Companies seeking to raise capital from the public must do so in accordance with CAMA and the ISA, amongst others. Particularly, the ISA provides that no company shall invite the public to deposit money with it for a fixed period unless such company is (i) a public company, whether quoted or unquoted (in compliance with the provisions of the ISA) or (ii) a statutory body or bank in Nigeria duly established and licenced to accept deposits and savings from the public. Nigerian banks must be duly licenced by the Central Bank of Nigeria (CBN) and upon obtaining a banking licence, they are authorised to receive deposits of money from the public. Various types of banks exist including commercial banks, merchant banks, microfinance banks, etc. Microfinance Banks (MFBs) play a major role in bridging the gap for technology solutions which seek to cater to large numbers of people within the confines of the law.
Regulation of microfinance banks in Nigeria
An MFB is a company incorporated in Nigeria and licensed by the CBN to provide financial services (such as savings and deposits, loans, domestic fund transfers, other financial and non-financial services) to economically active low-income earners, low-income households, the unbanked, etc. MFBs are permitted to accept deposits from persons (other than public sector deposits) provide credit/loans, issue debentures, act as agents for mobile banking and micro-insurance services to its clients.
Currently, the CBN regime governing MFBs provides various categories of MFBs, namely: (i) Tier 1 Unit MFB: authorised to operate in one location; must have a minimum capital requirement of N200,000,000 and is prohibited from having branches and/or cash centres; (ii) Tier 2 Unit MFB: authorised to operate in urban and high-density banked areas and must have a minimum paid-up capital requirement of N50,000,000; (iii) State MFB: authorised to operate in one state or the Federal Capital Territory, Abuja, have a minimum paid-up capital of N1,000,000,000 and may open branches or cash centres; and (iv) National MFB: authorised to operate in more than one State including the Federal Capital Territory, Abuja, must have a minimum paid-up capital of N5,000,000,000; and can open branches in all states of Nigeria and the FCT.
MFBs are also required to comply with the Code of Corporate Governance for Other Financial Institutions in Nigeria issued by the CBN dated October 26, 2018 (MFB Code) which came into effect from April 1, 2019. The MFB Code provides for relevant governance requirements relating to minimum board committees, directors’ qualification, number and tenure and disclosure requirements, amongst others.
What do MFBs have to do with alternative capital raising methods?
The CBN in March 2019 directed MFBs to register 64 new customers every month per branch (as applicable) in order to meet the CBN’s 80 per cent financial inclusion rate by 2020. The CBN also highlighted the contribution of MFBs towards the realisation of the financial inclusion target over the last six years of implementation of the National Financial Inclusion Strategy, which was launched in October 2012 and revised in 2018. MFBs can largely leverage on the requirements for setting up an MFB and the technological advancements that make it possible to reach large numbers of prospective investors.
For example, a company seeking to channel investments solely to agriculture can establish a Tier 2 Unit MFB (which requires N50,000,000 (circa $137,000) paid up capital) and upon obtaining the final approval of the CBN to operate as a MFB, accept deposits from the public i.e. its clients. Such deposits can be invested by the MFB in its specific targeted products i.e. agriculture. Unit MFBs are restricted to operating from one location. Nonetheless, a technology solution such as a web-based portal operated by the MFB or a mobile application can serve as the ‘numerous locations’ through which the MFB operates from.
This will reduce operating costs of the business (since it will not require physical state of the art furnished branches). Mindful of the high mobile penetration rate in Nigeria, customers can conduct certain banking transactions in Nigeria through such mobile platforms. Additionally, such a MFB may, with the approval of the CBN and the SEC, raise capital from the public.
Food for thought
In 2018, Piggybank.ng, an online savings platform that enables people to put away funds that they don’t want to withdraw easily, acquired a significant stake in a fully licensed and functional Nigerian MFB to aid its operations as part of its expansion plan. It is expected that start-ups who have the financial and technical ability to set up MFBs for their operations will continue to take this approach in order to expand their service offerings, tap the capital market for funds and also incorporate (as appropriate) similar business models for their operations. As such, the existing legal framework does accommodate old paths to new money.
The information provided herein does not and is not intended to, constitute legal advice. The contents of this paper are for general informational purposes only. Please formally engage a lawyer in the relevant jurisdiction before acting on any information contained in this paper.
Toni is an Associate in the firm of Banwo & Ighodalo, a top tier law firm in Nigeria. He has other published works on capital markets, consumer protection, crowdfunding, financial technology and governance which are available online at www.academia.edu/ToniNuma
