This is the season of regulatory searchlights around the world. China has redesigned its tech sector with an avalanche of new regulations. America is going after Facebook to break it while it looks at Apple, Amazon and Google. Certainly, Nigeria cannot be left behind in this circus. So, today, we are learning that the Central Bank of Nigeria has fired a warning shot to microfinance banks: you are not allowed to handle micro-credit and retail transactions with value more than N1 million per deal!
People, this singular decision will change multiples in the investor cap table.
Innovators, the government also wants you to focus on micro with 80% of loan portfolios to be micro-credits. As you already know: this warning is not for the traditional microfinance banks but rather the fintechs which get the microfinance licenses to run a largely full fledged retail banking services. Most of those fintechs /digital challenger banks must restructure their operations immediately to avoid the CBN shocks.
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Yet, looking at this circular, I can see how one can comply 100% without material impact on the current fintech business. CBN is very agile and smart on how it has worded this directive. I do not see a reason to panic. Fintechs/ digital challenger banks need to do a few things and they will be fine. Where they fail, expect a big PAUSE.
What To Expect
First, we could be seeing automatic breaking of transactions by fintechs so that what hits their general ledgers will not exceed N1 million. So, if you want to transfer N2 million, the software will break it into two transactions of N1 million each making sure you stay below the threshold of the N1 million.
Secondly, the way credits are allotted will change. If you approve a loan portfolio of N5 million for a merchant customer as a fintech, you may structure it to be issued over five different transactions, making sure you do not pay out more than N1 million at a time. (Note: the splitting of transactions may contravene other financial regulations depending on the intention. The key thing here is the intention, not necessarily the splitting.)
Besides these two options, I also expect many fintechs to have a relationship with retail banks. Through the relationship, the retail banks could run the back-office making sure that all compliance on sizes of transactions are complied with. In other words, you can have a system where tickets above N1 million are immediately warehoused via a retail bank partner while the small ones stay with you as a digital challenger bank.
More so, I expect tools like Venmo which has a way of breaking transactions to become popular in Nigeria as fintechs work to ensure transactions stay within compliance. As they do this, product pricing will evolve. If you get a loan of N1 million, you can ask for the same loan under the same terms in another 24 hours, if you have in mind to get N2 million in total.
All Together
Software can help fintech companies implement this compliance without material impact on their operations. Yet, I will not necessarily suggest that alone. The best would be to partner with a retail bank as a “holding hand company” to make sure it covers you. While many of these fintechs may not like that option, I do think it is what CBN has in mind: only the traditional banks will run the big transaction tickets in Nigeria. That is the reality based on this directive.
So innovators, you may not like it and it may likely cost you money, but a deal with a traditional bank will protect you from any regulatory shock from the apex bank.
At least, this time, CBN did not do the usual: ban, suspend or freeze. Innovators, recalibrate. Tomorrow at Tekedia Mini-MBA Live, I will be discussing regulatory elements and this new directive has just been added.
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I clearly disagree with your comparison of what is happening in US and China to that of Nigeria. I am disappointed in you. I do not expected someone that claimed to have been educated to your level to have committed this blunder. Where is the Education? Where is the hope of this nation? It is a shame.
It is possible you did not read that piece very well. If you did, you would have noted that my reference to the US and China was not a comparison but a trend. I used the word “circus”. Sure, you have a right to be disappointed in what you read. It is part of the circus. Hope you will have peace.
I also think that to save one from CBN axe, splitting transactions should carry different subjects of transactions.
Jerry, couldn’t you air your opinion or disagreement without hurling insults at the writer?
Sorry, Jerry, do you have any issue(s) outside what Prof noted and expressed in this article referencing the CBN circular?
Notice how this thread has so far been about the ethics of criticism all in response to the initial Jerry’s comment.
It may or may not have been intentionally engineered to hijack the subject or control the narrative, but please even though we disagree with it, let other comments be about the subject and not about Jerry’s comment.
I agree with you. So Prof, on transaction splitting, is that also not a contravention of CBN rules? I think it would be better if we get to know the reasons behind the circular in the first place. That will help understanding.
This is just sentiments beclouding reason. Dont shoot the messenger all Prof had done is to illuminate on this trend.. the fintechs are sure not smiling about this.
Jerry you’ve said nothing but insults and nobody has gained from your intervention. Whilst not taking sides, you would do us better if you point out where he erred and then profess your own views.
Jerry attack the subject and not the object. Disagree with the write-up but don’t insult the person. You can make your remarks without insults.
I read your insults but you never made any telling contribution to the write-up instead it’s all insults.
Not so good of you.
I believe ICE did addressed whatever i was going to say deftly. In addition, we should always try to gentle and polite especially in dealing with other people no matter who they may be.
My take though.
Interesting read and knowing that innovation is key to not only minimize risk exposures but to go around the CBN restrictions. Your thoughts Prof. are something MFBs should consider in doing so.
This is beautiful piece. An impressed. Prof.
won’t transaction splitting be considered a regulatory breach to circumvent the law? And if that be the case I believe the Fintech coy that are involved may be sanctioned or license revoked. This is because transaction splitting is considered suspicious and in view of the new law on the m/f bank they may be found guilty.
That is why everything has to be tested. As I noted, the best playbook may be partnering with big banks.
Everyone in Nigeria are being upset
May God help us
I also think that to save one from CBN axe, splitting transactions should carry different subjects of transactions.
What China is doing is not regulation but clamp down. China should never be in the same statement/context with the US when it comes to regulation.
What China is doing is not regulation but clamp down. China should never be in the same statement/context with the US when it comes to regulation.
Breaking down loan amounts and the transactions will create bottlenecks and issues for the fintechs later on, especially if there are defaults. Besides, the regulation is “limit to a single customer” and not limit per transaction. Invariably, breaking down the loan amount into tranches does not resolve the limit issue as the CBN will review the details on clients accounts
Besides, the CBN knows just too well the tricks that banks play, and can spot those false transactions.
The rationale by the CBN is laudable and I guess the MFBs and fintechs will do themselves much good complying with the rule, which of course has been there right from inception; it is not a new rule.
In a Nation of over 210 million people and less than 40 million access credit from formal lenders raises much questions. Again, much of the loans by fintechs goes for luxury and consumption expenditure for those above the average income level. Their loans are mainly available to salaried workers and less for the more than 80% of our people in the informal sector.
The thrust of the CBN is to ensure that these funds gets to the micro productive units towards poverty alleviation. The Fintechs should restrategize.
‘Besides, the regulation is “limit to a single customer” and not limit per transaction.’ In the directive, what I saw there was “per transaction”. Yet, if per single customer, how does that play? Per single customer in a year, day, month, etc. Could you explain.
Splitting transactions into tranches of maximum of N1m will amount to an effort to complywith the “letter” and not the “spirit” of the regulation/directive.
Any institution that tow this line is opened to penalty and sanction if regulator found them out.
How come no one is talking about item 4 on the circular. That caveat gives MfBs/FinTechs the opportunity to disburse loan amounts above N1 million as long as their loan portfolio is made up of 80% microcredits. Item 3 already defined the size of microcredit as loans of N1 million and below for tier 1, state, and National MfBs while N500,000 is for tier 2 MfBs.
“That caveat gives MfBs/FinTechs the opportunity to disburse loan amounts above N1 million as long as their loan portfolio is made up of 80% microcredits.” – that does not seem evident looking at that document. Do you have more documents on this you can share.