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.

– 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:-

1. 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.

2. 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.

3. 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.

4. 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:-

1. Evidence of the payment of the prescribed non-refundable application fee to the CBN.

2. Evidence of Capital Contribution by each of the shareholders.

3. Evidence of a minimum capital deposit in line with the CBN Guidelines to be verified by the CBN.

4. Evidence of company name reservation with the Corporate Affairs Commission (CAC).

5. 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).

6. 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.

7. A copy of the proposed Microfinance Bank’s draft MEMART (Memorandum & Articles of Association).

8. 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.

9. For regulated foreign Institutional investors, an approval or a ‘no objection’ letter from the regulatory authority  in the foreign investor’s country of domicile.

10. A copy of the proposed bank’s Shareholder’s Agreement.

11. A statement of an intent to invest in the bank by each investor.

12. A technical services agreement where applicable (Digital Banking).

13. 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.

14. The Bank Verification Number (BVN) and Tax clearance certificate of each member of the board of directors and shareholders of the proposed bank.

15. Duly signed resume & valid means of identification for the proposed bank’s shareholders and directors if any.

16. 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:-

1. Corporate Governance requirements for Microfinance Banks.

2. Operational requirements for CBN Intervention funds.

3. Requirements for Microfinance Bank Share Capital increase.

4. Conditions for the revocation of a Microfinance Bank license.

5. The new AML/CFT Compliance requirements.

6. Single obligor limits.

7. Operational requirements and controls.

8. Cyber Security compliance.

9. Lending Guidelines.

10. 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.

The recent trending video on social media is the display of a vehicle with an “automatic plate number” where the car uses two number plates attached to it and you can switch from one plate number to another electronically by just pushing a button installed inside the car. 

It looked cool and smooth and people went crazy over this display. So many people were making inquiries on how to get it as they would love their cars to use this “automatic switching” two number plates. 

The interesting thing is that there are laws prohibiting a vehicle owner from using two different plate numbers on a vehicle in Nigeria. A vehicle is only to be assigned with just one number plate and any act of acquiring or fixing a second plate number to your vehicle is a criminal offense.

It is the law that before you use a vehicle in Nigeria, you must register the vehicle first with the FRSC and obtain every necessary documentation, and be issued a number plate which will be affixed to the vehicle.

Section 10(3) of the FEDERAL ROAD SAFETY COMMISSION (ESTABLISHMENT) ACT, 2007, states that the  Federal Road Safety Commission has been charged with the duty (amongst others) of registering cars, designing and issuing number plates, and each vehicle is entitled to just one number plate; anything other than these; like obtaining a plate number from any other person other than the FRSC or using more than one number plate on a vehicle is a criminal offense.

Subsequently, the succeeding subsection 4 of section 10 provides that the FRSC has been empowered to arrest and prosecute anybody who fails to use or display a number plate on his or her vehicle. 

S.(10)(4)(s) provides thus; In the exercise of the functions conferred by this section, members of the Corps shall have the power to arrest and prosecute persons responsible or suspected of having committed any traffic offense including the following offenses and serve such person with court processes or notice of offense sheet-

(s) failure to display number plates on vehicles;

It is worthy of note that you are only permitted to drive a new car in Nigeria for just three months without registration or attaching a plate number but after three months and you still drive the car around without registering the car it then becomes a criminal offense and you can be arrested and prosecuted for that. 

Nigerians always feel that laws are made against them or to oppress them instead of them having the positive mindset that laws are made for their protection. Ironically, the laws bothering on the registration of vehicles and attaching number plates before use is one of the laws that is made for the protection and security of the vehicle users or owners because if by any means the car gets stolen or snatched it will be easier to be traced and recovered when the car has been registered and the details of the vehicle are in the database of the FRSC. 

The registration of vehicles also helps the security agencies keep track of the vehicles in the city and helps in the identification of the owners and users of the vehicle. There’s a reasonable presumption (which could be wrong) that those that refuse to register their vehicle with the appropriate authorities and attach an identifiable number plate are those that use their vehicle for criminal activities like kidnapping or robbery.

Let me congratulate AjoMoney for a small fundraise as it begins a new  round. Tekedia Capital led its pre-seed. They are growing very fast and now support 12,000 users at a total of  US$750,000 in GTV in just months of launch.

Founded by Ibrahim Adepoju and Chineye Ochem ACA, CFE, MBA, AjoMoney offers APIs and technologies to consumer-, mobile agent-, cooperative- and developer-platforms. They digitized Africa’s centuries-old rotating savings and credit associations (ROSCAs), making it possible for people to access zero or low interest credit when they collectively save and invest money.

Yes, buddies pull funds together and rotate who takes turns over months. Today, AjoMoney has technology to help you manage that, from two friends to cooperatives to a village, and beyond. Disrupt has a nice piece on AjoMoney.

https://school.tekedia.com/tekedia-capital/

He is building one of the finest structures for agriculture in Africa. He is an eminent operator and one of the most amazing in the continent. His technologies power institutions in Nigeria, Sierra Leone, Senegal, Kenya, etc. In short, a couple of universities in Nigeria depend on tools he has provided in some domains. Some banks run on his platforms – and he has millions of users!

DAVID MEEK JAH an emergent African industrialist, will be at Tekedia Mini-MBA live tomorrow to share what he is doing in the continent.

We have been working with 100 of his team in Tekedia Institute; welcome Sierra Leone to Africa’s largest business school for #builders and #makers. Amazing and brilliant young people.

 The Banking & Finance sector, especially the Fintech Industry, relies almost totally on information throughout all points of its value chain from Bank account opening to making deposits or withdrawals to creditworthiness assessments  to remittances and monetary transfers to Compliance measures and even to decentralized Digital asset transactions and Insolvency. 

Before the advent of Open Banking as a concept, the Fintech sector was basically a combination of sealed information compartments which provided a lot of problems in trying to effect seamless transactions based on limited end-user information, the closest thing at the time to a centralized information system being the Nigerian Interbank Settlement Scheme (NIBBS) as well as Credit Bureau.  

What this article thus aims to achieve is to treat in the most straightforward terms the following topics:- 

– An explanation of Open Banking as a concept. 

– The Regulatory Framework governing Open Banking in Nigeria. 

– The advantages and disadvantages of Open Banking, especially regarding the Fintech sector. 

– The stakeholders in Nigeria’s Open Banking system. 

– The most notable Regulatory Compliance requirements for Open Banking participants in Nigeria. 

What is Open Banking? 

Open Banking is simply a Financial service concept within Financial technology that states that Financial and Non-financial businesses should share or operate a seamless unified customer information system readily accessible with the prior consent of the Customers/End-users with the aim of providing more useful and competitive service packages for their customers mainly through the use of Application Programming Interfaces (APIs) which are software programs applied as digital connections for the purpose of Customer Data Request and transmission to 3rd parties. 

A practical illustration of this would be you trying to access a loan from your Digital Moneylender Mobile App on your phone which will in turn use APIs to access your Creditworthiness score from other online sources of your Financial state(such as your Banking app) in order to accurately determine if you qualify for a loan and then the appropriate loan offer for you in seconds as against the former practice of processing your application in 48-72 Hours during which manual Creditworthiness checks and KYC(Know-Your-Customer) due diligence had to be carried out. 

What is the Regulatory Framework governing Open Banking in Nigeria? 

Open Banking in Nigeria is governed by the Central Bank of Nigeria (CBN) through the CBN Guidelines For Open Banking in Nigeria 2022. 

Who are the main participants in Nigeria’s Open Banking system? 

The following entities make up Nigeria’s Open Banking system : 

– The Central Bank of Nigeria (CBN) as a Regulatory Agency of the Federal Government in charge of granting licenses to API providers and consumers to operate in an Open Banking system. 

– The API Providers (or ‘APs’)  which are Financial Institutions that share data with other institutions , a notable example being Banks. 

– The API Consumers (or ‘ACs’) which are companies that apply or access data released to them by the APs. 

– The Customers/End-users which are the owners of the data released by the APs to the ACs with the consent of the  customers. 

What are the benefits and disadvantages of Open Banking? 

ADVANTAGES 

– Open Banking provides a centralized information network/centre where people who use financial services can share their information (especially their financial information) with other Financial service providers in a secure way. 

– Open Banking provides a means through which Lenders can be provided with a more accurate picture of an End-user’s Financial exposure/risk level/credit rating as well as providing End-users a better assessment of their credit rating/financial health when considering applying for loans. 

– The creation of a service package culture based on the offering of personalized products to suit each End-user or Customer based on Open Banking can lead  to a higher rate of healthy business competition in the Fintech space. 

– It reduces the low level of customer trust in traditional Banking institutions. 

– It reduces accurate Customer data scarcity within the Banking and Financial Service/Fintech sectors. 

DISADVANTAGES 

– Open Banking has inadvertently left to higher rates of Hacking attempts in Nigeria, a number of such attempts being successful to the detriment of Customers/Digital Final Service End-users. 

– Open Banking in Nigeria has led to an abnormally higher amount of Customer Data access privileges to APs and ACs and their employees in a way that can violate the fundamental right of Privacy guaranteed under the Nigerian Constitution. 

– Open Banking comes with a significantly higher risk of Cyber-Terrorism and mass remote espionage. 

– Open Banking has also led to a higher rate of Consumer Rights Violations via Cyber-Bullying, particularly in the Fintech subsector of Digital Lending. 

– Open Banking poses a higher risk of Phishing scams. 

– The creation of entirely new trust relationships with 3rd parties for in most cases unaware customers using Digital Open Banking applications leading to ambiguity as to where to apportion liabilities in the event of a Customer complaint or Customer Dispute Resolution e.g. most financially literate people in Nigeria still believe that Banks actually carry out the electronic operations of Automated Teller Machines directly and have never heard of companies like Interswitch.  

What are the most notable provisions of the CBN Guidelines on Open Banking? 

The following are some of the most notable/important provisions of the Guidelines on Open Banking :- 

– The creation of an Open Banking Registry(OBR) :- This is a Regulatory oversight system &  public repository for the details of registered participants, with each participant being identifiable by its Corporate Affairs Commission (CAC) numbers as recorded in the OBR(Paragraph 6 of the Guidelines).  

– The outlining of Accreditation criteria for Open Banking System participation via onboarding to the OBR .(Paragraph 6.1). 

– The provision for Consent management rules (Paragraph 7). 

– The provision of responsibilities for APs and ACs (Paragraphs 8 & 9). 

– The provision of an Open Banking Dispute Resolution Framework (Paragraph 12) 

– The provision of a requirement for compulsory SLA Documentations of all transactions and contractual relationships between APs and ACs as well as a Regulatory fee structure to be outlined in the SLA documentation. 

Conclusion :- It can be seen from the above that while it might sometimes come across as a double-edged sword, Open Banking brings a lot of overwhelming advantages and constitutes another major value disruption in Nigeria’s Fintech space. Intending serious participants in the Open Banking system will thus be at a greater advantage when properly guided by the right set of professionals going forward.