How fintech startups evade federal law through Nigeria’s state gaps

Some Nigerian fintech startups have the opportunity to exploit fragmented regulatory oversight by incorporating in states with weaker scrutiny. These companies target states where regulatory bodies lack the tools or will to enforce national compliance. The result is a growing list of fintech entities operating within legal grey zones.

Startups pick these states to escape requirements set by federal authorities, especially the Central Bank of Nigeria and the National Information Technology Development Agency. They often avoid the licensing hurdles that national regulators impose, and the bureaucracies, too. Instead, they secure state-level approvals that hold little weight at the federal level but provide enough cover to operate.

These approvals typically come in the form of basic business registrations or memoranda of understanding with state agencies. Such documents offer an appearance of legitimacy without demanding full regulatory compliance.

The fintech companies then use these documents to open bank accounts, onboard customers, and raise funding. Investors (most likely local), in some cases, either overlook the implications or remain unaware of the loopholes.

Some states have encouraged this behaviour. State-level digital economy offices issue endorsements that do not align with federal standards. These endorsements allow startups to function within the state while marketing nationally or even internationally. In effect, the startups operate across borders using shallow legal anchors.

The companies also benefit from a lack of coordination between state and federal authorities. No central database links fintech approvals, leaving gaps that are easy to exploit. Without centralised checks, one state’s endorsement may conflict with federal policy, creating confusion and delaying enforcement action.

The practice weakens the national regulatory structure. It erodes investor confidence, undermines consumer protection, and increases the risk of financial misconduct. Yet no formal system exists to track which fintech companies bypass federal compliance through state channels.

This absence of transparency allows the behaviour to persist unchallenged.

Exposing the regulatory loophole

Nigeria’s constitution splits financial regulation between federal and state governments.

The federal government alone legislates banking, securities and payments under the Exclusive List, whereas private money-lending falls to the states.

As one analysis notes, the business of money lending “mirrors the moneylenders’ laws of the other States in Nigeria”, underscoring that each state enacts its own Money Lenders Act under the federal Money Lenders Act of 1958.

Crucially, that 1958 Act requires borrowers to obtain a licence from the state authority – it does not prescribe a federal licence for small-scale lending. In effect, fintech platforms offering consumer credit have often been treated as “money lenders” under state law rather than banks under federal law.

This dual regime has created an exploited gap.

Until recently, no specific federal fintech licence existed for peer-to-peer or digital lending, so startups often resorted to state licences. Industry comments note that before 2022, any digital lender “was required to obtain a Money Lenders Licence in any of the 36 states” under the state moneylenders laws.

In practical terms, a fintech could incorporate as a company and apply for a state Money Lenders’ licence to carry out its lending business, sidestepping CBN registration requirements.

Lagos State’s 2009 Money Lenders Law exemplifies this: it “requires an entity to be licensed before the commencement and operation of a moneylending business”. In other words, a startup with a Lagos licence could legally lend to Lagos residents without approaching the Central Bank or obtaining a national finance company permit.

At the same time, federal regulators have only limited reach over these state-licensed lenders. The Central Bank’s banking laws (e.g. BOFIA 2020) focus on deposit-taking and other exclusive banking activities, but do not repeal the state Money Lenders Acts.

As a commentator observes, state moneylending laws “have not been repealed by BOFIA or any other federal enactment. For the time being, they still co-exist”. Thus, a fintech that limits itself to lending under a state licence may argue it lies outside federal supervisory remit.

In some cases, firms have even registered as cooperative societies (licensed at the state level) to lend or invest. For example, the SEC recently warned that a “Silverkuun Investment Cooperative Society” holding itself out as a fund manager was not registered with the capital-market regulator.

Charting the state advantage

States offer clear advantages to fintech startups seeking fast entry. For one, licensing tends to be quicker and less onerous than a full federal banking permit.

In Lagos, Nigeria’s commercial hub, the Money Lenders Law puts authority in the Ministry of Home Affairs.

A firm applies through the local magistrate’s court, submits company documents and clearances, and then obtains a licence from the Home Affairs Ministry.

Pavestones Legal notes that “the office responsible for issuing licences is the Lagos State Ministry of Home Affairs and Tourism”, and the licence simply allows the holder “to carry on business of money lending in the state”.

By contrast, a CBN finance company licence requires meeting minimum capital thresholds and detailed CBN scrutiny.

Moreover, states sometimes permit higher interest rates and fewer consumer safeguards.

Under Lagos law, unsecured loans can carry “simple interest at the rate of forty-eight per centum per annum”. This is far above the 30% cap that federal regulators impose on banks and financial institutions. (The CBN’s 2014 Circular limited bank credit to 30% p.a., whereas the Lagos law explicitly allows up to 48% on small unsecured loans.)

This wide gap means a state-licensed fintech lender can charge much higher rates to borrowers than a regulated bank or microfinance firm could. Other states likewise cap interest, but often at similarly high levels.

Fintech companies exploiting these rules may market high-yield digital microloans under state law while noting that federal caps and disclosures do not apply to them.

In addition, state licences allow exclusive in-state operation, avoiding some federal restrictions. Notably, a state moneylender’s licence only permits lending “within the state where the license was procured”.

That seems a limitation, but digital lenders can invoke it to claim they serve local markets only.

A Lagos-based lender can argue it only does business with Lagos residents under its state licence, even if app-based loans reach wider areas. For example, a Lagos-based lender may simply obtain a Lagos State money-lending licence like Rank Capital’s Moni platform did, rather than a national banking licence.

In practice, enforcement of this geographic limitation has been weak, effectively letting fintech entities use state licences to lend much more broadly.

Finally, licencing exemptions offer loopholes. Lagos law explicitly excludes certain entities from moneylender requirements: “Cooperative societies, corporate organisations … banks, insurance houses, pawn brokers” are not regarded as moneylenders.

A fintech that registers as a cooperative society thus avoids needing a moneylender’s permit (but must comply with cooperative regulations).

That tactic has been attempted in practice: as noted, the SEC has publicly rebuked a company using a cooperative licence to conduct what amounted to unlicensed fundraising.

Similarly, registering as a consultancy or payments agent under state laws, rather than a lender, can at least nominally evade lending regulations.

Overall, states provide a patchwork of processes and rules that offer fintech startups faster local compliance routes and looser operating limits than the rigorous federal regime.

Comparing state financial laws

The specifics vary by state, but many share a common structure. Lagos, Cross River, Rivers and others all have Money Lenders Acts (often Chapter M7 of the state laws) requiring state licensing.

Lagos’s 2009 law, for example, demands that “any person who carries on business as a moneylender” must hold a licence.

A LinkedIn overview of moneylending laws confirms that Lagos “requires money lenders to register with the Lagos State Ministry of Home Affairs and Tourism” and penalises unlicensed operations.

It likewise notes that Rivers State’s 2013 law “mandates registration” and prescribes rules for fair lending. By contrast, some states use older laws (e.g. Bayelsa, Ebonyi), but the effect is similar: without a licence, a lender’s contract is unenforceable.

As one legal review put it, moneylending lies with the states by design, so state laws like the Lagos Cap. M7 mirrors others across Nigeria.

Differences in licensing procedure

Even among state laws, the path to getting a licence shows variations.

In Lagos, the multi-step process involves magistrate courts and the Home Affairs Ministry, with detailed documentation (company incorporation papers, tax clearances, police reports, etc.).

In Cross River State (Cap. M7 of 2004), Section 5 simply requires 14 days’ advance notice to the chief magistrate and the local police, listing the applicant’s name, address and proposed business address.

In practice, Cross River thus emphasises notice rather than pre-approval: one gives registered written notice of intent and then applies for the licence.

Cross River’s case is most interesting because the law sets the annual licence fee at only ₦10 (about $0.02), penalties for illegal lending are trivial (₦200–₦1,000), and interest caps/enforcement provisions are toothless.

Other states (Kaduna, Jigawa, Kano, etc.) follow a similar model: file with a magistrate or state ministry, meet capital or character requirements, and pay fees.

Many licences are valid for one year and renewable. Despite procedural differences, all require formal corporate registration (CAC incorporation) and proof of identity/character, but none demand the large capital or corporate governance that CBN licences impose.

Interest and conduct rules

State laws also differ on permitted charges.

Lagos law has an explicit interest schedule: secured loans up to ₦1,000 carry 17.5% simple interest, higher amounts 15%, while unsecured loans can attract up to 48% simple interest annually.

Other states often copy Lagos’s structure or set their caps (some lower, some effectively similar).

For instance, one study of moneylender laws noted that the philosophy is that unsecured credit justifies very high rates.

In practical terms, a fintech in Lagos can lend at nearly 50% p.a., whereas a bank cannot exceed 30% per CBN rules. Some states embed additional consumer protection language (like Rivers’s “fair practices” clause), but enforcement is generally light, leaving fintech entities free to impose harsh terms under state law.

Exemptions and scope

State statutes also clarify who is not covered.

For example, by law, Lagos excludes any organisation “empowered by special enactment to lend money”, insurance companies, cooperatives, etc., from needing a moneylender licence.

This means a fintech that organises itself as a licensed cooperative or an existing government-empowered body avoids moneylender licensing (though it gains other state regulation).

Some states similarly exempt churches or microfinance banks from moneylender requirements, leaving fintech entities scrambling for alternative registration. These gaps are sometimes exploited: one fintech advocate noted the use of cooperative society registration as a workaround.

In sum, while the broad strokes of requiring a state licence are common, states differ in the details of application, capital requirements, and penalties.

A promising fintech leader might choose incorporation in a state with faster processing or lower capital and use only that state’s license for operations. That geographic fix, however, raises tensions with federal law, as the next section explains.

Federal bodies vs state autonomy

Nigeria’s financial regulators insist that federal law trumps state law where overlaps occur, but the split regulatory design creates friction.

According to the Constitution, banks and deposit-taking institutions fall under the federal legislative list.

The Central Bank of Nigeria governs all national banking and currency matters, the Securities and Exchange Commission oversees capital markets, and other bodies (FRC, NCC, etc.) cover their sectors.

However, because moneylending (including micro-credit) is expressly allocated to states, federal statutes like BOFIA do not nullify state Moneylenders Acts. As discussed, an academic analysis points out that state moneylender laws “have not been repealed by BOFIA or any other federal enactment” and thus “still co-exist” until future harmonisation.

In other words, a state-licensed lender is technically lawful even under federal law, so long as it stays within the state remit.

In practice, fintech firms try to straddle these regimes. If a company’s operations cross state lines or involve deposit-taking, federal regulators claim jurisdiction. For example, CBN classifies any digital business that collects money beyond local communities as needing a finance company or microfinance bank licence.

The CBN’s Revised Guidelines (2014) specify that an entity doing consumer lending must be licensed by the CBN as a finance company. Likewise, the SEC recently published guidelines to regulate “digital asset exchanges” and custodians, signalling that trading tokens or crypto falls under federal (SEC) oversight.

A fintech cannot escape these requirements simply by citing a state permit. Indeed, the SEC has repeatedly warned that being registered as a cooperative society or issuing a state licence does not authorise capital-market activity.

In its notice, the Commission emphasised that a company (like Silverkuun Co-operative) “is NOT REGISTERED to operate in any capacity in the Nigerian Capital Market”, making clear that state coop registration cannot substitute for an SEC licence.

Nor can state licences override federal operating licences. Payment service providers (PSSPs), switches and “superagents” are federally licensed by the CBN to process payments, but none may hold customer deposits.

Industry bodies have clarified that such non-deposit fintech entities “should not be listed as beneficiary institutions when customers attempt to make bank transfers”.

Actions against defaulters

Regulators have taken action: for example, Paystack was fined ₦250 million in April 2025 for launching a peer-to-peer wallet (“Zap”) without the required microfinance licence.

The Central Bank stressed that because Paystack’s licence only permitted payment switching, it was “not permitted to hold customer funds”.

Similarly, in late 2023, the Nigeria Inter-Bank Settlement System instructed banks to remove all “non-deposit-taking financial institutions” from their instant payments network, effectively curtailing fintech startups that overstep license boundaries.

These federal clampdowns illustrate that while state law provides a loophole, regulators will enforce backstops if companies stray into federally-regulated activities.

Regulators are increasingly moving to close the loopholes.

The Federal Competition and Consumer Protection Commission issued an interim Digital Lending Guideline in 2022, explicitly stating it applies to all digital lenders “regardless of their enabling license”.

In short, it means that even if a fintech holds a state-issued licence, it must still comply with federal digital lending rules. Likewise, proposals have been floated to amend federal laws to carve out exceptions or harmonise the dual regimes. A legal review recommends that future legislation explicitly clarify regulatory borders and possibly remove federal oversight over pure state-licensed lenders.

For now, fintech startups continue to exploit the patchwork: they register where the licensing process is easiest and then pursue business across Nigeria with minimal federal interference. Until legislative or regulatory frameworks are harmonised, this arbitrage will remain a persistent feature of Nigeria’s fintech landscape.