Hedging Against Changing Policies: Opportunities and The Way Forward For Tech Companies In Nigeria

 

The recent freezing order obtained by the Central Bank of Nigeria against Bamboo, Risevest, and a few other tech companies for operating as asset management companies without a license and trading foreign stocks, along with the proposed NIDT bill, has resulted in the tech community's growing concern on how to protect their businesses in Nigeria. As a result of the freezing order and the emergence of regulatory instability in Nigeria, tech companies are compelled to create innovative solutions, not just to assist their customers, but also to stay afloat and promote customer confidence. Generally speaking, it seems like the obvious solution is to avoid Nigerian regulators by simply moving your business to another country. However, some tech companies interact primarily with the Nigerian financial sector and as such they must comply with Nigerian regulations, and this makes it impossible for some of them to move their businesses outside Nigeria. It has become imperative to come up with various options to provide shock absorbers against shock waves that these regulators might issue.

All hope is not lost for tech companies that cannot move their businesses outside Nigeria. There are still several options available to Nigerian tech companies to hedge against regulatory uncertainty.

The options available to Nigerian tech companies to avoid regulatory uncertainty are the following Rs:

1. Register your parent company in a tax haven or in a neighbouring country with a more favourable regulatory climate - for example, in the Cayman Islands and Delaware (tax havens), Ghana and Kenya (safer climates). This option offers the advantage that if things become difficult, you can pack up your Nigerian operations and move them to a new country.

2. Restructure your business model and company structure to avoid holding all properties in one company. It is possible to restructure tech companies to reduce regulatory and political uncertainty. Tech Companies can also enter into joint ventures or alliances with local companies in the sector they operate in to shoulder a large part of the risk. These joint ventures should be entered into with local companies that understand political risk.

3. Remote Operations: Reduce physical footprint by keeping physical infrastructure very small and investing very little in fixed assets. Airtel perfected the act of reducing physical footprint, they outsourced everything that can be outsourced and kept their primary team small. The remote culture thrust upon us by the pandemic could not have been more timely.

4. Reevaluating your Financial Hedging model- Make use of financial instruments (e.g. currency options, forward contracts). Assets should ideally be held offshore so that there are no interruptions to the continuation of business even if the accounts are frozen. Funds should be stored in favourable foreign jurisdictions or in cryptocurrency (crypto), except for the necessary operating funds. A foreign banking institution or crypto wallet has the advantage of not being freezable by Nigerian regulators. The disadvantage of this model is that you cannot easily repatriate the funds to Nigeria if your Nigerian bank accounts are frozen but you can easily find alternatives.

5. Reassure with Insurance: There are a number of insurance companies that offer insurance policies that cover politically associated business risks. This insurance covers items such as Confiscation, Expropriation, Nationalization, Currency inconvertibility and non-transfer, Contract frustration due to political events, Sovereign payment default, and Wrongful calling of guarantees and bonds.

6. Recruit legal and business strategy experts to establish strategies that will reduce risk. Businesses must understand that regulatory instability in Nigeria can lead to bankruptcy and even imprisonment, and as such must hire consultants who are aware of both the international and peculiar Nigerian situation and are committed to making ever-evolving plans to address the ever-changing regulatory uncertainty cycle.

Finally, it's pertinent to note that most Nigerian tech companies create products that solve Nigerian and international problems. Thus, operating as a multinational is always a sensible business approach as it provides the opportunity to expand beyond Nigerian borders and to have little concern over Nigerian regulatory uncertainty. The foregoing listed strategies might not work for all kinds of companies and also would need to be considered carefully and tweaked to yield solid results. It is therefore advisable to consult a lawyer on the method that best suits your business.

HOW ACORN & MUSTARD CAN HELP

Our business advisory team at Acorn & Mustard can assist tech companies by integrating politically sensitive risks into their risk management policies. Our team is well-positioned to give tech companies alternative plans and strategies they need.