The Legal Framework for Establishing a Microfinance Bank in Nigeria

Contributed By Eliot Oseighe Okosun

INTRODUCTION

The inception of microfinance banks was a result of the recognition of the need to foster a robust economic clime in the nation. This cannot be achieved without putting in place well-focused programs to reduce poverty through the empowerment of people by increasing their access to factors of production, especially credit. In line with this reasoning therefore, it was no mere coincidence that the Central Bank of Nigeria (CBN) introduced Nigeria’s first Microfinance Policy Framework which was introduced in December 2005, barely three months after the United Nations General Assembly adopted 2005,^[1] as the International Year of Microcredit to address the constraints that exclude people from full participation in the financial sector.^[2] This led to the establishment of microfinance banks in Nigeria.

What is Microfinance Banking

According to the CBN Revised Regulatory and Supervisory Guidelines for MFB in Nigeria, A Micro Finance Bank, unless otherwise stated, “Shall be construed to mean any company licensed to carry on the business of providing micro-finance services such as savings, loans, domestic fund transfers and other financial services”^[3]

Regulatory and Operational Framework

The regulatory environment of a microfinance bank is dominated by the Central Bank of a country (such as Nigeria), which offers policy and regulatory guidelines to push microfinance in the country while also serving as the sector’s regulator. The following laws apply to microfinance banks in Nigeria:

1. The Central Bank of Nigeria Act 2007
2. The Banks and Other Financial Institutions Act [BOFIA] 2020
3. Central Bank of Nigeria Guidelines for the Regulation and Supervision of Microfinance Banks in Nigeria (January 2020).

Permitted Activities of a Microfinance Bank^[4]

Under the Central Bank of Nigeria Guidelines for the Regulation and Supervision of Microfinance Banks, some activities have been spelt out in which a microfinance bank is allowed to engage for the provision of services to its clients. They are:

1. Acceptance of various types of deposits, including savings, time, target and demand deposits from individuals, groups and associations;
2. Provision of ancillary services such as capacity building on record keeping and small business management and safe custody;
3. Issuance of debentures to interested parties to raise funds from members of the public with the prior approval of the CBN;
4. Collection of money or proceeds of banking instruments on behalf of its customers, including clearing of cheques through correspondent banks;
5. Act as agent for the provision of mobile banking, micro-insurance and any other services as may be determined by the CBN from time to time, within the geographic coverage of its licence;
6. Provision of payment services such as salary, gratuity, and pension for employees of the various tiers of government;
7. Provision of loan disbursement services for the delivery of the credit programme of government, agencies, groups and individuals for poverty alleviation on a non-recourse basis and maintenance and operation of various types of accounts;
8. Investment of its surplus funds in suitable money market instruments approved by the CBN;
9. Operation of micro leasing facilities, microfinance-related hire purchases and arrangement of consortium lending and participation in CBN Intervention Fund and funds other sources;
10. Financing agricultural inputs, livestock, machinery and industrial raw materials to low-income persons;
11. Investment in cottage industries and income-generating projects for low-income persons as may be prescribed by the CBN from time to time; etc.

Categories of Micro-Finance Banks

In Nigeria, in accordance with the Central Bank circular of 3^rd March 2020 to shareholders and the general public, the Central Bank issued a “GUIDELINES FOR THE REGULATION AND SUPERVISION OF MICROFINANCE BANKS IN NIGERIA” with the aim to strengthen and improve the sector, highlighted four (4) types of Microfinance banks which include^[5]:

1. Tier One Unit Micro-Finance Bank
2. Tier Two Unit Micro-Finance Bank
3. State Micro-Finance Bank
4. National Micro–Finance Bank

Licensing And Ownership Requirements

A microfinance bank may be established by individuals, groups of individuals, community development associations, private corporate entities and foreign investors subject to a maximum of 49% shareholding for individuals and aggregate related parties^[6]. Thus, no individual, group of individuals, their proxies or corporate entities and/or their subsidiaries shall own controlling interest in more than one MFB, except as approved by the CBN.

Consequently, a financial holding company that intends to set up any category of a Microfinance bank as a subsidiary shall be required to meet the prescribed capital and other requirements stipulated in these Guidelines.

Furthermore, the Government also participates in the establishment of microfinance banks and such is structured according to the following models:

1. Fully Owned Government Microfinance Bank Model In this model, the State or Local Government is allowed 100 per cent ownership of the equity of a MFB but shall progressively divest its interest to private investors within a maximum period of five (5) years. Two variants of the model are envisaged as follows:
2. Government Fully Owned State Microfinance Bank
3. Government Fully Owned Unit Microfinance Bank
4. Public-Private Partnership Model.
5. Government-Sponsored Co-operative Model.

LICENSING REQUIREMENTS FOR APPLICATION FOR A MICROFINANCE BANK LICENCE

Under the Central Bank of Nigeria Guidelines for The Regulation and Supervision of Microfinance Banks in Nigeria (January 2020), there are three (3) stages for the licence procurement in Nigeria for Microfinance banks. Which are:

1. Requirements for Pre-licensing Presentation ^[7]

Promoters and investors shall be required to make a pre-licensing presentation on the business case of the proposed MFBs to the CBN before a formal licence application. This provision is also applicable to investors acquiring an existing MFB.

1. Requirements for grant of Approval-In-Principle (AIP)^[8]
   1. The promoters of MFBs shall be required to submit a formal application for the grant of licence addressed to the Governor of the Central Bank of Nigeria. The application must include the following document:

(i). Evidence of payment of non-refundable application fee to the Central Bank of Nigeria;

(ii). Evidence of capital contribution made by each shareholder;

(iii). Evidence of minimum capital deposit in line with Section 4.2.7 of the CBN Guidelines;

(iv). Evidence of name reservation with the Corporate Affairs Commission (CAC);

(v). Detailed business plan or feasibility report which shall, at a minimum, include:

a. Objectives of the Microfinance Bank;

b. Justification for the application;

c. Ownership structure in a tabular form indicating the name of proposed investor(s), profession/business and percentage shareholdings;

d. Sources of funding of the proposed equity contribution for each investor;

e. Where the source of funding the equity contribution is a loan, such shall be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system;

f. Organizational structure, showing functional units, responsibilities, reporting relationships and grade of heads of departments/units;

g. Schedule of services to be rendered;

h. Five-year financial projection of the proposed bank indicating expected growth, profitability and the underlying assumptions; and

i. Details of information technology requirements and facilities.

1. For institutional investors, promoters shall forward the following additional documents: certificate of incorporation and certified true copies of other incorporation documents, board resolution supporting the company’s decision to invest in the equity shares of the proposed bank, names and addresses (business and residential) of owners, directors and their related companies, if any, and audited financial statements & reports of the company and tax clearance certificate for the immediate past 3 years.
2. Draft copy of the company’s Memorandum and Articles of Association (MEMART).
3. A written and duly executed undertaking by the promoters that the bank will be adequately capitalized for the volume and character of its business at all times.
4. For regulated foreign institutional investors, an approval or a ‘no objection letter from the regulatory authority in the country of domicile.
5. Shareholders’ agreement providing terms for disposal/transfer of shares as well as authorization, amendments, waivers, and reimbursement of expenses.
6. Statement of intent to invest in the bank by each investor.
7. Technical Services Agreement, where applicable.
8. Detailed Manuals and Policies.
9. Bank Verification Number (BVN) and Tax Clearance Certificate of each member of the Board and significant shareholders.
10. Duly signed resume and valid means of identification for proposed shareholders of proposed MFB.
11. Criteria for selecting board members.
12. Board composition, directors’ duly signed resumes and valid means of identification. The size and composition of the board shall comply with the provision of the CBN Code of Corporate Governance for MFBs.
13. Consolidated statement of account showing the capital contribution for all shareholders.
14. Completed Fitness and Propriety Questionnaire; and sworn declaration of net worth executed by the proposed shareholders, directors and management personnel.
15. Any other information that the CBN may require from time to time.

Following the receipt of an application, the CBN shall communicate its decision to the applicant within 90 days. Where the CBN is satisfied with the application, it shall issue an Approval-in-Principle (AIP) to the applicant The proposed bank shall not incorporate/register its name with the CAC until an AIP has been obtained from the CBN in writing, a copy of which shall be presented to the Corporate Affairs Commission (CAC) for registration.

1. Requirements for Granting of Final License ^[9]

Not later than six (6) months after obtaining the AIP, the promoters of a proposed Microfinance Bank shall submit an application for the grant of a final licence to the CBN. The application shall be accompanied by the following:

1. Evidence of payment of non-refundable licensing fee to the Central Bank of Nigeria;
2. Certified true copy (CTC) of the Certificate of Incorporation of the bank;
3. CTC of MEMART;
4. CTC of Form CAC 1.1 (Application for Registration of Companies);
5. Evidence of location of Head Office (rented or owned) for the take-off of the business;
6. Schedule of changes, if any, in the Board, Management and Shareholding after the grant of AIP;
7. Evidence of ability to meet technical requirements and modern infrastructural facilities such as office equipment, computers, and telecommunications, to perform the bank’s operations and meet CBN and other regulatory requirements;
8. Copies of letters of offer and acceptance of employment in respect of the management team;
9. List of proposed top management staff and duly signed resume stating their qualification etc.
10. Comprehensive plan on the commencement of the bank’s operations with milestones and timelines for roll-out of key payment channels; and
11. Board and staff training programme.

Conclusion:

In conclusion, establishing a Microfinance Bank in Nigeria requires strict adherence to a comprehensive legal framework overseen by the Central Bank of Nigeria (CBN) and other regulatory bodies. This framework encompasses licensing, capital requirements, governance standards, risk management, and ongoing compliance obligations. Navigating these regulations diligently and ethically is essential for the successful and sustainable operation of a Microfinance Bank, ensuring financial inclusion and economic development in Nigeria.

1. United Nations, ‘Press Release’ : UN LAUNCHES INTERNATIONAL YEAR OF MICROCREDIT 2005, United Nations Press Release (18 October 2004) https://press.un.org/en/2004/dev2492.doc.htm , accessed on 21 September 2023 ↑
2. Draft National microfinance Development Strategy‘ (for discussion and comments only) p.1 https://ngfrepository.org.ng:8443/jspui/bitstream/123456789/1871/1/NGF%3B%20DRAFT%20NATIONAL%20MICROFINANCE%20DEVELOPMENT%20STRATEGY.pdf accessed on 21 September 2023 ↑
3. Central Bank of Nigeria : REGULATORY AND SUPERVISORY FRAMEWORK FOR MICROFINANCE BANKS [MFBs] IN NIGERIA (December 2015) https://www.cbn.gov.ng/out/publications/guidelines/dfd/2006/regulatory%20guidelines.pdf accessed on 21 September 2023 ↑
4. Central Bank of Nigeria Ibid ↑
5. Central Bank of Nigeria, ‘Circular to Microfinance Bank stakeholders and the General Public’ : Exposure Draft of the Guidelines for the Regulation and Supervision of Microfinance Banks in Nigeria (3 March 2020) https://www.cbn.gov.ng/out/2020/fprd/mfb%20regulation%20draft%20merged.pdf ↑
6. Ibid ↑
7. Ibid ↑
8. Ibid ↑
9. Ibid ↑