Digital Transition in Nigerian MFBs Against Radical Changes
The Great Financial Crisis (GFC) compelled traditional banks to slow down on lending, especially post-2015. Banks were busy recovering from the financial crisis and adjusting to the more rigid regulatory controls. As a result, the emergence of Non-banking financial institutions (NBFI) and Micro Finance Banks (MFBs) was imperative as a long-term funding source.
The GFC gave birth to the NBFIs in African countries like Nigeria, Egypt, and South Africa. These NBFIs were primarily insurance companies, pension funds, and investment institutions. The power of NBFCs is so remarkable that these 3 countries aggregate nearly 60% of all infrastructure investment in Africa funded from NBFCs.
NBFIs play a fundamental and complementary developmental role in these African countries. NBFIs primarily functioned in rural areas but gradually developed into various other types, such as community or microfinance banks, discount houses, primary mortgage institutions, Bureaux de change, finance companies, and many more.
Dawn of Microfinancing Banking in Africa
Various African countries realized a microfinancing bank entity is required to help the unbanked and underbanked population, which constitutes a huge percentage of the adult population. As a result, the Nigerian Government launched its microfinancing scheme in 2005. But before the GFC, South Africa and Egypt had their MFBs in 1980 and 1990. Currently, we are witnessing a digital transition in Nigerian MFBs.
Many African governments realized that resources must be directed toward the financial empowerment of those who live in slums and rural regions. This will help achieve sustained economic growth, elevate their life standard, ignite rural development, and encourage the growth of small and medium-sized businesses (SMEs).
Microfinance banks are the key to advancing rural development via financial inclusion and financial literacy. It will serve as conduits for on-lending money to beneficiaries, creating jobs and encouraging entrepreneurship, and offering training for the National Poverty Eradication Programme ( NAPEP) and National Economic Empowerment and Development Strategy (NEEDS).
Various Types of Microfinance Companies across Africa
Some of the commercial microfinance banks in Africa are National Microfinance Bank (NMB), Cooperative and Rural Development Bank (CRDB) Ltd, and Akiba Commercial Bank (ACB). Other names are Kenya Women Microfinance Bank and Yetu Microfinance of Tanzania.
For Nigerian microfinance banks, we see a different scenario. In 2013, the CBN issued Revised Regulatory and Supervisory Guidelines for microfinancing banks in Nigeria. The guidelines were expected to boost the rapid and sustainable growth of the microfinance industry using the global best practice in MFBs. These licensed microfinance banks can accept various types of deposits such as savings, demand deposits, grant credits, housing microloans, and many more, like customer services.
The Central Bank of Nigeria granted some microfinance banks limited banking licenses. The official website of CBN enlists around 916 licensed banks in which Kuda, LAPO, and ACCION are already popular. These licensed banks perform in a different way than the other MFBs. Kuda has a license for microfinance and mobile-banking services. On the other hand, LAPO, or Lift Above Poverty Organization, provides unsecured loans up to NGN 500,000 for small and medium enterprises. ACCION bank offers microfinance and fintech solutions to create regional financial inclusion.
There are four categories of microfinance banks in Nigeria:
- Tier 1
- Tier 2
- National MFB
- State microfinance banks.
Tier 1 will operate in high-density areas, and Tier 2 in rural or unbanked regions. The national MFB will work in more than one state, and State MFB is allowed to operate within one state or Federal Capital Territory.
Challenges Involved in Nigerian MFBs
Some of the significant obstacles that Nigerian MFBs face:
- Frequent changes in the Government policies
- Infrastructural inadequacy
- Lack of skilled human capital
- Inadequate donor funding
- Short of loan or equity capital to increase loan-able funds
- Socio-cultural misconceptions
- Pangs of frauds and forgeries due to poor corporate Governance
On the other hand, the pandemic has caused various problems to the activities of microfinance banks in Nigeria. Loan disbursement, in-person meetings of consumers and clients, recoupment of loans, and other multiple activities were almost halted during and after covid-period. This deteriorated the performance and the overall portfolio of the microfinance institutions.
Digital transition in Nigerian MFBs was highly required to cope with the situation faced during the pandemic. The sluggish infrastructure of MFBs in Nigeria negatively affected the survival of small-scale businesses. The lack of digital capacities made these MFBs vulnerable with insufficient capital and no or little interaction with the clients. These all compounded into overpowering and uneasy competition with the commercial banks and Fintechs.
Strategies for the Nigerian Digital Transformation in Future Growth
The strategies that were encouraged to take after the pandemic to have a breakthrough in this sector are:
– Cost Reduction
The majority of MFBs have turned to cost-cutting as one of their survival tactics. Each MFB claimed that to stay in business, they had to reduce operational costs to stay afloat. The MFBs have attempted to reduce expenses in the following areas: employee development, salary reduction, staff layoffs, and limitation of non-essential activities. However, these cost-cutting measures, such as salary reductions, staff training, and development, will negatively affect worker morale, mainly if the scenario lasts for an extended period.
– Digitalization of Banking Facilities
MFBs like GetriPay, one of Africa’s fastest growing financial institutions, provided ease of financial transactions. GetriPay endeavoured to boost seamless fund transfer, loan accessibility, bill payment, etc. It also encouraged its digital users with savings and transaction rewards. Like GetriPay, many other MFBs are revolutionizing digital banking with various rewards and offering the best banking services with unbelievable speed.
– Active Government Regulations
The future of Nigerian MFBs depends on the Government’s active participation in boosting the microfinance sector. It includes reforming the policies, standards, and guidelines of CBN. The Government has to make some friendly policies for microfinance operators shortly.
– Leveraging the Benefits of Blockchain Technology
It is essential to adopt digital technology to increase the lending capacities of Microfinance banks. This will help micro, small, and medium-sized businesses and financial inclusion. ACCION Microfinance Bank Chairman, Mr Patrick Akinwuntan, advised adopting blockchain technology for value creation in the financial sector. With the help of this technology, keeping public details and records will be safe.
Digitization in the microfinance banking sector has become a trend since post-pandemic. Many MFB owners understand its efficiency in the cost saving and don’t even need multiple licenses to expand to other states. With the help of digital means, the need for physical branches reduced drastically.
However, MFBs need to be cautious while choosing a technology partner who can work in the backend. It is not all about purchasing software. Instead, it holds more significance in adequately managing and keeping the data safe. A professional digital partner like CIT Vericash can guide the entire team for strategic growth.
How Can Technology play a Key Role in Impacting Microfinance Businesses?
CIT Vericash has been helping various MFBs transform into digital operations with reliable and growth-centric tactics for the past many years. Our long standing expertise in digital financial services and helping financial institutions and banks of all sizes digitally transform their operations has been at the heart of our technology platform and what we do.
With Vericash’s fintech enablement platform, we enable a lot of the microfinance banks and institutions and other lending companies to adopt an agile, flexible and scalable solution so that they can go to market with it in the fastest possible timeframe with the most cost effective approach. How we empower a lot of these microfinance banks, especially in a market like Nigeria, where there are close to 1,000 microfinance banks of different sizes with a big majority fo them still operating to a large extent manually creating huge challenges when it comes to growing their portfolio with high operational costs and limitations in actual expansions or customer reach. Digital transformation is the key to quickly enabling that with minimal cost and at the same providing them access to global top-notch technology capabilities. More importantly, it is how Vericash chooses to engage as a strategic partner to all these microfinance banks is a crucial part of the relationship. It goes beyond the technology itself, but the way in which we train, transfer know-how, and assist in provision of valuable information to assess and support the quick growth of their customer bases digitally with a large active base.
One practical example, is how we have been trying to work with the national association of nigerian microfinance banks to find a way to collectively provide the ecosystem within which they could thrive in and truly make a national impact on the efficiency and effectiveness of their operations tackling the issues and challenges all MFBs face from the largest of them to the very remote and small MFBs.
Africa is home to only 2% of the World’s microfinance institutions. The continent needs more willingness and technological upgrades to serve its billions of populations. We can help you stay ahead of the competition with our proven techniques and up-to-date guidance. Keep up with the Fintechs and large commercial entities with increased reach to potential consumers in no time.
To conclude, the microfinancing sector is booming in African countries. Especially digital transition in Nigerian MFBs is catalyzing expedited loan sanctions and flourishing the local economies. It is a major approach towards realizing financial inclusion mainly targeting the majority unbanked populations and micro, small and medium sized businesses. However, the lack of knowledge, skills, and resources with limitations in budget capabilities, create a very rocky pathway to actually implementing this in theory. Hence, finding the right partners that would enable them to truly and pragmatically digitally transform how they operate is fundamental to their growth. Regulators, on the other side, need to adopt a more realistic approach when they devise their strategies towards sincerely supporting these massively challenged institutions that are a crucial part of the economy and achieving true financial inclsuion. The investors’ communities, from investment banks, to venture capital firms, to private equity firms, to private angel investors, need to take part and relaize the huge potential into rather than investing from scratch take a more active role into providnig the funding a lot fo these established MFBs could be more of a sound investment with less risks. It is a 360 approach, technology is just one cornerstone.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.