial solutions, cybersecurity systems, and improved banking infrastructure, contributing to the modernisation of Nigeria’s financial services industry.

Conclusion  

Merchant banking is a specialised sector of the Nigerian financial ecosystem. It supports corporate finance, investment advisory activities, and is highly regulated by efficient regulatory frameworks.  With the CBN’s revised MCR, the entry threshold is considerably higher than before. Prospective and existing operators, at either the domestic or foreign level, should therefore understand the licensing, capital and operational requirements before applying for a license or making a financial commitment.  

Compliance with the CBN and the other relevant regulators is a good way to avoid penalties, restrictions, and to build lasting investor confidence.  

This newsletter is provided for general information purposes only and does not constitute legal, regulatory, or professional advice. While reasonable care has been taken in preparing this publication, readers are advised not to rely on its contents as a substitute for specific legal advice. Institutions and individuals are encouraged to consult their legal, compliance, or other professional advisers before acting on any information contained in this publication.