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Obtaining a microfinance bank license in Nigeria

Microfinance banks are quite common in Nigeria and this is because they play a key role in the financial sector. They offer small scale banking services to those who cannot be covered by the traditional banks. There are a couple of top Nigerian microfinance banks and they include Kuda microfinance bank, Lapo microfinance bank, Fairmoney microfinance bank, VFD microfinance bank and Accion microfinance bank.

In Nigeria, the regulatory body responsible for the operations of a microfinance bank is the Central Bank of Nigeria (CBN) and in this article, we will be considering what it takes to obtain a microfinance bank license.

What is a Microfinance Bank?

According to CBN, a microfinance bank (MFB), unless otherwise stated, shall be construed to mean any company licensed by the CBN to carry on the business of providing financial services such as savings and deposits, loans, domestic fund transfers, other financial and nonfinancial services to microfinance clients. Microfinance clients here are the economically active low-income earners, low-income households, the un-banked and under-served people; in particular, vulnerable groups such as women, persons living with disabilities, youths, microentrepreneurs, informal sector operators, subsistence farmers in urban and rural areas.

Types of MFB License

To operate a microfinance bank, there are various types of licenses required and they are grouped into four (4), namely:

Tier 1 MFB license

This category of license can be used to operate in banked and high-density regions, with a maximum of four (4) branches outside the main office within five (5) Local Government Areas closely linked or sharing the same borders.

Tier 2 MFB license

This license is used in unbanked or rural areas with a maximum of one branch outside the main office within the same local government area.

State microfinance bank license

A state MFB license enables the holder to operate in just one state or Federal Capital Territory (FCT) and can have branches in that state but not more than one branch in a local government area except it has at least one branch in every local government area in that state.

National microfinance bank license

This can be operated in more than one State including the FCT. Please note that a newly licensed National MFB cannot commence operations with more than ten (10) branches.

Who Can own a Microfinance bank?

A microfinance bank can be owned by individuals, group of individuals, community development associations, private corporate entities and foreign investors.

Can one Form of Microfinance Bank be Transformed into Another Type?

Yes, one form of Microfinance bank license can be transformed into another form of license. For example, a Tier 2 microfinance bank license can be transformed into a tier 1.

What are the Licensing Stages for a Microfinance Bank?

Licensing for a microfinance bank is grouped into 3 stages and they are;

1. Pre-licensing presentation
2. Approval in principle (AIP)
3. Final license

Requirements for Pre-licensing Presentation

Promoters and investors are expected to make a pre-licensing presentation on the business case of the proposed MFBs to CBN before a formal application for license can be made.

Requirements for grant of Approval-In-Principle (AIP)

1. Evidence of capital contribution made by each shareholder
2. Evidence of name reservation with the Corporate Affairs Commission (CAC)
3. Detailed business plan or feasibility report which should include:
   1. Objectives of the Microfinance Bank
   2. Justification for the application
   3. Ownership structure in a tabular form indicating the name of proposed investor(s), profession/business and percentage shareholdings
   4. Sources of funding of the proposed equity contribution for each investor
   5. Where the source of funding the equity contribution is a loan, it must be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system
   6. Organizational structure, showing functional units, responsibilities, reporting relationships and grade of heads of departments/units
   7. Schedule of services to be rendered
   8. Five-year financial projection of the proposed bank indicating expected growth, profitability and the underlying assumptions
   9. Details of information technology requirements and facilities.
4. where the applicant is an institutional investor, the following should be added:
   1. Certificate of Incorporation and certified true copies of other incorporation documents.
   2. Board resolution supporting the company’s decision to invest in the equity shares of the proposed bank
   3. Names and addresses (business and residential) of owners, directors and their related companies, if any
   4. Audited financial statements & reports of the company and Tax Clearance Certificate for the immediate past 3 years.
5. Draft copy of the company’s Memorandum and Articles of Association (MEMART). At a minimum, the MEMART is expected to contain the following information:
   1. Proposed name of the MFB
   2. Objects clause
   3. Subscribers to the MEMART
   4. Procedure for amendment
   5. Procedure for share transfer/disposal
   6. Appointment of directors
6. 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;
7. For regulated foreign institutional investors, an approval or a ‘no objection letter’ from the regulatory authority in the country of domicile;
8. Shareholders agreement providing terms for disposal/transfer of shares as well as authorization, amendments, waivers, reimbursement of expenses
9. Statement of intent to invest in the bank by each investor
10. Technical Services Agreement, where applicable
11. Detailed Manuals and Policies covering:
    1. Credit Policy Manual
    2. Internal Audit Manual
    3. Asset/Liability Management Policy (ALM Policy)
    4. Accounting policies and principles
    5. Roles and responsibilities of the senior management officials responsible for financial management
    6. Treasury operations, including funds management, vouchers, payroll and procurement
    7. Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) Policy
    8. Enterprise-Wide Risk Management Framework
    9. Whistle Blowing Policy
    10. Code of Ethics and Business Conduct;
12. Bank Verification Number (BVN) and Tax Clearance Certificate of each member of the Board and significant shareholders.
13. Duly signed resume and valid means of identification for proposed shareholders of proposed MFB
14. Criteria for selecting board members
15. 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
16. Consolidated statement of account showing the capital contribution for all shareholders
17. Completed Fitness and Propriety Questionnaire
18. Sworn declaration of net worth executed by the proposed shareholders, directors and management personnel;

Upon providing the above, CBN is expected to communicate its decision to the applicant within 90 days. Where CBN is satisfied with the application, it will issue an Approval-in-Principle (AIP) to the applicant. An AIP is very important because without it the applicant cannot register the bank with CAC.

Requirements for Granting of Final License

Application for the final license is expected to be made within six (6) months of obtaining the AIP and the requirements are:

1. Certified true copy (CTC) of the incorporation documents
2. Evidence of location of Head Office (rented or owned) for the take-off of the business
3. Schedule of changes, if any, in the Board, Management and Shareholding after the grant of AIP
4. Evidence of ability to meet technical requirements and modern infrastructural facilities such as office equipment, computers, telecommunications, to perform the bank’s operations and meet CBN and other regulatory requirements
5. Copies of letters of offer and acceptance of employment in respect of the management team
6. List of proposed top management staff and duly signed resume stating their qualification (including photocopies of academic and professional credentials), experience, records of accomplishments and valid means of identification
7. Comprehensive plan on the commencement of the bank’s operations with milestones and timelines for roll-out of key payment channels
8. Board and staff training program
9. Inspection of the premises of the proposed bank

Cost of Obtaining a Microfinance Bank License

The cost of obtaining a microfinance bank license is as follows:

FINANCIAL REQUIREMENTS	TIER 1 MFB (N)	TIER 2 MFB (N)	STATE MFB (N)	NATIONAL MFB (N)
Minimum share capital	200,000,000	50,000,000	1,000,000,000	5,000,000,000
Application fee	100,000	100,000	200,000	300,000
License fee	250,000	250,000	500,000	1,000,000

Please note that service fees for processing this license is wholly at the discretion of the service provider providing this service.

Are there other Compliance Requirements for a Microfinance Bank?

Yes, there are other compliance requirements for a microfinance bank and they some of them are:

1. Licensed microfinance banks are required to insure their deposit liabilities with the Nigerian Deposit Insurance Corporation (NDIC).
2. Compliance with money laundering laws
3. All corporate governance guidelines must be adhered to
4. Observance of whistle blowing guidelines in the Nigerian Banking Industry
5. Publication of its audited financial statement in a national daily newspaper
6. Appropriate procedures and policies for risk management must be put in place

Conclusion

Obtaining a microfinance bank license demands that all compliance requirements are met to ensure grant of license. Even after the license is granted, post license compliance must be observed to avoid revocation of license as this would destabilize the bank’s business. Kindly send us a message to us at Firmus Advisory today if you would like to know more about a microfinance bank license in Nigeria or are looking to obtain one.