Microfinance Bank’s Terrible Business Model in Nigeria

There is an inherent systemic flaw in the microfinance banking business model in Nigeria. I know someone won a Nobel Prize for pioneering the broad nexus of microfinance sector, but in Nigeria, it is simply not a good business model. You are expected to serve largely non-premium customers even though you cannot receive easy deposits as a “bank”. Yes, you have to look for expensive capital to serve people you would struggle to make money from. No issues – you would just be doing it until you run out of cash.

So, it is unexpected when CBN noted that it would be revoking the operating licenses of 182 other financial institutions in the country. Most of these entities ran out of cash and that was it. You cannot be serving those at the bottom of the pyramid who are typically very expensive to serve with the most expensive capital in the land. Commercial banks enjoy cheap capital through deposits, and yet they typically avoid bottom of the pyramid because they cannot make money from them. (Sure, that is changing through human-platform banking.)

The Central Bank of Nigeria on Wednesday gave a notification to revoke the operating licences of 182 other financial institutions in the country.

According to the list released by the regulator on Wednesday, 154 of the affected institutions are microfinance banks; six are primary mortgage banks; while the remaining 22 are finance companies.

The CBN said 62 of the microfinance banks had already closed shop; 74 became insolvent; 12 were terminally distressed; while six voluntarily liquidated.

Get me right – I am not saying that microfinance will not work. But the way we are running it across Nigeria has no core competitive advantage anymore. The Central Bank of Nigeria stripped all the things which made it appealing in most countries where it worked. But you cannot blame the CBN: Nigerian banking does not have super-great records on keeping people’s monies. There is no generation which has not been battered by failed banks either as depositors or sovereign losses through bailouts.

Fintechs in Nigeria

As the capital structure of microfinance banks haunt them, the fintech revolution is also catching up with many of them. Simply, fintech companies like Interswitch, Paga and Paystack are now automating out many microfinance banking institutions out of business. The services from the largely analog microfinance banks are expensive to use while the fintechs’ are cheaper. Because the fintechs are digital institutions, they are scaling their services thereby making them more appealing as they are everywhere at the same time. Just like that microfinance banking has become an endangered business in Nigeria.

The Remaining Niche

As fintech companies expand, the best remaining sector for most microfinance will be trade services: give traders money to trade locally. Most microfinance banks are unable to participate in the lucrative foreign financing part because of asset base and regulation. For the local trade services, I can give some microfinance banking institutions operating in our typical open markets (e.g. Aba, Iduomota, Onitsha) few years to live before they are annihilated by fintechs. The future is not that promising for microfinance banks in Nigeria unless they can use their licenses and become fintechs by digitizing how they work. Digitization will reduce marginal cost which is extremely important in delivering affordable products and services to the bottom of the pyramid constituency.

• Trade financing: You contribute to finance trade in some Igbo men going to China. But you need to have the right people. They mop money and use that money to bring containers. This is a thriving business in Aba and Onitsha as most have shunned banks due to cost of fees. And with the good returns, some people are taking risks. They offer good contracts and in some cases provide collateral as they own shops. Personally, I have used this model to assist some people. Yes, people I know. Their returns are the highest in Nigeria. The deal happens over four months as that is the typical time to go to China, import items and sell them at wholesale. Please do not ask me for contacts. If you are interested, this is very common in Aba, Onitsha and Lagos where there are concentration of Igbo traders.

All Together

If you are in a banking business where you only have access to expensive capital (compared to commercial banks with free deposits), and at the same time you have to serve the most expensive customers, you are in trouble. Microfinance banks in Nigeria are in that state: it is a total paralysis, and I do not see any positive outcome for many. Now, fintechs are automating most of their functions and the few “premium” customers they used to serve are moving to Paystack, Paga, and Interswitch.

The implication is a hopeless state which will not end well. So, when you read that CBN is revoking licenses of 154 of them, just understand that CBN is not even hard. It is not a business of the future unless you can do what is necessary: use the microfinance license and evolve as a fintech with scalable services where marginal cost is low, making them affordable for the extremely price-sensitive non-premium customers. Without that redesign, they would all die!

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