In a bid to curtail what some might call an “open season” on commercial paper fundraising, Nigeria’s Securities and Exchange Commission (SEC) has introduced a set of tightened regulations. This move follows the National Pension Commission’s (PenCom) decision to prohibit pension funds from investing in commercial papers outside the banking sector, a restriction meant to protect the retirement funds of millions of Nigerians from potential high-risk ventures. For Nigeria’s fintech sector, which has leveraged commercial papers as a key funding route, the new SEC guidelines have arrived with a thud, effectively ending an era of unchecked growth and easy liquidity.
One recent example of the dependence on commercial paper comes from Nigeria-based FairMoney, which redeemed its debut ₦2.5 billion ($3.3 million) Series 1 Commercial Paper issuance set to mature in March 2024. This successful issuance highlighted a new trend, with fintechs increasingly tapping into commercial papers to meet liquidity needs, often viewed as a quicker alternative to venture capital or traditional bank loans.
But now, fintechs like FairMoney will face a tougher set of rules, including new monetary and compliance requirements meant to filter out companies lacking the financial backbone that regulators deem necessary.
The SEC’s New Playbook
Under the SEC’s draft framework, issuers must now have a minimum shareholders’ equity of ₦500 million (approximately $660,000) and provide independently audited financial statements. Further, only companies with an investment-grade credit rating from a licensed rating agency will be eligible to issue commercial papers, a measure aimed at filtering out entities with questionable creditworthiness.
These requirements have also pushed fintechs and non-bank financial entities to secure the backing of a commercial bank, which must now act as the issuing and paying agent (IPA) for the commercial paper. Essentially, fintechs are being nudged back to traditional financial institutions, albeit in a supportive role rather than a direct lending one. The SEC has mandated that all commercial papers now carry a maximum maturity of 270 days, with issuances capped at 30% of the issuer’s total shareholders’ equity.
PenCom’s Conservative Shift: Banks Only for Pension Funds
The SEC’s new measures come on the heels of PenCom’s more conservative stance regarding pension funds. PenCom’s recent directive prohibits pension funds from purchasing commercial papers and securities issued outside the banking sector, effectively reining in the flow of retirement funds into what it sees as high-risk ventures. The message from PenCom is clear: banks are safer havens for pension money than fintechs, at least in the eyes of the regulator.
While PenCom has cited prudence as the guiding principle, the move has sparked debate. Some argue that this bank-first approach could stifle innovation by leaving fintechs and startups with fewer funding avenues.
Impact on Nigeria’s Startup Landscape
For Nigeria’s rapidly growing tech ecosystem, the SEC’s rule changes and PenCom’s stance on pension fund investments mark a pivotal shift. In recent years, startups and fintechs have relied heavily on commercial papers, particularly in a funding landscape where venture capital, while expanding, is not always readily available. Commercial papers have thus served as a stopgap, a way for startups to finance operations and growth without the strings attached to equity or bank loans.
Yet, with the increased regulatory oversight, fintechs may now face higher borrowing costs and fewer financing options, leading some to return to the venture capital market or seek strategic partnerships with banks. Analysts note that while these measures by SEC and PenCom could usher in greater stability, they could also restrict access to capital for Nigeria’s emerging companies that don’t meet the heightened requirements for the issuance of debt instruments, such as commercial paper.
A Divided Opinion on the New Rules
The dual approach of the SEC and PenCom has raised questions within the industry about whether these moves will ultimately strengthen Nigeria’s capital markets or create unintended constraints. While pension funds and traditional banks may enjoy the stability these measures offer, critics argue that it restricts the diversity of financial instruments available, potentially stymying the very innovation that fintechs are known for.
As the fintech sector digests this new reality, the SEC’s and PenCom’s firm stance serves as a reminder of Nigeria’s broader shift toward a more conservative regulatory approach, one that emphasizes risk aversion over rapid expansion. For now, it seems the days of “easy money” via commercial papers may be numbered. Whether this ultimately tempers fintech growth or spurs new, more sustainable funding models will be a story for the coming years.
