What are Microfinance Banks
Microfinance banking simply refers to the provision of a broad range of financial services such as deposits, loans, money transfers and insurance to the poor, low-income, middle-class household and their micro enterprises at affordable cost.
Therefore, we can explain Microfinance banks themselves as mini or non-commercial bank licensed by the Central Bank of Nigeria (CBN) to provide financial services (such as savings, deposits, loans, domestic funds transfer) and non-financial services to microfinance clients.
They function in almost the same ways as a Commercial bank, except that they cannot perform international Funds transfer services and have a limited financial ceiling.
Types of Microfinance Institutions
Several types of Microfinance Institutions (MFIs) exist, but for easy classification, we will class them as;
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- UNIT MICROFINANCE BANK: This type of microfinance bank requires at least N20,000,000 (Twenty Million Naira as a capital base to start up and it is not permitted to operate by opening branches or money centers apart from the main bank office.
- STATE MICROFINANCE BANK: This is a lot higher than the unit microfinance bank. It requires a minimum of N100,000,000 (One Hundred Million Naira) in the capital base to start. It requires approval by the Central Bank of Nigeria to operate in the same state when a new branch wants to open.
- NATIONAL MICROFINANCE BANK: This requires the highest cash as startup capital than the first two mentioned above. A sum of N2,000,000,000 (Two Billion Naira) is required to start a microfinance bank in this category. It can, however, operate in all states of the country, although it must be approved by the CBN for each branch that is to be opened
What are the unique features that distinguish microfinance from other formal financial products?
- The absence of asset-based collateral.
- The simplicity of their operations.
- The smallness of loans advanced and/or savings collected
Operations, Benefits and Services of Microfinance Banks in Nigeria
The functions and services offered by a microfinance bank may be different from one institution to another. However, their primary goal remains the same. The general functions of microfinance banks include deposits, payment services, loans, insurance, and money transfers as we earlier pointed out.
Their targets always include:
- Low-income households.
- The economically active poor.
- Informal sector operators, micro-entrepreneurs and subsistence farmers.
- The un-banked and underserved people, particularly vulnerable groups such as women, youths and the physically challenged.
What are the benefits of microfinance banks in Nigeria?
Some of the benefits of microfinance banks in Nigeria include:
- Ensures money transfers and insurance to the poor, low-income, middle-class household.
- Microfinance banks also serve as an instrument for governmental monetary control.
- They are tools of development and achievement of developmental policies.
- They are agents for positive targeting of certain industries and crafts.
- The bank offers loan to the poor as well as a better repayment rate, thereby creating jobs and helping the country’s economy grow.
List of Approved Microfinance Banks in Nigeria
Regulation of Microfinance Banks in Nigeria
The apex monetary authority CBN is the government agency in charge of licensing microfinance banks in Nigeria. Against the backdrop of concerns expressed by stakeholders and the need to enhance financial services delivery, the 2005 Microfinance Policy, Regulatory and Supervisory Framework for Nigeria was Revised in April, 2011, and in exercise of the powers conferred on the Central Bank of Nigeria by the provisions of Section 28, sub-section (1) (b) of the CBN Act 24 of 1991 (as amended) and in pursuance of the provisions of Sections 56-60(a) of the Bank and Other Financial Institutions Act (BOFIA) 25 of 1991 (as amended).
The policy according to the Central Bank of Nigeria recognizes existing informal institutions and brings them within the supervisory purview of the CBN creating a platform for the regulation and supervision of microfinance banks (MFBs) through specially crafted Regulatory Guidelines.
How do I set up a Microfinance Bank in Nigeria?
Below, we have outlined the requirements to operate a Microfinance bank in Nigeria in line with the Central Bank guideline.
Licensing Requirements for the Microfinance Bank in Nigeria:
The various licensing requirement of microfinance bank in Nigeria includes the followings:
- Application in writing to the Governor of the Central Bank of Nigeria indicating which of the three categories is being applied for by its promoters. The said application should be accompanied by an application fee.
- A deposit of minimum capital requirement of the microfinance bank in a microfinance bank share capital escrow account with the Central Bank of Nigeria. Note: This will be released without interest to the promoters after the license has been issued.
- Evidence that the capital requirement paid is accepted to the Central Bank of Nigeria and not from illicit trade, laundered money etc.
- Detailed feasibility report and certificate of capital importation in case of foreign capital.
- A copy of the Memorandum and Articles of Association of the company.
- A letter of intent to pay for the subscribed shares of the proposed microfinance bank by its shareholders.
- List of promoters/proposed shareholders, their addresses, as well as the names and address of their branch
- And finally, particulars of the proposed board of directors.
- Upon submission of the various documents, the Central Bank of Nigeria will properly go through all the steps mentioned and go on to issue an approval in principle after interviewing the promoters. The approval in principle shall be granted by the Central Bank of Nigeria if satisfied with the overall quality within three months of receipt of the application. However, the approval in principle does not grant permission to commence operation before the grant of a final license.
- A microfinance bank with the Approval in Principle shall be granted a final operating license and commence business after satisfying the CBN’s conditions by submitting the requisite documents:
The list of documents the promoter will submit to the CBN to obtain the license includes the followings:
- A full copy of the shareholders’ register
- A valid copy of the share certificate of each shareholder
- A form CAC 2 i.e. return of allotment filed with the Corporate Affairs Commission
- Form of Corporate Affairs Commission i.e. particulars of the board of directors
- Memorandum and article of association filed with the Corporate Affairs Commission
- The opening statement of affairs audited by an approved firm of accountants practicing in Nigeria
- Certified valid copies and original copy of the certificate of incorporation
- One copy of a letter of offer and acceptance of employment by the leading management team
- Letter of undertaking to follow the rules and regulations governing the microfinance bank in Nigeria.
Upon successful completion of the above process, the Central Bank of Nigeria will write to the microfinance bank to commence business after physical inspection of the structure. The microfinance bank will need to inform the Central Bank of Nigeria on the date of commencement of business.
Upon acceptance, the Apex monetary authority would then issue;
- An Approval-in-Principle (AIP) is then granted by the CBN on receipt of the application and after being satisfied with the overall quality of the proposal within three (3) months.
- The grant of the AIP is a condition precedent for registration at the CAC. When this is done, the incorporation process would be concluded at the CAC (NB: Name must end with Microfinance Bank).
- An MFB with AIP will then be granted a final operating license upon the submission of the required documents such as the incorporation documents, share certificates of the shareholders, membership register and opening statement of affairs (NB: Before the MFB can begin operations, the CBN will conduct a physical inspection of its premises).
It is important to note that the Central Bank of Nigeria reserves the right not to issue a license to the microfinance bank if it is not satisfied with the structures of the proposed microfinance bank after the evaluation. Once a license is not issued, the capital and its interest will be returned back to the promoters.
What are the Limits of Operation for Microfinance Banks in Nigeria?
Microfinance banks cannot perform any of the under listed banking operations:
- MFBs in Nigeria cannot accept public sector deposit except if permitted
- They cannot engage in foreign transactions
- Microfinance banks in Nigeria cannot provide funding for illicit activities e.g. gambling
- MFBs cannot participate in foreign electronic funds transfer
- Cannot provide funds for speculative purposes
- Microfinance banks cannot deal in the real estate business
- Engage in foreign corporate finance
- Selling/buying or renting of any kind with directors without the request and approval by the Central Bank of Nigeria
The regulatory requirements to establish an MFB might be too onerous for a startup with limited funding. Typically, startups alleviate funding problems by entering into Service Level Agreements, Partnership Agreements or other similar agreements with existing MFBs to use their license for operations. Subsequently, the startup can then establish or acquire its own MFB after scaling and attracting significant funding.
Summary:
Microfinance banks serve a very critical role in an economy, helping to reach the ”unbanked”, and making banking and credit services regulated by the Central Bank of Nigeria; supervising, approving, regulating and enacting policies that decide the modes and manners of operation to ensure smooth, efficient and safe banking that aligns with national economic policies and objectives.
Author- Chukwu Chinatu-Ikem
is an Economist, Researcher, Econometrist, Business Developer and Writer who is committed to solving real problems, for real people and in real-time. His focus is on excellence in corporate service delivery.