With the world becoming a global village, Nigeria has no option than to join the revolution of financial technology (Fintech) through electronic payments, loans, savings, switching, processing, investment, and banking applications to enhance day-to-day transactions in banking and non-banking areas of the country.
Microfinance banks as a getaway to reaching unbanked areas of the country create an inclusive regime for rural Nigeria.
This article explores the frontiers of microfinance banks in a global banking trajectory and how they can leverage financial technology by capitalizing on advantages provided by the CBN Guidelines for Payment Service Banks in Nigeria.
Banking in Nigeria remains an attractive sector with a valuable pool of over $9 billion however, despite efforts to ensure the vast majority of the country participates in banking transactions, the vast populations are unbanked.
In the Fintech sector, emerging trends are making a pool of several technological and smart banking apps which has
skyrocketed bank payments, business transactions and encouraged savings among unbanked areas of the country. Currently, Fintech revenue has shot more than $1 billion owed by the recent valuation of Flutterwave, one of the biggest digital payment
platforms in Nigeria.
Digital Payment, withdrawal, and wealth processing is the core focus for Fintech companies, this is as a result of the affordability and usability in the consumer spectrum as a bulk of its consumers are middle-aged tech-savvy individual.
This digital payment platform like Payment Service Banks is created to take advantage of the unbanked areas of Nigeria and encourage banking transaction in rural areas which in turn increases small and medium scale enterprises hence, ensuring further compliance with the National Financial Inclusion Strategy aimed at getting over 80 percent of the bankable
adults in Nigeria access to financial services. The paper examines the opportunities available for microfinance banks 6 with reliance on the new Central Bank of Nigeria Guideline for licensing and regulation of Payment Service Banks in Nigeria.
MICROFINANCE BANKS AND PAYMENT SERVICE BANKS IN NIGERIA
Growth and Activities of Microfinance Banks in Nigeria
The Microfinance Policy, Regulatory and Supervisory Framework for Nigeria 2005 established MFBs as a means of formalizing microfinance institutions (MFIs) to promote financial discipline and sustainability, while also providing access to financial services to the unbanked population.
The framework was designed to attract new capital as well as to regularize Community Banks (CBs), which had been established since the early 1990s, mainly as conduits for rural lending.
Licensed by the CBN, MFBs are allowed to solicit
deposits, ensure withdrawal, and process payments that are guaranteed by Nigeria Deposit Insurance Corporation (NDIC)10. Currently, the guideline for supervision and regulation of Micro Finance Banks 202011 is sought to promote rapid micro-savings, microcredit, and transfer services while ensuring rapid sustainable growth in the microfinance industry.
Recent development in microfinance bank credit growth, microfinance bank deposit growth, microfinance bank investment growth, microfinance bank asset growth, and per capita income shows that microfinance banks are contributing tremendously to the unbanked areas of the economy.
This was further stated in a world bank survey on the performance of microfinance institutions all over the world shows that in China, microfinance programs have been able to ensure 150 million people participate in banking transactions since 1998.
In Nigeria, the microfinance sector counts around 800 licensed MFBs as of 2014 and as of 2019, the number increased to a total of 900. This growth has given more people in the rural sector adequate assets to funding for their small-scale businesses most especially agricultural producers.
The new regulation has equipped microfinance banks to accept deposit, provision of a microloan,6 Continually referred to as MFBs Continually referred To as CBN Central Bank of Nigeria ‘Guidelines for licensing and regulation of Payment Service Banks in Nigeria’ 2020 continually referred to as CBN Guidelines for PSBs 2020 supporting small business management, clearing of the cheque, provision of mobile banking services and domestic remittance of funds amongst other.
Growth and Activities of Payment Service Banks in Nigeria. The Fintech breakthrough in the Nigerian financial sector brought changes in transaction, payment, and transfer of money seamlessly across one payment channel to another.
This technological breakthrough ushered in an era for MFBs making them leverage on the new guidelines for MFBs swerving previous confinement by CBN hence, relying on the innovative sections of the guideline.
Most MFBs registered under tier one category as provided in the guideline15 are meant to ensure their services get wider coverage in Nigeria hence breaking from the shell of a single ingenious local government location as provided in the regulation. In the wake of August 2020, CBN released a guideline aimed at regulating this kind of bank.
The CBN Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria ushered in a new era aimed at promoting a sound financial system.
The guideline was formulated to ensure strict compliance with the NFIS aimed at deepening financial services in the unbanked section of the society through Fintech by leveraging mobile digital channels to enhance financial inclusion and stimulate economic activities at the grassroots. Accordingly, PSBs are envisioned to facilitate high-volume low-value transactions in remittance services, micro-savings, and withdrawal services in a secured technology-driven environment.
During the last few months, payment service banks have provided payment support and banking operations for rural and unbanked areas at low cost. They provide a card scheme operation to ensure seamless withdrawal through the point of sale or banking agents, these technologically-driven banking activities aims at reaching out to customers clustered around the nation and to aid deposits, remittance, sales of foreign currency, electronic wallet operation, electronic payment channel operatio and investment in Federal Government of Nigeria and CBN Securities. On this note, many banks which are currently operating under the tier 1 license of the guidelines for MFBs can offer better banking operations across the Nigerian economy without necessarily becoming a commercial bank.
OPPORTUNITIES AVAILABLE FOR MFBs IN FINTECH THROUGH PSBs
Guidelines for MFBs 2020
S. 3.1 CBN Guidelines for MFBs 2020
CBN Guidelines for PSBs 2020
S. 14 CBN Guidelines for PSBs 2020
Since the introduction of PSB operations, major financial inclusion and impact have taken place in the Nigerian economy owing to the increased use of technology. CBN believes that introducing these new guidelines tailored to technological advancement will go a
long way in fulfilling the National Financial Inclusion Strategy thereby encouraging key players. As such; Banking Agents, Telecommunicationcompanies, MMOs, Switching Companies and other entities on the merit of its application subject to the approval of the CBNcan apply for PSBlicenses’19.
The current CBN review of the guidelines for MFBs20 seeks to engender strong and financially sustainable microfinance banks, enhance the safety and soundness of the microfinance sub-sector. However, for microfinance to key into emerging trends, it must take control of the advantages highlighted in the guidelinesfor PSBs by extending its tentacle, accommodating willingness to integrate operations with technological financial services hence ensuring a large consumer spectrum and increased capital
The following are opportunities available for MFBs most especially those in the tier 1 license category if it obtains a PSB licence and adapts its mode of operation.
I. MFBs will break the barrier of non-card scheme operators, it can enter into contracts with card scheme operators or their designated settlement agents for acceptance and settlement of such transaction at the ATM which will further deepen withdrawal and transactional settlement.
II. It will ensure financial operation in rural and unbanked locations, targeting financially excluded persons aimed at not less than 25% financial service touchpoints in such rural area which will in turn expand its ‘5 location’ threshold
according to the guideline.
III. Since the aim of PSBs and MFBs is to revolutionize electronic payment and withdrawal among rural and unbanked areas, MFBs ensure little or no bank charges when transacting.
IV. The Adoption of the PSB model for MFBs encourages digital-savvy middle-aged and young individuals to partake in financial liberty. With over 200 Million Nigerians and over 50% being middle-aged adults, there are high tendencies
for consumer market penetration hence, ensuring small business management growth and high domestic remittance fund in line with the CBN Guidelines for MFBs22
S. 5 CBN Guidelines for PSBs 2020
S. 3.1 CBN Guidelines for MFBs 2020
S. 2.1 CBN Guidelines for MFBs 2020
V. It encourages capacity building, operation of electronic wallet, widespread banking services, and internet banking amongst rural and unbanked areas through coordinated centers and financial services touchpoints.
Nigeria has embraced electronic banking largely by practice, probably due to globalization and the internet revolution but, the country’s laws have lagged in providing a robust framework althoughCBN had overtime expended effort in this regard.
It is worthy to note that the high cost of registration and licensing for PSBs pegged at five billion naira (N5Billion) as minimum share capital24 will discourage corporate bodies running a microfinance bank to explore this frontier since tier 1 license for microfinance banks cost two hundred million naira (N200Million), though outrageous, yet reasonable enough to ensure safety, security, and integrity.
There is an unpredictable legal environment for Fintech as the right and obligations of transacting parties, the legal aspect of electronic switching and processing, use of specified security procedure is undefined except in limited capacity25 and will
continuously become a source of concern for community confidence in technological transactions.
It is imperative to note that Microfinance banks are not specifically mentioned among eligible promoters for Payment Service Banks however, Stakeholders in the Microfinance industry interested in applying for PSB license can adopt S. 5(ix) of the CBN Guidelines for PSBs which provides that other entities on the merit of its application to the CBN can apply, such application subject to CBN’s approval.
The article has examined the salient provision of the CBN Guideline on MFBs and PSBs and its impact on micro banking as well as opportunities available for MFBs if it adapts the PSB Model thereby leveraging internet banking to reach a wider consumer
spectrum. The attempt is a reminder to MFBs to explore their frontiers by invoking S. 5(ix) of the CBN Guidelines for PSBs.
Emmanuel Onele is an Associate with Pistis Partners LLP
23 S. 3(viii) CBN Guidelines for MFBs 2020
24 S. 6.6 CBN Guidelines for PSBs 2020
25 S. 3(ix) CBN Guidelines for PSBs 2020
26S. 5 CBN Guidelines for PSBs 2020