HOW TO SET UP A MICROFINANCE BANK IN NIGERIA

Microfinance Banks are mini banks licensed by the Central Bank of Nigeria (CBN) to carry on the business of micro finance services such as savings, loans, domestic fund transfers and other financial services which they provide for their customers particularly the economically disadvantaged, subsistence farmers, artisans, micro entrepreneurs etc., and to a large extent unbanked people in the rural areas.

By virtue of the powers conferred on it by Sections 56 to 60 of the Banks and Other Financial Institutions Act (BOFIA), the Central Bank of Nigeria is the regulatory agency for all financial institutions in Nigeria including Micro Finance Banks.

WHAT LAW(S) REGULATES MICRO FINANCE BANKS IN NIGERIA?

A couple of laws and regulations play a role in regulating the activities of micro finance banks in Nigeria, among which are: The Banks and Other Financial Institutions Act (BOFIA), The CBN Guidelines for the Regulation and Supervision of Microfinance Banks in Nigeria (“Guidelines”). The microfinance policy, supervisory and regulatory framework was first launched in the year 2005. It was revised in 2011 following several issues that emerged in the course of implementation. In 2013 it was revised and further revised and reissued on March 3rd, 2020 to address the challenges experienced in the implementation of the previous regulations.

WHAT ARE THE TYPES OF MICRO FINANCE BANKS (MFBs) IN NIGERIA?

As provided by the CBN guidelines, there are, currently four (4) categories of Micro Finance Banks. These categories are differentiated by their share capital and geographical location requirements.

  1. Tier 1 Unit Micro Finance Bank (with urban authorization): They are licensed to operate in the banked and high-density areas, and is allowed to open not more than four (4) branches outside the head office within five (5) contiguous Local Government Areas as approved by the CBN. The share capital requirement for starting a Tier 1 Unit Micro Finance Bank is N200,000,000 (two hundred million naira) which is deposited with the CBN, and which sum may be invested by the CBN and thereafter refunded to the depositors, with any interest, at the end of the application process, regardless of whether a final license is granted or not). To apply for a Tier 1 Micro Finance Bank license with the CBN, payment of; non-refundable application fee of N100,000 (one hundred thousand naira) for the CBN’s Approval-In-Principle, a non-refundable licensing Fee of N250,000 (two hundred and fifty thousand naira) for final license and, where necessary, a Non-refundable change of name Fee of N50,000 (fifty thousand naira) is required

2. Tier 2 Unit Micro Finance Bank (with rural authorization): They are licensed to operate only in rural, unbanked or under banked areas, and is allowed to open one (1) branch outside the head office within the same Local Government Area subject to the CBNs approval. A Tier 2 Unit MFB requires a N50,000,000 (fifty million naira) share capital, which will be deposited with CBN. The amount may be invested by CBN and thereafter refunded to the depositors, with any interest, at the end of the application process, whether or not a  final License is granted. To apply for this license category, a non-refundable Application fee of N100,000 9one hundred thousand naira) for the CBN’s Approval-In-Principle, a non-refundable Licensing Fee of N250,000 (two hundred and fifty thousand naira) for final license and, where necessary, a non-refundable change of name fee of N50,000 (fifty thousand naira).

Please note that the minimum issuing micro loan amount Tier 2 Microfinance banks are permitted to issue to customers per transaction is less than N500,000 (five hundred thousand naira) while other categories of micro finance banks are permitted to issue not more than N1,000,000 (one million naira). See paragraph 24.0 of the guidelines.

3. State Micro Finance Banks: They are licensed to operate in one State or the Federal Capital Territory (FCT) and is allowed to open branches within the same State or the FCT subject to prior written approval of the CBN for each new branch or cash center. It is not permitted to open more than two branches or cash centers in the same Local Government Area unless it has established at least one (1) branch or cash center in every Local Government Area in the State or the FCT. N1,000,000,000 (one billion naira) is the share capital requirement for a state microfinance bank. This sum will be deposited with the CBN, and may be invested by CBN and thereafter refunded to the depositors, with any interest, at the end of the application process, whether final License is granted or not. To apply for this class of license, such applicant must pay; a non-refundable application fee of N200,000 (two hundred thousand naira), for the CBN’s Approval-In-Principle, a non-refundable Licensing Fee of N500,000 (five hundred thousand naira) for final license and, where necessary, a Non-refundable change of name fee of N100,000 (one hundred thousand naira).

4. National Micro Finance Banks: They are authorized to operate in more than one State including the FCT. A newly licensed National MFB shall not commence operations with more than ten (10) branches. A National MFB requires a N5 Billion share capital to start up. This sum will be deposited with CBN, and may be invested by CBN and thereafter refunded to the depositors, with any interest, at the end of the application process, whether final license is granted or not. Apply for this license category requires a non-refundable application fee of N300,000 (three hundred thousand) for the CBN’s Approval-In-Principle, a non-refundable licensing fee of N1,000,000 (one million naira) for final license and, where necessary, a Non-refundable change of name fee of N250,000 (two hundred and fifty thousand naira).

WHAT ARE THE PERMISSIBLE AND NON PERMISSIBLE ACTIVITIES OF MICRO FINANCE BANKS?

The framework for the operation of microfinance banks in Nigeria has spelt out the various services that a Micro Finance Banks may provide.

A micro finance bank shall be allowed to engage in the provision of the following services to its clients:

  1. Acceptance of various types of deposit including savings, time, target and demand deposits from individuals, groups and associations;
  2. Provision of credits to its customers;
  3. Provision of housing micro loans;
  4. Provision of ancillary services such as capacity building on record keeping and small business management and safe custody;
  5. Issuance of debentures to interested parties to raise funds from members of the public with the prior approval of the CBN
  6. Collection of money or proceeds of banking instruments on behalf of its customers including clearing of cheques through correspondents banks;
  7. Act as agents 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 license;
  8. Appoint agents to provide financial services on its behalf in line with CBN agent banking guidelines, within the geographic coverage of its license;
  9. Provision of payment services such as salary, gratuity, pension for employees of the various tiers of government.;
  10. Provision of loan disbursement services for delivery of the credit programme of government, agencies, groups and individual for poverty alleviation on non-recourse basis;
  11. Provision of banking services to its customers such as domestic remittance of funds;
  12. Maintenance and operation of various types of account with other banks in Nigeria;
  13. Investment of its surplus funds in suitable money market instruments approved by the CBN
  14. Operation of micro leasing facilities, microfinance related hire purchase and arrangement of consortium lending;
  15. Participate in CBN intervention fund and funds other sources;
  16. Provision of microfinance related guarantees for its customers;
  17. Financing agricultural inputs, livestock, machinery and industrial raw materials to low-income persons;
  18. Investment in cottage industries and income generating projects for low-income persons as may be prescribed by the CBN from time to time;
  19. Provision of professional advice to low-income persons regarding investments in small businesses;
  20. Issuance of domestic commercial paper subject the approval of the CBN
  21. Provide financial and technical assistance and training to micro enterprises; and
  22. Any other permissible activity as may be approved by CBN from time to time.

Non Permissible Activities

The CBN through it regulatory framework prohibits Microfinance banks from engaging in the following financial services:

  1. Foreign currency transactions, except foreign currency borrowing;
  2. International commercial papers;
  3. International corporate finance;
  4. International electronic funds transfer;
  5. Clearing house activities;
  6. Collection of third party cheques and other instruments for the purpose of clearing through correspondent banks;
  7. Dealing in lands for speculative purposes;
  8. Dealing in real estate except for its use as office accommodation;
  9. Provision of any facility for speculative purposes;
  10. Leasing, renting and sale/purchase of assets of any kind with related parties and/or significant shareholders (five percent or more of the equity) of the MFB without prior written approval of the CBN;
  11. Financing of any illegal activities; and
  12. Any activity other than those permitted as stated above or as may be prescribed by the central bank of Nigeria from time to time.

PROCEDURES AND REQUIREMENTS FOR OBTAINING A MICRO FINANCE BANK LICENSE

Obtaining a Microfinance Bank (MFB) license in Nigeria depends on the category of microfinance bank one seeks to operate. The setting up of a microfinance bank must be in compliance with the principles provided for by the CBN as all financial institutions seeking operations in Nigeria must be licensed by the CBN. According to the CBN regulation, application for MFB license shall be in three (3) stages, namely:

  1. Pre-licensing Presentation;
  2. Approval-in-Principle (followed by Registration with the Corporate Affairs Commission) and;
  3. Final License

Before the application for an Approval in Principle (AIP)  is made to the CBN, the promoters of the proposed Micro Finance Bank need to apply for a reservation of name with Corporate Affairs Commission (CAC). However, the incorporation process with the Corporate Affairs Commission shall not be completed until an Approval in Principle is obtained. Therefore, to have your micro finance bank registered with the CAC, the following under-listed requirements and procedures are to be followed

  1. Minimum of two proposed names of the bank (a minimum of two is required in the event one is rejected).
  2. Form CAC 1, reservation and availability of name
  3. The proposed objectives of the business should be well defined and stated
  4. A properly drafted memorandum and articles of association for the proposed bank. It’s advisable to have this prepare by an experienced Corporate Lawyer.
  5. Statement of the authorized share capital. Unlike the previous Companies and Allied Matters Act (CAMA), the 2020 Act requires that all the shares be issued by the company to the initial subscribers.  Also person(s) having significant control over the company must be disclosed.
  6. Details of shareholders, director(s) and company secretary such as: names, home and contact address, phone numbers and email address, date of birth, occupation, two recent passport photographs of each director and the secretary, including valid means of identification (the data page of the ID). Currently, the CAMA 2020 gives room for a single shareholder registration unlike the previous Act which required a minimum of two shareholders to register. This however still depends on the sector of operation as some sectors (such as banks) require a minimum of two or more shareholders.
  7. Statutory declaration of compliance by a legal practitioner
  8. The address of the principal place of business
  9. Fillings with the Federal Inland Revenue Service (FIRS) after stamp duty has been paid.
  10. Approval in Principle by the CBN
  11. All other documents or fees that may be required by the Commission.

Requirements for Granting Approval-In-Principle (AIP)

A. The promoters of MFBs shall be required to submit a formal application for the grant of license addressed to the Governor of the Central Bank of Nigeria.

B. The application shall be accompanied with the following:

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.

C. For institutional investors, promoters shall forward the following additional documents:

  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.

D. Draft copy of the company’s Memorandum and Articles of Association (MEMART). At a minimum, the MEMART shall 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

E. 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;

F. For regulated foreign institutional investors, an approval or a ‘no objection letter’ from the regulatory authority in the country of domicile;

G. Shareholders’ agreement providing terms for disposal/transfer of shares as well as authorization, amendments, waivers, reimbursement of expenses;

H. Statement of intent to invest in the bank by each investor;

I. Technical Services Agreement, where applicable;

J. 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.

K. Bank Verification Number (BVN) and Tax Clearance Certificate of each member of the Board and significant shareholders.

L. Duly signed resume and valid means of identification for proposed shareholders of proposed MFB

M. Criteria for selecting board members;

N. 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

O. Consolidated statement of account showing the capital contribution for all shareholders;

P. Completed Fitness and Propriety Questionnaire; and sworn declaration of net worth executed by the proposed shareholders, directors and management personnel;

Q. Any other information that the CBN may require from time to time.

Upon six (6) month of obtaining AIP, the promoters shall further submit another application for the grant of final approval addressed to the Governor of Central Bank of Nigeria

Requirements for obtaining final license.

Not later than six (6) months after obtaining the AIP, the promoters of a proposed MFB shall apply in writing for the grant of a final license addressed to the Governor of the Central Bank of Nigeria. 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 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, 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 (including photocopies of academic and professional credentials), experience, records of accomplishments and valid means of identification;
  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

Conduct of Pre-Licensing Inspection

As a requirement for the grant of final license, the CBN shall conduct an inspection of the premises and facilities of the proposed bank to, amongst others:

  1. Check the physical structure of the office building and infrastructure provided for take-off of the MFB;
  1. Sight the original copies of the documents submitted in support of the application for license;
  2. Meet with the Board and Management team whose resumes had earlier been submitted to the CBN;
  3. Verify the capital contributions of the promoters; and
  4. Verify the integration of its infrastructure with the National Payments System.

Where the CBN is satisfied that the MFB has complied with the prescribed requirements, a final operating license will be issued subject to any terms and conditions prescribed by the CBN.

We hope you found this information useful? If you need further guidance on setting up a micro finance bank or obtaining a license from the CBN, feel free to reach out to us here or through any of our contacts. We look forward to hearing from you.

Cynthia Tishion
Cynthia is a lawyer and currently serves as Head of Corporate / Commercial Services at LEX – PRAXIS. With her passion for business and entrepreneurship, she is actively engaged in creating awareness on the legal aspect of businesses through various platforms such as writing, public speaking engagements.

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