FX Liquidity: Driving Growth through Non-Resident Accounts

Drawing from recent corporate financing and fund formation transactions, this update highlights critical insights that underscore the need for Nigeria’s Central Bank to reassess its policies on the operation of non-resident accounts. By refining these rules, Nigeria can position itself as a more competitive and attractive destination for foreign investment, unlocking new opportunities for growth and development

Current Regulatory Landscape

Presently, Nigeria's Central Bank restricts access to non-resident bank accounts to a select few categories. The entities that can legitimately open non-resident accounts in Nigeria include overseas correspondence and examination bodies, foreign companies executing approved contracts, and foreign professional bodies. (See generally, Memorandum 17 of the CBN Foreign Exchange Manual, 2018). While Memorandum 17 served its purpose in the past, the evolving dynamics of international finance and the shifting sands of global business necessitate a more flexible and inclusive approach. In our view, there are a number of corporate and private capital financing structures that we believe should enjoy the benefit of non-resident bank accounts. These include:

(a) Venture Capital and Private Equity Investments in Nigeria 

International venture capital firms are now a staple locally, investing in funds managed by local managers as well as directly in local start-ups. For context, African start-ups reportedly raised $6.5billion across equity and debt deals in 2022. Indeed, the amount of venture capital flowing to African start-ups highlights the need for the Nigerian government to introduce policies to encourage the inflow of venture capital and also presents an opportunity to design a policy for FX liquidity management.

Globally, countries like India have recognized the importance of enabling non-resident foreign venture capital and private equity investors to operate special non-resident local accounts, thereby facilitating smoother investment flows, reducing currency risks, and enhancing operational efficiency. 

Our experience advising on transactions of this nature suggests strongly that allowing foreign/non-resident private equity and venture capital firms, including development finance institutions, to operate non-resident Naira and FX accounts, presents a compelling opportunity to improve FX liquidity and to propel private capital investments and onshore fund formation in Nigeria.

(b) Securitization Transactions in Nigeria

We are seeing an upward turn in securitization transactions in the local fintech market. We estimate that Nigerian start-ups have raised up to $1billion between 2021 and the date, via the securitization route. Securitization transactions are particularly strategic for unlocking foreign direct investment flows not just in fintech but also in the infrastructure, telecoms, electricity distribution, oil & gas, and entertainment sectors. At the core of a typical securitization transaction is an offshore bankruptcy-remote special purpose vehicle (the "Transaction SPV"), which plays a pivotal role in fundraising and in purchasing and holding securitized receivables. Our experience advising on transactions of this nature suggests strongly that allowing the Transaction SPV, typically, a non-resident entity, to operate non-resident Naira and FX bank accounts, will reduce transaction costs significantly and also drive more foreign direct investments via the securitization route. 

https://balogunharold.com/securitizations-in-nigeria-some-key-considerations-for-startups/

Whilst allowing private capital investors and fund managers that meet certain criteria to open non-resident bank accounts holds the promise of improving FX liquidity locally, there are also a number of key advantages for private capital investors. These include:

i)Facilitation of Investment Activities: Non-resident bank accounts make it easier for private capital investors and fund managers to conduct investment activities in the host country. They can receive and disburse funds related to investments more efficiently and thereby reduce administrative hurdles.

ii)Currency Management: Given that non-resident bank accounts typically allow transactions in both local and foreign currencies, this level of flexibility enables foreign investment firms to manage their investments in the local currency, reducing the risk associated with exchange rate fluctuations.

iii)Funding Flexibility: Non-resident bank accounts provide foreign investment firms with the flexibility to fund their investments and operations using various sources of capital, including funds from both local and foreign investors.

iv)Local Presence: Non-resident bank accounts can help private capital investors and fund managers to establish a local financial presence, which can enhance their credibility and relationships with local businesses, entrepreneurs, and other stakeholders.

v)Transaction Efficiency: Non-resident bank accounts can offer more streamlined transaction processes, reducing delays and administrative costs associated with moving money in and out of the host country and with moving money to portfolio companies.

Final Remarks

While the perspectives shared here are supported by anecdotal evidence derived from practical experience advising on the aforementioned transactions, it is important to note that they only serve as a starting point rather than a definitive conclusion. However, it is clear to us that attracting foreign direct investments and improving FX liquidity ought not to be a generalized one-size-fits-all proposition and that a targeted approach is going to be essential. In this legal update, we share the perspective that one of such targeted approaches would be to identify and review specific corporate financing structures and to review the legal framework underlying such structures with a view to making those structures more capital-efficient and FDI-friendly. Within this context, it may be prudent to allow private capital investors and fund managers that meet certain qualifying requirements to operate non-resident bank accounts. We fully expect that such accounts will be subject to the extant AML/CFT regulations applicable in Nigeria.

Balogun Harold provides this information as a service to clients and other friends for educational purposes only. The foregoing information should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or via legalsupport@balogunharold.com for support.