Locations: Issues In 'Geographical Boundaries' Regulation And Digital Operations Of Microfinance Banks In Nigeria

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The emergence of microfinance banks in Nigeria was a conscious regulatory policy initiative to bank the unbanked, financially disadvantaged ‘bottom of the pyramid' but significant segment of the economic populace:
Nigeria Finance and Banking
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The emergence of microfinance banks (MFBs) in Nigeria was a conscious regulatory policy initiative to bank the unbanked, financially disadvantaged 'bottom of the pyramid'1 but significant segment of the economic populace: traders, artisans/low skilled workers, farmers, with an inclusive focus on also those in the rural areas.2 The army of unbanked or financially excluded people has been a global phenomenon, especially in developing economies, with concomitant efforts to close the "financial access" gaps. On its own part, the United Nations' Millennium Declaration 2000 which laid out the Millennium Development Goals (MDGs),3 also gave a boost to the MFB regulatory framework in Nigeria.

Currently, the Nigerian MFB regulatory framework prescribes geographical operating boundaries for most MFBs, except one category – National MFB.4 However, such other MFBs are arguably not prevented from having online presence, especially as digitisation is increasingly becoming our undeniable reality; moreso as both internet penetration and financial inclusion, work hand in hand to deliver seamless, efficient and far reaching operational capabilities.

This raises some pertinent questions: can non-National MFBs not validly transact online with 'out of boundary' customers? Is the territorial regulatory restrictions not limited to physical operations? Why should a non-National MFB that has made the necessary investments in technology not able to leverage its platform and other (third party, including industry) ICT infrastructure that it can access to have a wider online reach, rather than being constrained by the physical limitational prescriptions of its license?

This article aims to address these and other questions regarding the emerging operational and business challenges faced by MFBs, in the context of their applicable regulatory cum commercial framework. However, we will preface our discussion with a historical overview of MFB regulatory policy in Nigeria.

Evolution of Pro-Poor Financial Services in Nigeria: from Community Banks to Microfinance Banks

The current MFB regime in Nigeria was preceded by the following three major phases: (1) Traditional Contributory Thrift Savings Schemes such as Àjor Esusu (in the South-West), Isusu (in the South-East), and Adashe (in the North);5 (2) Community Banks (CBs) established in the mid/late 1990s to further institutionalise traditional savings schemes,6 but which cumulated into failure during the 'failed banks' era,7 such that in 2005, CBs were required to convert into MFBs before December 2005.8 The Nigerian CB regime was also influenced by pro-poor financing initiatives in other developing economies, such as Bangladesh;9and (3) Pre-immediate current MFB Regime.

Pre-Immediate Current MFB Regime

The current Nigerian MFB regime can be said to have started in December 2005, when the CBN issued the Microfinance Policy Framework for Nigeria (the Policy). The Policy was in exercise of the CBN's powers in section 28(1)(b) CBN Act10 and pursuant to erstwhile sections 57-61(1)(a) Banks and Other Finance Institutions Act11 (BOFIA), which is in pari materia with sections 56-60(1)(a) BOFIA 2020.12

With the Policy, the government sought to address different issues needed to strengthen microfinance institutions (MFIs) in Nigeria. For example, the Policy mandated CBs to convert into MFBs and to meet minimum capital thresholds of N20 million shareholder funds unimpaired by losses for a Unit MFB and N1 billion for State MFBs, on or before 31st December 2007.13 It also mandated that any intending MFB operator must be licensed by the CBN14 and gave not for profit MFIs the option to either incorporate a subsidiary MFB, while still running their not for profit operations, or convert into a fully licensed one.15 The aim was to have adequate regulation and supervision over the microfinance sector in Nigeria.

The Policy was revised in 2011,16 to, amongst others, use the MFB platform to "increase financial inclusion rate in Nigeria [by improving] access for the economically active poor, pursue poverty eradication and mainstream the informal microfinance sub-sector into the formal financial system." The envisaged MFB services included "micro-savings, micro-credits, transfer services and other financial products targeted at the economically active poor. These services have over time, evolved to include the transmission of government's developmental initiatives."17

According to the 2020 Guidelines, in 2012, the CBN issued the Revised Regulatory and Supervisory Guidelines for Microfinance Banks in Nigeria (the 2012 Guidelines),18 to address the features and risks of microfinance which effectively support the orderly development and sustainability of MFIs to enable them foster improved financial inclusion and poverty alleviation.19 The 2012 Guidelines also sought to address the challenges observed in the implementation of the Policy, by highlighting the following, amongst others, for MFBs: permissible and prohibited activities,20 ownership and licensing requirements,21 corporate governance structure, 22 funding and accounting regulations,23 reporting obligations,24 prudential requirements,25 risk assessment measures,26 and operational controls and requirements.27

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*The authors acknowledge the helpful comments of Chimezirim Echendu to the earlier drafts of this article, but take responsibility for all the views expressed (and errors), herein. Blessing Agoruah and Chimezirim Echendu are LeLaw alumni.

1. See M.O Oladeji, 'The Nigerian Microfinance Policy: A Perspective from Cooperative Societies', International Journal of Economic Development Research and Investment, Vol. 2 No. 1, p.127, April 2011: https://icidr.org/ijedri_vol2no1_april2011/The%20Nigerian%20Microfinance%20Policy%20A%20Perspective%20from%20Cooperative%20Societies.pdf (accessed 07.05.2021).

2. For example, per World Bank statistics, globally as at 2017, 1.7 billion people did not have access to modern financial services, despite strides by most countries in improving financial inclusion. See Omovefe Oghotomo, 'Banking Services for All: Legal Imperatives in Driving Financial Inclusion in Nigeria', LeLaw Thought Leadership Insights, February 2019, p.1: https://lelawlegal.com/add111pdfs/Financial_Inclusion.pdf (accessed 07.05.2022). According to some commentators, in Nigeria, the financial exclusion rate as at 2020 was 35.9% (46.3% in 2010); and it was estimated that it will take about 40 years to arrive at 10% exclusion rate. See J. Okuduwa and N. Odiboh, 'Nigeria's Financial Inclusion: The Way Forward', KPMG Insights, 23.08.2021, pp. 1-2: https://assets.kpmg/content/dam/kpmg/ng/pdf/nigerias-financial-inclusion-the-way-forward.pdf (accessed 11.05.2021). See also related literature and referenced data, in: Ope Adeoye, 'Nigeria's Missed Financial Inclusion Goal and Solution', The Guardian, 01.04.2022: https://guardian.ng/ opinion/nigerias-missed-financial-inclusion-goal-and-solution/; Tayo Fabusiwa, 'Financial Inclusion and Digital Financial Services in Nigeria', BusinessDay, 17.08.2022: https://businessday.ng/opinion/article/financial-inclusion-and-digital-financial -services-in-nigeria/; 'Financial Inclusion Rising, Sustain the Tempo', Punch Editorial, 18.07.2022: https://punchng.com/financial-inclusion-rising-sustain-the-tempo/; (all accessed 18.11.2022). See also Nigerian results in Asli Demiguc-Kunt et al, 'The Global Findex Database 2021: Financial Inclusion, Digital Payments and Resilience in the Age of Covid-19', World Bank Group, 2022: https://www.worldbank.org/en/publication/globalfindex (accessed 18.11.2022).

3. Note particularly, the MDG's Goal 1 – to eradicate extreme poverty and hunger. One of the metrics to measuring this was through the poverty gap ratio which could be affected by access to capital. See 'UN Launches International Year of Microcredit 2005', United Nations Press Release, 18.11.2004: https://press.un.org/en/2004/dev2492.doc.htm (accessed 16.12.2022).

4. Whilst National MFBs are authorised to operate in more than one State including the Federal Capital Territory (FCT), a newly licensed National MFB shall not commence operations with more than ten (10) branches. See Guideline 3.4, 'Guidelines for the Regulation and Supervision of Microfinance Banks in Nigeria' (Exposure Draft, January 2020), p. 9: https://www.cbn.gov.ng/out/2020/fprd/mfb%20regulation%20draft%20merged.pdf (accessed 20.12.2022).

5. Ajo, Isusu and Adashe mean thrift savings contributions scheme in the Yoruba, Igbo and Hausa languages respectively, whereby members contributes a certain sum daily, weekly or monthly, and respective members collects the entire contributions once in a rotational cycle. Thereafter, another cycle begins, with same or new/additional members. It is usually based on trust and members can be family and friends, colleagues (employees, tradesmen/women group members), etc. Under another variant, a thrift collector goes round to collect daily contributions for a fee (typically equivalent to a daily contribution) and pays over the cumulative amount to the contributor at the end of every month. The thrift collector can also earn income on the float that the contributions represent between collection and payment to contributors, for example by providing loans to members or third parties. These arrangements obviated the formalities associated with bank borrowings. See Gboyinwa Ajomale, 'Ajo - Benefits of Contributory Thrift Saving Scheme', Pulse.ng, 02.02.2018: https://www.pulse.ng/lifestyle/money/saving-scheme-ajo-benefits-of-contributory-thrift-saving-scheme/2sfb1ne ; and Anayo Okoli et al, 'Isusu, A Traditional Savings and Loans Scheme Boosting Petty Businesses in Igboland', Vanguard, 24.03.2021: https://www.vanguardngr.com/2021/03/isusu-a-traditional-savings-and-loans-scheme-boosting-petty-businesses-in-igboland/ (both accessed 26.05.2021).

6. The Federal Government instituted the regulatory framework for the establishment of CBs vide the Community Banks Decree No. 46 of 1992 ((now Community Banks Act, Cap. C18, Laws of the Federation of Nigeria (LFN) 2004) (CB Act)), partly in response to the closure of rural branches of commercial banks, following the Structural Adjustment Program (SAP). The CB Act established the National Board for Community Banks (NBCB) charged with promoting, developing, monitoring and supervising CBs. Section 2 CB Act provided for the composition of the NBCB; the CBs were also regulated by the CBN and the Federal Ministry of Finance. For example, Section 1(2) CB Act states that to obtain a CB License, an application must be made in writing by the community or a group of communities to the Governor of the CBN, through the NBCB. CB Licenses were revocable by the CBN Governor, on the recommendation of the NBCB. The raison d'etre of CBs was need to promote rural development through the provision of banking and financial services, enhancement of rural productive activities and improvement of economic status of low income rural and urban residents. Thus, the primary activities of CBs were encouraging savings and issuing credit facilities to their members and to a lesser extent, to the public. See O.F Ayadi et al, 'The Role of Community Banks in Economic Development: A Nigerian Case Study', 2008, p.164: https://aisberg.unibg.it/retrieve/handle/ 10446/27408/9010/AYADI%202-2008.pdf (accessed 09.05.2021).

7. The Nigerian CB system failed due to the following reasons: (i) CBs' weak capital base; (ii) weak institutional capacity; (iii) the existence of a huge un-served market; (iv) low economic empowerment of the poor, employment generation and poverty reduction; (v) inadequacy of appropriate savings opportunities and products for the poor; (vi) lack of a robust microfinance framework to stimulate the interest of local and international communities in micro-financing; and (vii) under-utilisation of the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) Fund. See Paragraghs (Paras) 3.0 – 3.7, the Policy. See also, C.M Anyanwu, 'Microfinance Institutions in Nigeria: Policy, Practice and Potentials', paper presented at the G24 Workshop on "Constraints to Growth in Sub Saharan Africa" in Pretoria, South Africa, 29.11.2004, p.4: https://g24.org/wp-content/uploads/2016/01/Microfinance-Institutions-in-Nigeria.pdf (accessed 09.05.2021).

8. Para 9.2 the Policy states that: "All licensed community banks, prior to the approval of this Policy, shall transform to microfinance banks licenced to operate as a unit bank on meeting the prescribed new capital and other conversion requirements within a period of 24 months from the date of approval of this Policy. Any community bank which fails to meet the new capital requirement within the stipulated period shall cease to operate as a community bank. A community bank can apply to convert to a microfinance bank licenced to operate in a State if it meets the specified capital and other conversion requirements."

9. See for example, Professor Muhammad Yunus' world famous the Grameen Bank launched in 1976 to provide banking services to the rural poor, expanding its footprint nationally with increasing success. The Grameen Bank is self-described as "bank for the poor": https://grameenbank.org/ (accessed 20.01.2023). In October 1983, the Grameen Bank project was transformed into an independent bank by government legislation. Following its enormous impact, Professor Yunus and the Grameen Bank were awarded the 2006 Nobel Peace Prize for their work to "create economic and social development". See Karl Grandin, 'The Nobel Prizes 2006', Nobel Foundation, Stockholm, 2007: https://www.nobelprize.org/prizes/peace/2006/yunus/biographical (accessed 20.05.2021). The Grameen Bank's objectives were: "to extend banking facilities to poor men and women; eliminate the exploitation of the poor by money lenders; create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh; bring the disadvantaged, mostly the women from the poorest households, within the fold of an organisational format which they can understand and manage by themselves; and reverse the age-old vicious circle of 'low income, low saving & low investment', into virtuous circle of 'low income, injection of credit, investment, more income, more savings, more investment, more income". See M.D Mohinuddin, 'Grameen Bank: History, Objectives and Methodology', Sweducarebd, 09.02.2018: https://socialworkeducationbd.blogspot.com/2018/02/grameen-bank-history-objectives-and.html?m=1* (accessed 20.05.2021).

10. Cap. C4, LFN 2004, originally enacted as CBN Act No. 7 of 2007.

11. Cap. B3, LFN 2004.

12. Act No. 5 of 2020. BOFIA 2020 repealed BOFIA, Cap. B3, LFN 2004. See also, Obadeyi J.A, 'Microfinance Banking and Development of Small Business in Emerging Economy', Nigerian Approach, IOSR Journal of Economics and Finance, (April 2015), Vol 6, p. 50: http://www.iosrjournals.org/iosr-jef/papers/Vol6-Issue2/Version-1/H06215060.pdf (accessed 20.05.2021).

13. See Important Notice on the Deadline for Conversion of Existing Community Banks (CBS) to Microfinance Banks (MFBs) CBN, August 2007: https://www.cbn.gov.ng/OUT/CIRCULARS/OFID/2007/OFID-08-2007.PDF (accessed 07.05.2022). The Policy's prescription of only two categories of MFBs was to ensure an orderly and even spread of MFBs thereby obviating over-concentration of Financial Institutions (FIs) in some areas to the detriment of others: Para 6.0: Obviously, the Policy did not envisage that MFBs could operate via online platforms outside the geographical boundaries of their licences.

14. See Para 4.3, the Policy.

15. See Para 6.0, the Policy.

16. Vide the CBN's 'Revised Microfinance Policy Framework for Nigeria', 29.04.2011: https://www.cbn.gov.ng/Out/2011/pressrelease/gvd/Reviewed%20Microfinance%20Policy%20April%202011.pdf (accessed 07.05.2022).

17. Para 1.0. (Introduction), 'Guidelines for the Regulation and Supervision of Microfinance Banks in Nigeria, January 2020', (the 2020 Guidelines), p.5: https://www.cbn.gov.ng/Out/2020/FPRD/MFB%20REGULATION%20DRAFT%20 MERGED.pdf (accessed 20.05.2021).

18. See CBN, 'Revised Regulatory and Supervisory Guidelines for Microfinance Banks in Nigeria (the 2012 Guideline)', 2012: https://www.cbn.gov.ng/Out/2013/CCD/Amended Regulatory and Supervisory Guidelines for MFB.pdf (accessed 08.11.2022).

19. See Guideline 1.0, the 2012 Guidelines.

20. See Guideline 2.0, the 2012 Guideline.

21. See Guideline 3.0, the 2012 Guideline.

22. See Guidelines 4.0 and 14.0, the 2012 Guidelines.

23. See Guideline 5.0, the 2012 Guidelines.

24. See Guideline 7.0, the 2012 Guidelines.

25. See Guideline 8.0, the 2012 Guidelines.

26. See Guideline 9.0, the 2012 Guidelines.

27. See Guideline 13.0, the 2012 Guidelines.

Originally published January 2023

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