Regulators of the Nigerian financial services sector need to increase regulations of digital banks otherwise called neo-banks in other to avoid a potential financial crisis.
This is based on comments from Mr. Ayodele Othihiwa, a Partner & head of, the Financial Services Industry of KPMG Nigeria. He made the comments at the Bank Directors Annual Summit with the theme “Safeguarding Financial Stability in Nigeria- a new perspective for Bank Directors and Regulators.”Â
The event was held in Lagos on the 12th of October 2022 at the Oriental Hotel.
In his closing remarks, Mr. Ayodele Othihiwa called for tighter regulations against digital banks claiming that they were “young and reckless”.
- “We have a new set of neo-banks, digital banks, payment system banks that are becoming significant in this economy. They are becoming significant but the regulation of this sector is very limited and these guys are young and reckless. Reckless in the sense that not all of them have the experience to manage an institution of that size.”
He also alluded to the fact that digital banks that do not have a physical presence are a risk as when depositors lose their money there is no office to run to such as the case in a bank run.
- “They don’t have footprints, you only see them on your mobile phones and the day your money gets lost you will be searching for them on your mobile phone. So it is important that we need to think about regulating them.”
He also targeted traditional banks that are responding to competition from digital banks by creating HoldCo models which allow them to spin off digital banks as separate entities and possibly operate under the radar of the regulator’s strict commercial banking regulations.
- “Now if you look at the way banks are going almost all banks are going to Holdco model, so the traditional banks are separate and they create a digital bank within that same structure. Obviously, there is a regulatory arbitrage they are taking advantage of in terms of regulation.”
He charged regulators to be more aggressive with their regulations for digital banking and electronic payment channels in other to avoid an imminent crisis. He called for a proactive approach to avoid a calamity where some of the banks will fail under limited supervision.
- “Therefore regulators must wake up because again, these neo-banks, have not been faced with a crisis any day because they are new. So we don’t know whether they have experience or not and we don’t need to wait for that. We need to be proactive and design a system that can ensure that we will know at the time that they are about to fail. Today there are a number of digital banks where their CEOs will just wake up and just “japa” and they are sitting on a huge amount of customer deposits.”Â
Other panelists at the event include Mr. Olabode Augusto, Founding Managing Partner Augusto & Co, Mr. Aminu Ismail, Director at AMCON, Mr. Bello Hassan, MD of NDIC, and Mrs. Onari Duke, non-executive director of UBA as moderator.
A recent report from TechCabal revealed one of the most popular neo-banks in the country, Kuda Bank reported an N6 billion loss for the financial year that ended in December 2021. The report sent chills down the digital banking stakeholders as many wonder how many more such banks are experiencing losses and how this affects depositors’ funds.
Well I appreciate his concerns about regulation. I believe he is exaggerating the issue
It isn’t, I have same concerns especially as it relates to physical location where I can lay complain if I have to, guess I am traditional like that, works for me
That lack of physical location is the main problem really