The need for better financial services

For the majority of Nigeria’s population, access to adequate financial services is almost always non-existent. This means that those most in need of these services are often disempowered from getting them. The rise of FinTech has created alternatives to traditional banking and given many Nigerians access to these previously exclusive financial services through readily available digital applications.  

Why are microfinance banks important?

Microfinance Banks (MFBs) were established in Nigeria to improve financial inclusion across the country. With the promise of low cost credit options, the initiative was designed to foster the inclusion of Nigeria’s unbanked population by catering to poorer citizens who cannot afford most financial services.

What has changed?

The Central Bank of Nigeria has recently released a draft guideline revamping the regulations of MFBs. Data on the institutions performance suggest that although there is a positive and significant correlation between them and poverty alleviation, their impact is still understated, meaning that progress is slow and moderate. Likewise as MFBs are in part designed to cater to Nigeria’s growing SME (small and medium sized enterprises) sector, the recapitalization is premised on the notion that banks with stronger financial liquidity will be able to accommodate the needs of this sector.

All Microfinance Banks are now expected to meet the new financial requirements introduced by way of the new minimum capital base structure. The changes are as follows:

  • The new capital base structure means that the CBN now categorizes MFBs into four classes as opposed to the three previously contained in the 2012 Guideline. Under the new structure which starts in April 2020, MFBs will be categorized into Tier-1 Unit, Tier-2 Unit, State and National.
  • The capital base requirements of the previously classed Unit MFBs have risen from N20 million to N50 million for Tier 2 Unit banks and to N200 million for Tier 1 Unit banks. Both are expected to meet at least N35 million and N100 million capital base by April 1 2020.
  • The capital base of State MFBs has been raised from N100 million to N1 billion by 2021 and they are expected to have N500 million capital base by April 1 2020
  • National MFBs are expected to have N3.5 billion by next month and shore it up to N5 billion by April 2021 from a previous requirement of N2 billion
  • Tier 1 unit banks will operate in the banked and high-density areas, and are allowed to open not more than four branches outside the head office within five contiguous local governments areas
  • Tier-2 unit banks with rural authorization will only operate in the rural, unbanked or underbanked areas, and are allowed to open one branch outside the head office within the same local government area
  • A State Microfinance Bank is authorized to operate in one State or the Federal Capital Territory (FCT). It is allowed to open branches within the same State or the FCT, subject to prior written approval of the CBN for each new branch or cash centre.

Why is this important?

FinTech companies have been a major disruptor in the banking industry because they offer similar services with the added convenience of transacting digitally. Most however frequently collaborate with Microfinance Banks to be able to offer more comprehensive financial services beyond savings and minor investments.

With pressure from the CBN for MFBs to meet the 80% financial inclusion goal slated for 2020, some banks may scramble to stay viable amidst the new capital base requirements. The CBN also announced plans to usher in more mobile banking, agency banking and digitized payment services, all which present competition for banks that have not developed substantial digital offerings.

On the flip side, technological innovations in the banking industry have ushered in a new crop of MFBs that operate mostly digitally. With the proposed restructuring of MFBs, the jury is still out on the potential effects of the guidelines on the status of these particular MFBs.

For brick and mortar MFBs, increased partnerships with FinTech companies may be on the horizon as banks may find themselves looking to these companies to increase their holdings via new clients. Now more than ever MFBs are under pressure to illustrate their vitality to Nigeria’s sporadic financial sphere. The policy starts on the 1st of April 2020 and all MFBs are obliged to comply.