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The Central Bank of Nigeria has a new directive on the size of deals microfinance banks can do in the nation. Largely, the apex bank does not want any credit or transaction that exceeds a total amount of N1 million. Largely, as we already know, the microfinance banks of today are fintechs and digital challenger banks. So, this directive is really going to impact these fintechs.

As I write, more than 90% of fintechs would be affected because N1 million transaction size is small money in Nigeria. Yet, there are ways they can overcome this challenge.

In this post, I shared some ways fintechs and digital challenger banks can update their operations to be in compliance.

I will discuss this deeper during Tekedia Live today. Largely, there is no reason to panic. The central bank has not dropped a hammer here. Innovators must adjust and continue to fix market frictions. I see many ways to be in compliance and I just listed a few on the link. I also expect our members in the compliance world to provide guidance during Tekedia Live.

Comment on LinkedIn Feed

Comment #1: Why can’t the CBN come up with a digital banking license like Singapore if they really do care about financial inclusion. These archaic licenses and regulations do more harm than the impact they are trying to make.

My Response: Actually what everyone is saying. But one thing is clear here: digital banks cannot advance real financial inclusions since fintechs/digital banks are not allowed by law to issue bank verification numbers (BVN). So, customers of the digital banks must first be customers of the traditional banks. Yet, CBN is a victim here because Nigeria does not have what other nations have: national identity number. Digital banks’ customers are subsets of traditional banks because they cannot bring full new customers into the fold.

Comment #2: CBN is a very smart institution. The goal is not to run against innovation but to protect the traditional banks from running out of business. I think this is an important thing to do. Traditional banks are still very instrumental to the progress of the nation even for a long time to come, hence the need for some protection through, crafting ways to indirectly force collaboration… We can call it a “pseudo-merger” at play.
The result: the fintechs can leverage the physical infrastructure of the traditional banks to reach new customers and provide a holistic value to existing ones. The traditional ones can leverage the digital prowess of fintechs to scale operational efficiency and make things better for their mostly, non-digital customers.

From my point of view: It’s a win-win.

My Response: “the goal is not to run against innovation but to protect the traditional banks from running out of business.” – I made the point that CBN expects that deeper partnership. Now, I expect Kuda which has tons of money to explore actually buying a traditional bank to justify the $500 million tag.

Central Bank of Nigeria Sends Warning Shot to Microfinance Banks and Digital Challenger Banks

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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.

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.

You do not need GSM to have broadband internet access in your village or rural office. All you need is a TV signal there. We are truly honoured for the support which the Nigerian Communications Commission (NCC) has offered to our engineering experimentation.

Today, we have broadband internet access and we have no bill from any GSM operator. Amazing things are coming from engineers and we are excited about the promises of the future.

Tekedia Capital will continue to support builders of the future through capital and engineering vision. Tekedia Capital offers a specialty investment vehicle (or investment syndicate) which makes it possible for citizens, groups and organizations to co-invest in innovative startups and young companies in Africa and around the world. Capital from these investing entities are pooled together and then invested in a specific company or companies. Learn more here.