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Thursday, September 14, 2017

How to Setup a Microfinance Bank in Nigeria

Microfinance banks as we have them today evolved from pre-2005 community banks and cooperative societies which carried out informal financial services to the benefit of low income, rural dwellers who were too far from accessing retail banking services from commercial banks or earned too little to even be worth saving or approaching them for loans.

The Central Bank of Nigeria saw this situation and noticed that despite the huge acceptance of the Esusu System (local/informal revolving, interest free loan scheme) was very well received in Nigeria only a few corporate organisations were tapping into this.

Nigeria’s rural poor cumulatively could generate over N280 billion in savings annually (as at 2005) and cheap access to loans and other business funding meant a lot of people could move out of poverty as they fund their micro businesses – especially rural subsistence farmer, petty traders, artisans, low income salary earners and other unskilled labour. 

Business Opportunity for Setting up Microfinance Banks in Nigeria
There are plenty of reasons microfinance banks in Nigeria are needed. But we shall look at only 4 today.

Huge demand for affordable Loans to Micro, Small and Medium sized Businesses 
The number of small and medium sized businesses in the economy that need finance to fund their operations but are unable to do so is really huge. Less than 54% of Nigerians have bank accounts and interestingly many of these people not captured own farms, run small sized commercial ventures and have their eyes set on doing bigger business which without additional funding they will be unable to do. At least N600 billion is requested for by SMEs annually but less than N300 billion is granted.

Increase in Population of SME Businesses Captured in the Formal Sector
More hitherto informal businesses are migrating into the formal sector. For instance, small food retailers like 5 years ago would have grown into medium sized businesses employing from a few to dozens of employees. These employees would somehow need to be captured in a payroll system which would require documentation. The business would need to start paying taxes, pensions etc. But this same business may be better served by a microfinance bank which is closer and more compatible than a commercial bank.

Microfinance Banks are strong drivers of savings among low income earners
Many low income earners may be know the benefits of savings but microfinance banks offer greater services in mobilizing them to save than commercial banks. Low income earners who prefer Esusu scheme for target savings are more likely to patronize an MFB than a commercial bank to open and operate a savings account - the reason being that savings can be a major source of credit and financing to them, which commercial banks are less likely to deliver on.

Challenges of Running Microfinance Banks in Nigeria
In the Nigerian business environment running an MFB is a huge challenge. There are many obstacles and threats which could both slow down or even stifle your success in the business. For instance;

Internal Bank Fraud
While the CBN, EFCC, NDIC, NDLEA and the police have played crucial roles in limiting internal fraud in many MFBs, there are still instances of where bank staff make away with depositors funds. Some MFBs have even folded up because a director made away with huge sums of money under various pretext. This is a reality which they still face till date.

Loan Defaults from some Customers
In comparison to commercial banks MFBs tend to record less loan defaults. In fact petty traders and artisans who are less educated seem more likely to repay a loan than a formal business run by educated people. But there are indications that loan defaults among Nigerian 
MFBs have been on the increase year on year by very small margins.  Loan defaulting has a way of frustrating revolving loan schemes which in turn can discourage further savings.

Misapplication of Loans
Some people will approach a bank to raise a loan for their business but divert it to pay house rent, splash on wedding or cater to another non-business need which could lead to them either not repaying the loan or taking longer than they should.

Mini Commercial Bank Syndrome
A newspaper report quoting the CEO of an MFB noted how most MFBs in Nigeria are struggling to stay afloat. In fact most of them are close to closing down as over 40% of the entire market is captured by just 10 out of 991 existing MFBs. This was attributed to ‘mini commercial bank syndrome’ where the MFBs function like commercial banks and target more of middle level customers than low income earners and micro businesses. According to the CEO when you neglect the core microfinance practice you are heading for insolvency which most MFBs in Nigeria are currently doing.

Setting up a Microfinance Bank in Nigeria is not too hard and offers great Returns
You can actually start a microfinance bank in Nigeria with as little as N20 million operating from just one unit location within a state. Alternatively, you can startup as a state MFB with N100 million startup capital or N1 billion for national MFB. The return on investment (if you manage the business well) can be as high as 35% and this can be realized by your 3rd year. Your first year is capable of generating over 20% ROI.

Setting up an MFB in Nigeria has stringent requirements but they are not too difficult for serious minded individuals who want to invest in it. Secondly while the market is growing, there are challenges to deal with and but sound management practices can handle most of them. The future of MFBs in Nigeria will likely improve as more people in the informal sector have increased access to financial services.

Want to setup a microfinance bank in Nigeria and need a bankable business plan with detailed industry analysis, market information, financial projections and management setup plan. Give me a call: 0803 206 4106 or email me: paulonwueme@gmail.com to have one prepared for you.