CBN widens activities of Microfinance Banks
The Central Bank of Nigeria (“CBN”) has updated its Revised Supervisory and Regulatory Guidelines for Microfinance Banks (“MFBs”) in Nigeria to support their continued development and sustainability.
A recent financial sector report published by the CBN concluded that the MFB sector is facing headwinds, including increased competition (for origination and deposits) and increasing credit risk. This is considered the case, especially for the smaller institutions.
With these conclusions in mind, in early March the CBN announced a new minimum capital requirement for MFBs, while also splitting the categories of licences from three into four. The new minimum capital structure, states that Tier 1 unit MFB must have an NGN 100 million (USD 274 000) capital threshold by April 2020, and NGN 200 million (USD 548 000) by April 2021. For Tier 2 Unit MFB, the regulator raised the capital base to NGN 50 million (USD 137 000) by April 2021, but by April this year, the threshold should be NGN 35 million (USD 99 000). State and National MFBs minimum capital requirements have not changed, NGN 1 billion (USD 2.7 million) and NGN 5 billion (USD 13.6 million), respectively. Generally, higher minimum capital requirements for MFBs encourage consolidation, which should strengthen the industry.
The CBN also addressed a wider scope of permissible activities for MFBs in order to encourage financial inclusion. MFBs permissible activities now include the issuance of commercial paper and appointment of agents under the agency banking model. MFBs can now invest in money market instruments including Treasury Bills and access intervention funds. The introduction of an agency banking model facilitates the introduction of digital banking type services.
The CBN has been slower than other African regulators to develop robust licence regimes suitable for mobile and digital banking. Separately the CBN has released draft guidelines of new Licencing Regime (Licence Tiering) for payment system providers (applicable to switching, PSSPs (Payment Processing Gateway of Portals), PTSPs (POS Terminal deployment and services ), Non-bank merchant acquiring, Super Agency and Mobilising Aggregators). There is no confirmation for the date of implementation of these regulations.
We view the calibration of the regulatory minimums in the sector as a tricky balance for the regulators across the Continent. Raising minimum capital requirements can promote scale and sustainability in emerging institutions through consolidation and capital raising. However, hurdles too high can dampen competition and innovation by creating barriers to entry.