‘Dotun and Aaron are both Legal Practitioners, and Junior Associates at Banwo & Ighodalo and Matrix-Solicitors LLP, respectively.

In October 2018, the Central Bank of Nigeria (“CBN”) increased the minimum capital base of Nigerian Microfinance Banks (“MfBs”) via the Review of Minimum Capital Requirement for Microfinance Banks in Nigeria (“the Circular”), to address the challenge of inadequate capital base in the microfinance-banking subsector.

How does this affect MfBs?

The reviewed capital requirements as it affects the particular Microfinance Bank (“MfB”) is dependent on the category of the MfB. According to the CBN Microfinance Policy, Regulatory and Supervisory Framework for Nigeria (“the CBN Microfinance Policy”), introduced in 2005 and reviewed in 2011, there are three categories of MfBs:

Category 1: Unit Microfinance Banks;

Category 2: State Microfinance Banks; and

Category 3: National Microfinance Banks.

The Unit Microfinance Banks, authorized to operate in one location, and prohibited from having branches and cash centres, are required under the Circular, to have a minimum paid up capital of N200Million, up from the previous requirement of N20Million by 900%.

The State Microfinance Banks, authorized to operate in one State or the Federal Capital Territory (the FCT), and allowed, to open new branches within that one State or the FCT, subject to prior written approval by the CBN, are now required to have a minimum paid up capital of N1Billion, also up by 900% from the previous requirement of N100Million.

The National Microfinance Banks, authorized to operate in more than one State including the FCT, and permitted to open branches in all States of the Federation and the FCT, subject to prior written approval by the CBN, must now have a minimum paid up capital of N5Billion, up by 150% from the previous N2Billion.

This new minimum capital requirement immediately applies to new applications by promoters and microfinance service providers that wish to become MfBs, while existing MfBs are required to comply fully from April 1, 2020.

Our discussions with key players within the microfinance-banking subsector reveal unique concerns on the survival of the subsector based on the new capital requirement. Major concerns border on the capital raising options of MfBs, possible changes in shareholding structures, and the unique features of MfBs categories.  Whilst we are also concerned on the possible impacts of the new capital requirements on the MfBs, and would probably support a relative downward review, it has been our consistent view that the new capital requirements will compel existing MfBs and new entrants to raise capital, and explore external restructuring options in mergers and acquisitions. We believe these will strengthen the capacity of the microfinance-banking subsector to adequately, capture wider but strategic customer base and profitable transactions, depending on specifics of the various connected deals, and their overall impact on the subsector.

We recall that, in 2005, the minimum capital base of Nigerian banks was raised to N25Billion, up by a record high 1150% from the previous N2Billion. This resulted in several mergers, as banks struggled to meet this capital requirement, thereby reducing the number of banks operating in Nigeria from 86 to 25. In our view, the new minimum capital requirement for MfBs will trigger similar responses within the microfinance-banking subsector, as we had it in the banking sector, in 2005.

A further analysis of the MfB categories as structured under the CBN Microfinance Policy would however, reveal possible unique MfB restructurings, complexities and opportunities, different from what we had in the banking sector in 2005. We expect to see: current Unit MfBs transform into State MfBs or National MfBs; current State MfBs transform into Unit MfBs, or National MfBs; current National MfBs transform into Unit or State MfBs; or such other transformations. These transformations can be quite complex and requires tailored symmetrical approaches.

Furthermore, bearing in mind, the uniqueness of each category of MfBs, each MfB, whether adopting direct capital injection, external restructuring options, or both, need develop and put forward structures and options that take into consideration, the peculiarities of each transaction, in line with the provisions of the CBN Microfinance Policy, and the actual/potential concerns of the shareholders, and stakeholders. We believe this are very crucial and critical.

To conclude, it is our view that the new capital requirement for the microfinance-banking subsector offers viable options for investments in the subsector, and we are very keen on the impacts the new capital requirements will have on the overall performance of the subsector. We also expect the CBN to issue further regulations to enable the subsector meet its target under the CBN Microfinance Policy.

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