Microfinance banks in Nigeria have been given a loud wake-up call by the COVID-19 pandemic to accelerate investment in digital channels for loan disbursement and collection, according to the credit rating agency, Agusto & Co.
While many operators have since developed web portals for loan applications and are actively exploring the use of payment services such as Remita, Paystack and ultimately mobile money for collections, Agusto & Co. said the efficacy of such channels in Nigeria may, however, be limited by the low digital literacy of the unbanked, underbanked and low-income target market of the Microfinance Industry.
“We believe the future success of digital channels in the microfinance space (critically for collections and consequently disbursements) will be strongly dependent on the adoption of digital payments by lowincome earners and MSMES in everyday purchase and sales transactions,” Agusto & Co. said.
The strong physical presence of Microfinance banks across various geographical locations in Nigeria is said to be the major driver of the industry’s success. The largest microfinance banks have branches spread across the country and are easily identifiable to the target market of low-income earners and MSMES operating in the surrounding area.
Regardless of the licensing of three payment service banks ( PSB) – Hope PSB Limited, 9 PSB Limited and Moneymaster PSB Limited – which are expected to offer possible solutions that are similar to Safaricom’s popular M- Pesa platform in Kenya, Agusto & Co. said if the underlying economic activities continue to be executed in notes and coins, then the fundamental challenge of converting collections to a digital transaction would remain.
“Users of the M- Pesa platform in Kenya and other East African countries can pay digitally from and to a mobile telephone number for groceries at a market stall, for public transport or for the services of an artisan, for example. This “mobile money” can be used to settle loan obligations using the same platform, thus facilitating digital collections,” Agusto & Co. said.
Speaking on the COVID-19 pandemic and the Microfinance banks’ technology gaps, Agusto & Co. said in its recent report on the Microfinance Industry in Nigeria that, like in most developing countries with relatively low penetration of e-channels, the impact of the pandemic helped to trigger a doubling of obligations that were past due for up to 30 days (PAR 30) during the first wave of the pandemic and lockdown restrictions in early 2020.
“Despite up to N5 billion spent by the major national and state microfinance banks in Nigeria on the implementation of internet, mobile and USSD banking services, the Industry remains heavily reliant on brick-and-mortar branches for the acquisition of customers and disbursement of loans and the collection of notes and coins for repayment.
Given the low technological literacy in the country, collections from Micro, Small and MediumScale Enterprises (MSMES) ground to a halt during the six- week lockdown, even in sectors categorised as essential and in regions not otherwise facing restrictions. The economic environment also did not lend itself to loan disbursements given the sharp decline in business activities while many microfinance banks were caught off guard by the pandemic with few having the infrastructure in place to lend to MSMES digitally.
However, Agusto & Co. expects the two- phased increase in the minimum capital requirements for all categories of Microfinance banks, expected to take effect in April 2021 and April 2022, to lead to a reduction in the number of operators from more than 900 to around 500 through consolidation activities as well as failures to meet the new requirements. The result of the recapitalisation exercise is projected to help strengthen the adoption of digital infrastructure.
The credit rating agency also expects the Microfinance Industry to fare better in 2021 supported by the global roll-out of COVID-19 vaccines, accelerated digital transformation of microfinance banks and businesses in general, a renewed focus on essential sectors and government support for MSME businesses. The Industry, however, continues to have a high level of susceptibility to macroeconomic challenges as was witnessed in 2020.
According to the Central Bank of Nigeria (CBN), Microfinance banks operating in rural unbanked and underbanked areas (Tier 2) are expected to meet the N35 million capital threshold by April 2021 and N50 million by April 2022.
Those operating in urban and high- density banked areas (Tier 1) are expected to meet the N100 million capital threshold by April 2021 and N200 million by April 2022;
State licenced Microfinance banks are to increase their capital to N500 million by April 2021 and N1 billion by April 2022.
National Microfinance banks are expected to meet minimum capital of N3.5 billion capital by April 2021 and N65 billion by April 2022.