The introduction of the Microfinance Policy, Regulatory & Supervisory Framework in 2005 was done with the aim of pushing for the first time, a definite resolution on the part of the Federal Government to achieve the objectives of:-
– Financial Inclusion for the economically active poor.
– Poverty eradication.
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– Mainstreaming the informal Microfinance sector into the Nigerian Financial system.
These objectives were to be dependent on the Microfinance Bank model, which grew in popularity and previously underbanked customer reach, warranting the introduction in 2013 of The CBN Revised Guidelines For the Regulation and Supervision of Microfinance Banks 2013 introduced for proper Regulatory oversight in a subsector of the Financial system that was growing in leaps and bounds but had its own issues of unethical practice due to the absence of a direct monitoring system.
No one probably foresaw the next stage of Microfinance Banking – The Digital Bank Model, which was a positive disruption and value addition at the same time using the intangible Human Resource Capital skill that is Financial technology.
Other developments led to a revised set of Guidelines governing the licensing of Microfinance Banks which forms the main objective of this article which is trying to achieve a clear understanding of the issues of :-
– The Regulatory Framework currently governing Microfinance Banks in Nigeria.
– Who can own or operate Microfinance Banks in Nigeria.
– The current categories of Microfinance Banks in Nigeria.
– The permissible and non-permissible activities for Microfinance Banks in Nigeria.
– A limited view of the post-licensing operation and Compliance requirements for Microfinance Banks in Nigeria.
What is the Regulatory Framework currently governing Microfinance Banks in Nigeria?
Microfinance Bank licensing and operation in Nigeria is governed by the Central Bank of Nigeria(CBN) through the Banks and Other Financial Institutions Act (BOFIA) and specifically the CBN Guidelines For the Regulation and Supervision of Microfinance Banks in Nigeria 2020.
Who can own a Microfinance Bank in Nigeria?
Microfinance Banks can be owned by:-
– Individuals.
– Groups of Individuals.
– Companies.
– Foreign Investors.
This is subject to a maximum of 49% shareholding for individuals & aggregate related parties.
What are the current categories of Microfinance Banks in Nigeria?
The current categories of Microfinance Banks in Nigeria are:-
- Tier 1 Microfinance Banks :- These are Microfinance Banks authorized to operate in urban areas that carry an authorized minimum share capital of 200 million Naira and are allowed to have not more than 5 branches in within 5 contiguous Local Government areas in a state subject to the authorization of the CBN.
- Tier 2 Microfinance Banks :- These are Microfinance Banks with Rural authorization (to operate only in rural underbanked locations) having an authorized minimum share capital of 50 Million Naira and are allowed to have not more than 2 branches in 1 Local Government area subject to the authorization of the CBN.
- State Microfinance Banks :- Microfinance Banks in this category carry a minimum capital requirement of 1 Billion Naira, require the approval of the CBN before opening any new branch, and are required to commence operations with not more than 10 branches in a state and must also not have more than 2 branches in a Local Government area unless it had 1 branch in every Local Government area in the state or Federal Capital Territory.
- National Microfinance Banks :- Banks in this category carry an authorization to operate nationwide , a minimum capital requirement of 5 Billion Naira and are required to commence operations with not more than 10 branches. This Microfinance Bank is most commonly operated in Nigeria currently as a Digital Bank model.
What are the permissible and non-permissible activities for Microfinance Banks in Nigeria under the CBN Guidelines?
Permissible Activities
– The acceptance of various types of deposits including savings, target & demand deposits from individuals, groups and associates.
– The provision of credit to its customers.
– The provision of Housing micro-loans.
– Ancillary services such as capacity building on record keeping & small business management and safe custody.
– The issuance of debentures to interested parties to raise funds from members of the public with the prior approval of the CBN.
– Agency Banking & acting as an agent for the provision of mobile banking, micro insurance & any other services as may be determined by the CBN from time to time.
– The collection of money or proceeds of banking instruments on behalf of its customers including the clearing of cheques through correspondent banks.
– Payment services such as salaries, gratuities and pensions for employees of various tiers of Government.
– The provision of loan disbursement services for the delivery of the credit programme of government , agencies, groups & individuals for poverty alleviation on a non-recourse basis.
– The provision of domestic funds remittance services for its customers.
– The Investment of its surplus funds in suitable Money Market instruments approved by the CBN.
– The maintenance and operation of various types of accounts with other Banks in Nigeria.
– The provision of micro-leasing facilities, Microfinance-related hire purchase & the arrangement of consortium lending services.
– CBN Intervention fund participation.
– Domestic Commercial Paper Issuance.
– Investment in cottage industries and income generating projects for low-income persons as may be prescribed by the CBN.
Non-Permissible Activities
– Forex Transactions except Forex borrowing.
– International Commercial Papers.
– International Electronic Funds transfer.
– Clearing house activities.
– Dealing in Land for speculative purposes.
– Dealing in Real Estate except for use as office accommodation.
– Provision of any facility for speculative purposes.
– International Corporate Finance.
– Collection of 3rd- party cheques and other instruments for the purpose of clearing through correspondent banks.
– Leasing, renting & sale or purchase of assets of any kind with related parties and/or significant shareholders of the bank without prior CBN approval.
– Financing any illegal activities.
What are the requirements for a Microfinance Bank License?
Applying for a Microfinance Bank license is in 3 stages namely:-
– The Pre-licensing presentation stage.
– The Approval-In-Principle (AIP) stage.
– The Final licensing stage.
The Pre-licensing stage.
– The promoters & investors of a proposed Microfinance Bank shall be required to make a Pre-licensing presentation on the Business case of the proposed Microfinance Bank to the Central Bank of Nigeria before a formal application for a license.
– This provision is also applicable to investors seeking to acquire an existing Microfinance Bank.
The Approval-In-Principle Stage.
The promoters of a proposed Microfinance Bank through their lawyer will be required to submit a formal application for a license grant addressed to the Governor of the Central Bank of Nigeria.
This application shall be accompanied by:-
- Evidence of the payment of the prescribed non-refundable application fee to the CBN.
- Evidence of Capital Contribution by each of the shareholders.
- Evidence of a minimum capital deposit in line with the CBN Guidelines to be verified by the CBN.
- Evidence of company name reservation with the Corporate Affairs Commission (CAC).
- A detailed Business plan/Feasibility report (consult your lawyer on the required contents of a Microfinance Bank Business plan as prescribed by the CBN Guidelines).
- For Institutional/Corporate Investors, promoters shall forward the following documents:-
– Its Certificate of Incorporation and other relevant Incorporation documents.
– A copy of its Board Resolution supporting the company’s decision to invest in the equity shares of the proposed bank.
– Names & addresses of owners, directors & their related companies if any.
– Audited Financial statements and reports of the company along with a Tax clearance certificate for the immediate past 3 years.
- A copy of the proposed Microfinance Bank’s draft MEMART (Memorandum & Articles of Association).
- A written and duly executed undertaking by the bank’s promoters that the bank will be adequately capitalized for the volume & character of its business at all levels.
- For regulated foreign Institutional investors, an approval or a ‘no objection’ letter from the regulatory authority in the foreign investor’s country of domicile.
- A copy of the proposed bank’s Shareholder’s Agreement.
- A statement of an intent to invest in the bank by each investor.
- A technical services agreement where applicable (Digital Banking).
- Detailed manuals & policies covering the proposed bank’s:-
– Credit policy manual.
– Asset/liability management policy.
– Anti-Money Laundering Combating the Financing of Terrorism (AML/CFT) policy.
– Whistle-blowing policy.
– Enterprise Risk Management Framework.
– Code of Ethics/Business Conduct.
- The Bank Verification Number (BVN) and Tax clearance certificate of each member of the board of directors and shareholders of the proposed bank.
- Duly signed resume & valid means of identification for the proposed bank’s shareholders and directors if any.
- The criteria for selecting the proposed bank’s board members.
The processing of an AIP application from the date of completing the application takes at least 90 days. The grant of an AIP will entitle the promoters to register the bank with the Corporate Affairs Commission upon the presentation of the AIP from the CBN.
The Final Licensing Stage
The promoters of a Microfinance Bank should within or not more than 6months after obtaining an Approval-In-Principle, submit through their lawyer, an application for a final Microfinance Bank license grant to the Governor of the Central Bank of Nigeria to which the following should be attached:-
– Evidence of the non-refundable bank license fee payment by the promoters today the Central Bank of Nigeria.
– Certified True Copies of the Bank’s Certificate of Incorporation of the Bank, Memorandum & Articles of Association & CAC Form 1.1.(Application for registration of company)
– A schedule of changes in the bank’s board, management & shareholding after the AIP grant if any.
-Evidence of the head office location (rented or owned) of the bank for the commencement of business operations.
– Evidence of the bank’s ability to meet the requirements to perform operations & meet all its Regulatory Compliance requirements.
– Copies of letters of employment offers and acceptance regarding the bank’s management team.
– A list of the bank’s proposed management staff and their duly signed resumes.
– Comprehensive plan in commencement of the bank’s operations with milestones and timelines for the rollout of key Payment channels.
– Board & staff training programme.
– The conduct of a Pre-licensing inspection of the bank’s premises and facilities by the CBN.
What is the position of the CBN Guidelines on Digital Banks?
Oddly, there is currently no clear Regulatory Framework on Digital Banks as a specific bank category, and this has created a vacuum through which Microfinance Banks have been able to operate, sometimes beyond the scope of their license categories due to the physically borderless nature of digital banking.
What the CBN Guidelines provide for are physical office structures within confined geographical areas with licensing requirements that have to be complied by Digital Microfinance Banks as well.
The Guidelines being subsidiary legislation should thus be understood to apply to Digital Banks based on their licensing categories. Digital Banks seeking to operate nationwide have to either opt for a National Microfinance Bank license or consult a lawyer on formulating an alternative Digital operating structure.
What are the important post-licensing Compliance requirements that must be observed by Microfinance Banks?
Once a Microfinance Bank license has been granted, the bank should as soon as possible consult its Legal adviser and other professionals on following operational compliance requirements:-
- Corporate Governance requirements for Microfinance Banks.
- Operational requirements for CBN Intervention funds.
- Requirements for Microfinance Bank Share Capital increase.
- Conditions for the revocation of a Microfinance Bank license.
- The new AML/CFT Compliance requirements.
- Single obligor limits.
- Operational requirements and controls.
- Cyber Security compliance.
- Lending Guidelines.
- Restructuring and reorganization requirements.
Also, every Microfinance Bank is required to be a member of the National Association of Microfinance Banks (NAMB) as well as to always maintain the minimum capital requirement & an adequate accounting/record-keeping system; comply with all CBN Guidelines ; comply with the requirements incidental to the authorization to perform Banking operations & other sector regulations.