Law And Policy Of Impact Investment In Nigeria

INTRODUCTION TO IMPACT INVESTMENT IN NIGERIA

It has been popularly acknowledged that every action of man has a reciprocal effect on nature, the environment, and society at large. As a result, governments were created by man and tasked with the duty of maintaining and regulating the nation in what is commonly called the social contract in order to ensure the sustainable existence of man, preservation of nature, and wellbeing of the people. However, since individual actions have a direct effect on society, it is neither feasible nor practicable for the government alone to handle and control all the state simultaneously.

The task is difficult, and with Nigeria, it is even more difficult. Nigeria is adjudged to possess a USD 300 Billion infrastructural deficit that seems to increase daily. If that was not bad enough, the Brookings Institute in 2018 has adjudged that Nigeria has overtaken India as the country with the most significant number of people living in extreme poverty.  An estimated 87 million Nigerians, or around half of the country’s population are thought to be living on less than USD1.90 a day in what is now commonly known as multidimensional poverty.

Furthermore, Nigeria is ranked 131st among 190 economies in the ease of doing business, according to the latest World Bank annual ratings.  Ease of Doing Business in Nigeria averaged 145.09 from 2008 until 2018, reaching an all-time low of 170 in 2014 and a record high of 120 in 2008. Thus, it will not be wrong to say that doing business in Nigeria is somewhat complicated and tasking for businesspersons and investors.

As a result of all these and many other social, political, and economic factors, there is now consensus that every individual has a role to play in the development of the nation-state.  This is especially true since both our individual and collective actions will either have a positive or negative impact on nature, environment, and society. We are therefore left with the option of selecting the kind of impact we are inclined to make. All this helped the rise and growth of impact investing.

Impact investment in simple terms means the act of investing in a business venture with the primary intention of improving the society by making a positive impact on the environment, nature or in the life of a group of persons while at the same time ensuring a healthy financial return on investment. Nigeria has recently experienced an upsurge of impact investment. However, these investors undertake to inject capital or mainly altruistic purposes, notwithstanding the existence of the insufficient policy and legislative support for impact investment in Nigeria. A good example of impact investing in Nigeria is the Tony Elumelu Foundation. LifeBank, which is a startup that works with hospitals round the clock to find lifesaving medical products and deliver same to the hospitals in the right condition across Africa. Wecyclers is a company that offers convenient household recycling services using a fleet of low-cost cargo bikes. They are committed to powering social change using the environment by allowing people in low-income communities to capture value from their waste. There have also been various Agric tech startups that use crowdfunding to help raise capital for small scale Nigerian Farmers. Finally, there are many venture capitalists, microfinance banks and foundations sponsored by High net worth individuals that are silently investing in businesses or people in order to create sustainable development first before making profit. 

From the above, it is evident that the existence if impact investing in Nigeria is not in doubt, instead the question is the market share impact investing controls as well as the role of laws and policies in promoting impact investment in Nigeria. This paper seeks to examine the legal and policy framework of impact investment in Nigeria. Furthermore, it will, discuss the adequacy of the existing regulations, strategy and policies of impact investing in light of the challenges of doing business in Nigeria and propose some recommendations.

LAWS REGULATING BUSINESS AND INVESTMENT IN NIGERIA

The general legal framework for the regulation of businesses and investment in Nigeria are the Companies and Allied Matters Act, Investment and Securities Act, and the Nigeria Investment and Promotion Commission Act.  The Companies and Allied Matters Act regulates businesses. It provides all the regulations necessary to give a business life and make all the necessary provisions for the operation such businesses and returns required to be made to the Corporate Affairs Commission.  The Investment and Securities Act establishes the Securities and Exchange Commission as the apex regulatory authority for the Nigeria Capital Market, as well as regulates the market to ensure the protection of investors, maintain the fair, efficient and transparent market. The Nigerian Investment and Promotion Commission Act establishes the Nigerian Investment and Promotion Commission (NIPC) is concerned with the encouragement and promotion of investment in the Nigerian economy and other related matters. 

These above and other sector-specific laws are the existing laws regulating investment in Nigeria, and the success of any economic endeavour such as impact investment will largely depend on how workable these legislations are.  One cannot undermine the importance of legislative function on Impact investment. For instance, in the United Kingdom, which from which, we adopted most of our laws have taken steps to promote impact investment. In June 2018, the UK Government pledged its support to expand impact investment. This was contained in a Government Response to Advisory Group Report: ‘Growing a Culture of Social Impact Investing in the UK’ dated June 2018. This is in addition to the UK’s Social Investment Tax Relief program, which offers a tax break of 30% of the value of investments made into organizations with a social purpose.  Apart from the UK, countries are taking steps to promote impact investing. France, USA and South Africa, have taken steps to create incentives for impact investors, especially those investing in renewable energy and businesses that help the environment. 

Furthermore, globally in 2015, 193 countries including Nigeria adopted the 17 United Nations SDGs and 169 corresponding targets for global development; 196 countries including Nigeria also signed the Paris Climate Agreement (COP21), which aims to mitigate global climate change. Impact Investment ordinarily is not different from any other investment, and thus the procedure for undertaking the same is virtually the same. For instance, if there is a need to incorporate a new company for this purpose, then the investor(s) must have to comply with the requirements of the CAMA for registration. 

However, being a special kind of investment that tends to leave a positive social, and environmental impact and as well generate financial returns, it has to be encouraged by favourable legislation.  One key legislation to note is section 23(1) of the NIPC Act which provides that NIPC may issue guidelines and procedures, which specify priority areas of investment and prescribe applicable incentives and benefits, which conform with Government policy.  It is in line with the above provisions that the pioneer status incentive is rooted. The Pioneer Status Incentive was established by the Industrial Development (Income Tax Relief) Act, No. 22 of 1971 and is a tax holiday.  It grants qualifying industries and products relief from payment of corporate income tax for an initial period of three years, extendable for one or two additional years. The guidelines have been revised from time to time with the latest revision gazetted on August 14, 2017. 

Pioneer Status applies to industries like Agriculture, manufacturing, Waste management, etc. however, there are specific subsectors for which a business has to meet to qualify for application. For instance, the impact investment made by a company like wecyclers may qualify for pioneer status under waste management and where the application is granted, it will be entitled to a tax holiday for three years and renewable for the other two years.  This will encourage persons to engage in such impact investments knowing that the business will not be taxed on its limited financial gains.  It should be noted that the pioneer status is not specific about impact investments and thus impact investments made in an industry that does not qualify for pioneer status will not be eligible for this incentive. 

CHALLENGES OF IMPACT INVESTMENT IN NIGERIA

Haven highlighted the legal framework; it is also important to review the challenges with the impact of investing in Nigeria. It should be noted here that; impact investment can be double-edged. An investor can invest his capital in an enterprise that engages in positive impact creation businesses.  The business may then qualify for pioneer status, and thus the income of the business will not be taxed for the period the status lasts. However, an impact investor is still entitled to little financial returns by way of dividends from the business.  More often than not, it ends in tears for the impatient investors as the businesses often make losses, especially at the infancy stage of the businesses. For many an investor, losses are unacceptable and a significant turn-off. 

Other significant challenges are:

  1. Difficulties in sourcing Viable Investments that meet Both Financial and Social Environmental Objectives as a Result of Limited Capacity of Sustainable Social Enterprises in Nigeria: Low deal flow is partly due to the limited number of sustainable social enterprises or impact investees able to demonstrate a sufficient track record and capacity development following the risk appetite of impact investors. This is coupled with limited ability to measure and report adequately on impact performance where such capacities do exist.
  2. Difficulty Exiting Investments: Value in private equity investments in the traditional financial markets is sought and realized through an exit point at which the investor sells their stake in a firm.  This can be done through Initial Public Offerings (IPOs) as the endpoint of the funding value chain. The challenge of finding profitable and varied exit options stems from the fact that most African capital markets are still at a relatively early stage of development
  3. Unclear Regulatory Environment: One of the key challenges facing the impact investment sector ecosystem in all African countries is to create an enabling and stable regulatory and policy environment for both investors and sustainable social enterprises. Currently, Nigerian enterprises are generally challenged by a poor environment for doing business, and investors constrained by our developing financial markets. 
  4. Lack of Ecosystem synergy: There is a poor synergy between sustainable social enterprises, entrepreneurs, investors and innovation networks. The majority of Nigeria’s sustainable social enterprises are not members of professional associations or other formal networks, which makes finding investible enterprises and entrepreneurs a challenge for investors. Furthermore, sustainable social enterprises may have limited access to academic and research institutions focusing on research and development (R&D) that can be developed into goods and services for markets.

RECOMMENDATIONS

It is worthy to note that even in light of the challenges of impact investment in Nigeria, it is not all gloom and doom. The impact investment ecosystem is growing at a steady rate. As such, the solutions to the problems mentioned are not far-fetched. The following recommendations should be considered in tackling the challenges of impact investment in Nigeria.

  1. Provision of an adequate legal and regulatory framework with responsive incentives. 
  2. Bolstering the education and training of rising and mid-career finance professionals and entrepreneurs that launch businesses aimed at addressing social/environmental problem. 
  3. Developing tools and services (for portfolio allocation, investment analysis, and benchmarking) that integrate impact alongside risk and return. 
  4. Strengthening the identity of impact investing by establishing principles and
    standards and articulating a shared purpose across capital with different risk-return
    profiles and impact objectives 

If these steps are taken, there will be a considerable upsurge in impact investing. There will likely be an inflow of capital for impact investment in Microfinance and other financial services, Agriculture, FinTech (financial technology) Infrastructure and energy.

Conclusion

In conclusion, the authors are of the view that over time the public will see the positive impact of this class of investment. However, it is advised that the government relax some of the tax obligations of such enterprises and investors in a bid to encourage impact investment.   It is also vital that the Nigerian government take a leave from the Government of the United Kingdom which has pleaded their support to encourage impact investment as contained in their response to the Advisory Group Report titled’ Growing a Culture of Social Impact Investing in the UK’ dated June 2018.  The highlights of the response include taxation, professional education, regulation responsible business communicating corporate social responsibility, maintain momentum and build cohesion across initiatives. An adoption of something similar will go a long way to building a sustainable Nigerian impact investing ecosystem.  

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2018 Global Excellence Awards Kenna Partners