With the recent fintech microfinance bank revolution in Nigeria, the CBN has beamed its attention to microfinance banks. Far back in 2018, it announced that it was going to increase the minimum capital requirements for MFB licences.
This was first disclosed in the original 2018 circular [PDF] which indicated the regulator would increase the Unit MFB requirement from ₦20 million ($54,291) to ₦200 million ($542,910). State MFB was pegged at ₦1 billion ($2.7 million), up from ₦100 million ($271,455). And lastly, the National MFB required a ₦5 billion ($13.6 million) minimum capital.
However, this will soon be revised. The new guidelines are slated to become active by April 2020 even though not many fintech startups are satisfied with its coming release.
On March 3, the Central Bank of Nigeria released the latest MFB exposure draft. “The need to reposition and strengthen MFB towards improved performance has become apparent as revealed from the report of a recent review of the subsector,” the regulator wrote without mentioning the name of the report.
In the new draft to be released April 2020, the CBN changed the requirements for Unit MFB. It divided it into two tiers that had strict location limitations and carefully worded-descriptions.
Tier 1 Unit MFBs “shall operate in the banked and high-density [urban] areas”, the CBN wrote. It can only operate a maximum of five offices within six local governments. The Tier 1 Unit MFB has a ₦200 million ($542,910) capital requirement.
However, The Tier 2 Unit MFB is on the low-end. It carries a ₦50 million ($135,727) capital requirement. “[it] shall operate only in the rural, unbanked or underbanked areas”. Holders can only operate a maximum of two offices which must be in the same local government.
Once the new guidelines kick in by April, fintech startups operating under the Unit MFB will have to tweak their operations.
Most mportantly, the new regulation puts significant funding constraints on fintech startups. While fintechs have received the largest share of funding to Nigeria, not many of them have enough to cover capital requirements beyond ₦200 million ($542,910) which CBN is requesting.
In September 2019, Kuda Bank raised $1.6 million (₦586.4 million). PiggyTech’s last fundraise was $1.1 million (₦403.2 million) in 2018. These are not “large fundraises”. The operational cost of running a startup is already high, so any increase in fintech microfinance bank regulation will make things more strenuous for startups than necessary.
Even though startups could also use a loan, rather than capital, to meet the revised regulatory measures… it’s not a good option as the irregularities of the market make things unpredictable for startups and also, fintech startups can’t borrow from a Nigerian lender. “Where the source of funding the equity contribution is a loan,” the CBN wrote in the exposure draft, “such shall be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system.”
We may ask… will the revised requirements force fintechs to consider mergers to stay competitive? Let’s wait and see.
The regulator is giving companies 12 months to reach the new capital thresholds once the guideline becomes active. Tier 2 holders need to raise their minimums to ₦35 million ($95,009) by April 2020, and ₦50 million ($135,727) by 2021. While Tier 1 holders must raise theirs to ₦100 million ($271,455) by April 2020 and ₦200 million ($542,910) by 2021.
The “rural” location requirement of the Tier 1 licence is unclear. Many fintechs operate in Lagos from locations like Yaba, Ikeja, Lagos Island and Ikoyi. These are not “rural” areas in any sense. To remain compliant, these fintechs may either have to secure the Tier 1 Unit licence or relocate their offices to be eligible for the less costly Tier 2 licence.
There is no indication, however, that the revised MFB guidelines would tackle MFB holders that are exploiting the grey area caused by tech-adoption.
One bank, however, VFD Microfinance Bank called this new guideline a “good move.”
“If you want to do this business, if you want to hold peoples’ deposit, you must have the capacity,” Azubike Emodi, Managing Director at VFD was quoted saying. “I can’t take people’s deposits perhaps ₦500 million, ₦1 billion and ₦2 billion in deposit with a recapitalisation of N20million; it doesn’t augur well,” he added.
But VFD is based in Lagos Island, a relatively urban area and operates with a Unit licence. Talking tough, Emodi told Guardian Newspapers his bank has already recapitalised without saying what tier it secured.
Even at that, its digital banking app, V Bank, technically shouldn’t operate nationally under the Unit licence. That is a grey area, but Emodi said nothing about it. This regulatory hole and capital requirements on every fintech microfinance bank are issues fintechs and their investors would like to see fixed.