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How to Start a Microfinance Bank in Nigeria – Requirements and Procedures

How to Start a Microfinance Bank in Nigeria? This guide will walk you through the process of starting up your own microfinance bank in Nigeria and how to meet the requirements and procedures to get the license from the CBN (Central Bank of Nigeria). You’ll learn how to find funding, hire employees, gather investment capital, and become profitable. This guide covers everything you need to know about starting up your own microfinance bank in Nigeria, so let’s get started!

What is a Microfinance Bank?

A microfinance bank is simply a microlending institution. The main difference between banks and MFBs is that MFBs specialize on lending money to small businesses. An MFB’s assets are mainly cash, loans (both short-term, medium-term or long-term), securities purchased, receivables due from other MFBs, demand deposits with commercial banks etc.

Why do we need another microfinance bank in Nigeria?

Before we go into how to start a microfinance bank in Nigeria, it’s important for us to first look at why we need another one. A littlereport by CBN indicates that there are about 916 licensed microfinance banks in Nigeria. That is CBN said it’s not enough considering Nigeria’s population of over 200 million people and our economy is dependent on them so much. So this is an opportunity to setup your Microfinance bank and make huge profit.

What are the requirements to start a Microfinance bank?

The CBN Guidelines for MFBs require that you have a minimum paid-up capital of 5,000,000,000100 Naira. If your institution is not owned by individuals, it must be incorporated as a company limited by guarantee with authorized share capital. Other guidelines specify that no single shareholder shall own more than 10% of your shares, at least 70% of which should be local investors. In order to start a micro-finance bank, one needs to adhere strictly to CBN’s guidelines for starting an MFB in Nigeria. In order to obtain a license from Central Bank of Nigeria (CBN), you must submit certain documents along with your application. The following information can help guide you through the process of starting a microfinance bank.

CBN Licensing Requirements For Microfinance Banks In Nigeria

Application for MFB licence shall be in three (3) stages, namely:
(I) Pre-licensing Presentation
(II) Approval-in-Principle
(III)Final License
4.2.1 Requirements for Pre-licensing Presentation Promoters and investors shall be required to make pre-licensing presentation on the business case of the proposed MFBs to the CBN before a formal application for licence. This provision is also applicable to investors acquiring an existing MFB.
4.2.2 Requirements for grant of Approval-In-Principle (AIP)
A) 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.
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 this Guidelines, to be verified by the CBN;
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;
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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:
i. Certificate of Incorporation and certified true copies of other
incorporation documents.
ii. Board resolution supporting the company’s decision to invest in the equity shares of the proposed bank;
iii. Names and addresses (business and residential) of owners, directors and their related companies, if any;
iv. 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:
i. Proposed name of the MFB
ii. Objects clause
iii. Subscribers to the MEMART
iv. Procedure for amendment
v. Procedure for share transfer/disposal
vi. Appointment of directors
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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:
i. Credit Policy Manual;
ii. Internal Audit Manual;
iii. Asset/Liability Management Policy (ALM Policy);
iv. Accounting policies and principles;
v. Roles and responsibilities of the senior management officials responsible for financial management;
vi. Treasury operations, including funds management, vouchers, payroll and procurement;
vii. Anti-Money Laundering and Combating Financing of Terrorism
(AML/CFT) Policy;
viii. Enterprise-Wide Risk Management Framework;
ix. Whistle Blowing Policy;
x. 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;
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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.
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.
4.2.3 Requirements for Granting of Final License 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, addressed to the Governor of the Central Bank of Nigeria. The application shall be accompanied by
the following:
i. Evidence of payment of non-refundable licensing fee to the Central Bank of Nigeria;
ii. Certified true copy (CTC) of Certificate of Incorporation of the bank;
iii. CTC of MEMART;
iv. CTC of Form CAC 1.1 (Application for Registration of Companies);
v. Evidence of location of Head Office (rented or owned) for the take-off of the business;
vi. Schedule of changes, if any, in the Board, Management and shareholding after the grant of AIP;
vii. 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;
viii. Copies of letters of offer and acceptance of employment in respect of the management team;
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ix. 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;
x. Comprehensive plan on the commencement of the bank’s operations with milestones and timelines for roll-out of key payment channels; and
xi. Board and staff training programme.
4.2.4 Conduct of Pre-Licencing Inspection As a requirement to the grant of final licence, the CBN shall conduct an inspection of the premises and facilities of the proposed bank to, amongst others:
a. Check the physical structure of the office building and infrastructure provided for take-off of the MFB;
b. Sight the original copies of the documents submitted in support of the application for license;
c. Meet with the Board and Management team whose resumes had earlier been submitted to the CBN;
d. Verify the capital contributions of the promoters; and
e. Verify the integration of its infrastructure with the National Payments System.
4.2.5 Requirements for commencement of operations
The bank shall, in writing, inform the CBN of its readiness to commence operations and such information shall be accompanied by one copy each of the following:
i. Shareholders’ Register;
ii. Share certificate issued to each investor;
iii. Opening statement of affairs signed by directors and external auditors;
iv. Enterprise Risk Management Framework (ERMF);
v. Internal control policy;
vi. Minutes of pre-commencement board meeting;
vii. Evidence of integration of their infrastructure with the National
Payments System; and
viii. Evidence of ability to meet technical requirements and infrastructural facilities in office equipment, computers, telecommunications, to perform banking operations, render
17 regulatory returns, respond to CBN’s requests and handle customer complaints quickly and efficiently.
ix. Board and board committee charters stating the roles and responsibilities of the board and sub committees;
4.2.6 Post-commencement Requirements
A Microfinance Bank shall:
i. Comply with all guidelines and regulations issued by the CBN and other sector regulators.
ii. Maintain adequate accounting system and keep records that capture information which reflect the financial condition of the bank.
iii. Maintain not less than the prescribed minimum capital at all times.
iv. Always comply with the requirements incidental to the authorization to perform banking operations as stipulated by
the CBN from time to time.
4.2.7 Financial Requirements
a. The financial requirements for MFB types are as follows: Unit MFB State MFB
(N)
National MFB
(N)
Tier 1
(N)
Tier 2
(N)
Minimum Capital 200,000,000 50,000,000 1,000,000,000 5,000,000,000
Non-refundable
Application fee 100,000 100,000 200,000 300,000
Non-refundable
Licensing fee 250,000 250,000 500,000 1,000,000
Non-refundable
Change of Name fee 50,000 50,000 100,000 250,000
b. The prescribed minimum capital requirement for each Category of MFB may be reviewed from time to time by the Central Bank of Nigeria from time to time.
c. The investment of the Share Capital Deposit in compliance with BOFIA, shall be subject to availability of investment instruments and upon the grant of license or otherwise, the Bank shall refund the sum deposited to the applicant, together with the investment income, if any, after deducting administrative expenses and tax on the income.

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For more information, see CBN Guidelines for Microfinance Banks in Nigeria.

Write a business plan for your Microfinance bank

Now that you know what it takes to start a microfinance bank in Nigeria, it’s time to pull them together into a single document in form of a business plan which covers financial plan, setup plan and operational plan of your microfinance bank business. The is also the document that potential investors will look at and draw conclusion whether your is worth investing in.

Choose Location for your Microfinance bank 

While it is possible to establish branches of foreign financial institutions in Nigeria, these will not be allowed for microfinance banks. This means that, if you want to start a microfinance bank in Nigeria, you will have no choice but locate all your offices within Nigerian borders. This makes sense given how most people are likely to prefer banking with a local bank than one from abroad. You can do so as long as there is interest among potential customers for your services. If you are planning on starting a microfinance bank in Lagos, consider locations like Ikeja or Victoria Island. On the other hand, if you’re considering opening up shop in other areas like Ogun State or Oyo state and Kano State, look into cities like Abeokuta or Ibadan and Kano. These are commercial centers that have lots of people who are into trading business who will patronize your bank.

Register with the Central Bank of Nigeria And Corporate Affairs Commission Of Nigeria. 

The Central Bank of Nigeria (CBN) regulates all financial institutions operating in Nigeria. In order to start your own microfinance bank, you will need to register and obtain a microfinance operating license from the CBN.

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This can be done by submitting an application form on their website. Once approved, you will receive an operating license, which is valid for three years.

You may also to register your microfinance bank with the Corporate Affairs Commission Of Nigeria (CAC) as a limited liability company.

You will also have to register with other regulatory bodies such as; National Insurance Commission (NIC), Nigerian Deposit Insurance Corporation (NDIC), Financial Reporting Council of Nigeria (FRCN), Securities and Exchange Commission (SEC), Pension Regulatory Authority (PRA), Office of Auditor General of Federation, etc. All these regulatory bodies are designed to protect both depositors’ funds and investors’ interests.

In order to obtain your license from CBN, you must first meet all their requirements. The CBN has published detailed guidelines on how to start a microfinance bank in Nigeria which you can find on CBN website.

In summary, they require that you must be incorporated as either limited liability company or limited by guarantee.

The Challenges Faced by New Microfinance banks

Before you apply for an MFB license, it’s important to recognize that running a microfinance bank is no easy task. The CBN requires all prospective MFBs to adhere to strict performance standards, and once you start operating, there are several more hurdles that you will need to overcome. First, consumer confidence: In order for your bank to survive its first few years of operation, you will need your clients (both existing ones and new ones) on board.

Hire and Train Staff for your Microfinance bank.

After you start your microfinance bank, find qualified staff. It is important to take care of your staff because they will make sure that your clients are taken care of properly. Thus, it is important that you train them before their first day on-the-job. Do not hire any person without proper qualifications. Ensure that they have gone through training before employing them. You can also give them training after hiring them. This way, you will ensure that they learn all about what they need to do when working for your company. You can give them some assignments as part of their job training. This way, you will know if they are fit for employment or not. When giving out assignments during job training, be very clear about what needs to be done and how long it should take to complete each task assigned.

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What are the steps involved in starting a Microfinance Bank?

A microfinance bank is an institution that provides financial services to poor people, including short-term loans and other basic banking services. If you want to start your own Microfinance bank, follow these steps..

1. Find out if your location qualifies for a Microfinance bank license

2. Apply for a license

3. Set up business

4. Register with CBN

5. Open accounts

6. Obtain licenses

7. Get funding

8. Recruit staff

9. Market yourself

10. Get clients

11. Run daily operations

12. Manage growth

13. Obtain new funding

14. Expand

Open The Doors of  your Microfinance bank to the Public.

This is arguably one of, if not THE most important step. After all, you’ve spent lots of time and money getting your startup off of the ground. You’ve found success with crowdfunding campaigns or investors, developed an app that everyone wants on their phone or created new solutions for old problems. Now it’s time to open your doors! Congratulations! Your hard work has paid off.

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