Do you want to start a microfinance bank in Nigeria? If YES, here is a 18-step guide on how to start a microfinance bank with no money and no experience. A micro finance bank is a type of bank that provides microloans to its customers: individuals, entrepreneurs and small businesses. Sometimes, such banks operate in low-income regions that need money for development. Micro-credits are issued in small amounts for an extended period.
Starting a micro finance bank in Nigeria is really an interesting idea. Statistics has shown that the number of small and medium sized businesses in Nigeria that need finance to fund their operations but are unable to do so is rising enormously.
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.
Also informal businesses are moving into the formal sector. For example, small food retailers few 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 need documentation.
It would need to start paying taxes, pensions etc. This business may be better served by a micro finance bank which is closer and more compatible than a commercial bank.
Starting a micro finance bank in Nigeria is lucrative because these banks are strong drivers of savings among low income earners. A lot of low income earners in the country understand the advantages of savings but micro finance banks offer greater services in mobilizing them to save than commercial banks.
Presently in Nigeria, there are income earners who prefer Esusu scheme or private target savings to commercial bank savings. This is because this savings can be a major source of credit and financing to them, which commercial banks are less likely to deliver on.
18 Steps to Starting a Microfinance Bank in Nigeria
1. Understand the Industry
The key duty of micro finance banks is to provide microloans to individuals and small businesses. These individuals and small businesses tend to go for loans to be able to pay for the purchase of real estate and other transactions. This demand in turn makes the micro finance bank business a recession-proof business.
According to industry reports, the stages of growth and development of a micro finance industry are usually classified into four segments, for ease of analysis. These are the pioneer stage, the breakout stage, the consolidation stage and the maturity stage. The requirements for the survival of an industry at each of the different stages of development may differ significantly.
Report has it that the Nigerian micro finance industry started officially in 2005 (the International Year of Microcredit as declared by the United Nations) with the release by the Central Bank, of the Micro finance Policy Framework for Nigeria.
Note that the practice of micro finance or its precursor, microcredit, has been in Nigeria for a much longer time. It manifested in the activities of moneylenders, regulated under the Moneylenders Act, and other different forms of rural or informal credit market operations. We believe that the high end of it existed in the form of Non-governmental Organizations (NGOs), governed by cooperative rules and regulations.
Industry pioneers were motivated by the need to help in canalizing financial resources, basically in the form of microcredit, to microenterprises that constitute over 90 per cent of Nigerian business entities. It is believed that 70% of over 170 million Nigerians lived below the poverty line. Evidently therefore, there was a lot to do in the area of the fight against poverty, and micro finance was a fitting instrumentality.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
It’s very necessary to state explicitly that a Micro finance Bank is a company licensed by the Central Bank of Nigeria to carry on the business of providing financial services such as savings and deposits, loans, domestic funds transfer and non-financial services to micro finance clients.
Note that a micro finance bank can be established by individuals, groups of individuals, community development associations, private corporate entities or foreign investors. Accord to industry data, micro finance banks target client includes the following groups of people:
- The economically active poor
- Low-income households
- The un-banked and underserved people, particularly vulnerable groups such as women, youths and the physically challenged.
- Informal sector operators
- Subsistence farmers.
3. Decide What Niche to Concentrate On
Some of these services rendered by a micro finance bank include loans, deposits, domestic money transfer among a wide range of services offered. Some of the beneficiaries targeted for this service include artisans, fishermen, youths, farmers, citizens, non-salaried workers in the formal and informal sectors of the economy respectively.
Note that the loans are usually of unsecured nature depending mostly on the cash-flow of the business, as well as the applicant’s character. Also loans offered by micro finance banks usually don’t exceed 6 months, except in special cases like agriculture where it will extend to 12 months. For other projects like property development, it can a bit further to 24 months but won’t exceed that period.
The maximum principal amount will not exceed N500, 000 or 1% of the shareholders fund. You can differentiate yourself in this industry by choosing to provide a specific loan package, but anyone looking to start a micro finance bank in Nigeria needs to understand that there are of 3 types:
Unit micro finance bank
This is a micro finance bank with a paid up capital of N20 million, but without branches/ cash centers beside the main office.
State micro finance bank
This bank must provide a paid up capital of N100 million. They are allowed to operate within the same state or the FCT subject to written approval by the CBN for each new branch/cash centre to be opened.
National micro finance bank
A National micro finance bank must have a paid up capital of N2billion. They are allowed to operate all over the states or the FCT subject to written approval of the CBN for each new branch/cash centre.
Level of Competition in the Industry
The Nigerian Micro finance bank industry is a monopolistically competitive market. It is believed that the fairly easily achievable conditions for entry (licensing) allows profit-seekers to venture into the business and compete for the presumed profit available in the sector.
Reports have it that Nigeria now has over one thousand micro finance banks and several providers organized as NGOs. This goes to show that the industry in Nigeria is attractive to investors who are willingly investing their capital.
At the industry’s present stage, policy activity focuses on refinement and improvement of regulation and the digitalization of the regulatory and supervisory oversight capabilities of the appropriate authorities. Have it in mind that the competition and demand in the micro finance bank industry is driven by interest rates, consumer confidence, and capital spending by businesses.
Indeed the profitability of individual companies depend on their ability to originate, service, and get loans, as well as to collect fees and interest on credit and other financing products. Bigger companies in this industry have economies of scale in securing access to capital. Smaller and growing companies can compete effectively by specializing.
4. Know the Major Competitors in the Industry
- AB Micro finance Bank Nigeria
- Main street micro finance bank Nigeria
- Acxiom Micro finance Bank Limited
- Finer Trust Micro finance Bank
- ADDOSSER Micro finance Bank Limited
- Micro finance Mutual Trust
- FINCA Micro finance
- LAPO Micro finance Bank
- Rehoboth Micro finance Bank
Micro finance banks were primarily established to give out loans to poor and rural dwellers that the commercial banks do not deem fit to transact business with. A lot of micro finance banks have lived up to this responsibility over the years. A lot more however have failed. It is believed that many have become defunct because they could no longer meet with the requirements set by the Central Bank of Nigeria.
A lot have also engaged in endless litigation with the manager and the investor on a side, and the manager and the customers on the other side. To function successfully, micro finance banks also get loans from the Central Bank of Nigeria. The Central Bank gives out this loan at a rate that will make it convenient for them to loan to retailers.
But most micro finance banks tend to acquire additional loans from local commercial banks. At that point, the interest rate they offer is usually on the high side. Eventually, it gets burdensome to service the loans from Central bank and that from other local banks. This is usually the genesis of the problems that micro finance banks have afterwards.
Micro finance banks are expected to finance micro, small and medium businesses. On the average the standard is that the highest that micro finance banks can give as loan is N500, 000. Issues tend to arise when micro finance banks give out loans to big organizations and bankrolling projects worth millions of dollars.
When they do this, the micro retailers get to suffer as their banks have decided to put all of its eggs in one basket. The resources that should ordinarily serve 200 individuals will end up in a person’s coffer. Some micro finance banks tend to make the mistake of thinking they are commercial banks.
They make this mistake when they feel that their managers and supervisors are qualified to use expensive cars as their counterparts in the commercial banks; when they think that they are supposed to earn as much as those in the commercial bank setting. When micro finance institutions make mistakes like these, they are bound to fail.
5. Decide Whether to Buy a Franchise or Start from Scratch
When starting your micro finance bank, understand that other people have done it and you can also do it successfully. But why go through the struggle of from the basis when you can leverage an existing successful model. In the financial service business, it takes time and resources to establish a brand and to build trust.
Have it in mind that starting from the scratch will not guarantee you an established support network and the staff you hire and train may become your future competition.
Also time-consuming tasks include: administration, marketing, auditing, accounting, hiring a processor and secretarial staff, training, lead generation, courting clients, networking and cultivating relationships with bankers. All of this would take you away from the main objective of your business – to acquire and sustain costumers. Meanwhile, the advantages of buying into a franchise may include:
- Relationships with banks are already in place
- Can operate your franchise with only one or two people.
- Policies and procedures in place.
- Unshakable support and advice when you need it.
- Back office support already in place.
- Brand affinity, credibility, recognition and power of a brand name.
- Powerful network already established.
6. Know the Possible Threats and Challenges You Will Face
Starting and managing a successful micro finance bank in Nigeria is very challenging. You are sure to face numerous obstacles and threats which could both slow down or even restrict your success.
Internal Bank Fraud
Although the CBN, EFCC, NDIC, NDLEA and the police have played important roles in limiting internal fraud in many MFBs, there are still cases where bank staff made away with depositors funds. Some MFBs have even folded up because a director made away with huge sums of money under various pretext.
Loan Defaults from some Customers
When compared to commercial banks, micro finance banks 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 managed by educated people. Micro finance banks in the country 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
Note that some individuals can 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 expected.
Mini Commercial Bank Syndrome
Reports in recent years have shown that micro finance banks in the country 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 micro finance banks function like commercial banks and target more of middle level customers than low income earners and micro businesses. Industry experts believe that once you neglect the core micro finance practice you are heading for insolvency which most micro finance banks in Nigeria are currently doing.
7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
The best legal entity to choose when start a Micro finance Bank in Nigeria is a private limited company. This business structure is a legal entity in its own right, separate from those who own it, the shareholders. Note that the limited liability and simplicity of running the private limited company makes it the most common of registered business in Nigeria.
As a shareholder of a private limited company, the shareholders personal possessions remain separate (unless they are secured against the business for borrowing), and the shareholders risk is reduced to only the money they have invested in the company and any shares the shareholder holds which has not be paid for.
In Nigeria, Limited liability companies are seen to be prestigious by other companies and the general public due to its legitimate nature and the way important information is recorded at the Corporate Affairs Commission.
Also have it in mind that anyone looking to do businesses with a Limited Liability Company can verify who is connected to the company and also the financial status of the company by paying the Corporate Affairs Commission a small fee. The very minimum requirements are:
- The company must have a registered office in Nigeria
- The company name must not be exactly identical to any other company name currently held in the registry of the Corporate Affairs Commission
- At least twenty five percent of the authorised shares must be allotted at incorporation
- At least two people above the age of 18 must subscribe to the memorandum and articles of association.
- The total number of members in a private limited company must not exceed 50, not including those who are bona fide in the employment of the company
- The authorised share capital shall not be less than 10,000
8. Choose a Catchy Business Name from the ideas Below
- Astra Bank
- Blue Micro Bank
- Peoples Micro finance bank LLC
- Kindle Micro finance Bank
- African micro finance Bank
- Community Bank
- Green Credit Union
- Farmers loans Inc.
- First Micro Trust Bank.
- Heritage microloans
- First National Bank
- Golden micro Credit Union
- Western micro finance bank
9. Discuss With an Agent to Know the Best Insurance Policies for You
- Coverage for repossessed properties
- Directors and officers Liability
- Employment practices liability
- Lender liability
- Crime (financial institution bond)
- Cyber Risk
- Fiduciary liability
- Trust errors and omissions liability
- General liability
- Auto liability
- Workers Compensation
- Security and privacy insurance protection
10. Protect your Intellectual Property With Trademark, Copyrights, Patents
Worldwide statistics has shown that companies that clearly manage their IP as a financial asset tend to outperform their competitors by up to 30%. They do this explicitly by maximizing the effectiveness of investment in their business, moving performance in areas that produce the best return and managing operational risk. You can also do this and a few more in other to protect your intellectual properties. They may include:
- Managing Return on Investment and Improving Performance
- Provide security for financing
- Drawing Up an IP Strategy
- Secure assets to benefit a third party
11. Get the Necessary Professional Certification
There are professional certifications in quite every field and you can discover them by extensive research and discussing with those in the industry or by examining job descriptions. They may include:
- Institute of chartered accountants of Nigeria (ICAN)
- Chartered institute of bankers in Nigeria
- Association of National Accountants of Nigeria
12. Get the Necessary Legal Documents You Need to Operate
- A copy of the shareholders register
- A copy of the share certificate of each shareholder
- Form CAC 2 (return of allotment) filed with the corporate affairs commission (CAC).
- Form CAC 7 (particulars of directors)
- Micro Finance Bank Business Plan
- Memorandum of association as well as articles of association filed with the corporate affairs commission.
- Opening statement of affairs audited by an approved firm of accountants practicing in Nigeria.
- Certified true copies and the original copy of the certificate of incorporation.
- A copy of the letter of offer and acceptance of employment by top management staff as well as confirmation that the management team as approved by the CBN is in place.
- A letter of undertaking to comply all rules and regulations guiding the micro finance banks
- Form CAC 3 showing the location and address of the head office and branches where applicable.
13. Raise the Needed Startup Capital
To start a micro finance bank in Nigeria, you need at the very least N20 million as CBN required paid up capital. This does not include the fund required to obtain and maybe renovate your business office, fit your office with furniture and software. You will also need funds to register your business with CAC and all other expenses. This industry is capital intensive but you can raise funds through the means mentioned below.
- Bank loans
- Venture Capitalist
- Personal savings
- Loans from family and friends
- Getting Capital from angel investors
14. Choose a Suitable Location for your Business
Choosing a suitable location for your micro finance bank business is one of the most important decisions you have to make. There are a lot of businesses and activities you can accomplish online today without actually having a physical office right away, but you should have a designated location or space in which you can work.
Note that without a physical office where you can attend to your clients, then you should be open to meeting clients in their homes or other agreed-upon locations. Also when choosing a location, consider renting one with related businesses that can serve as a source to promote your micro finance business. For example, choosing an office complex with a real estate agent and an appraisal company very close may help drive targeted customers to your bank.
15. Hire Employees for your Technical and Manpower Needs
Indeed as your micro finance bank business grows, you may need to hire loan officers and debt collectors or loan processors. With a bigger staff, the need to hire human resource and payroll services also increases. Note that as your bank grows, you need to keep track of your business’ and employees’ tax information.
Remember to keep all your employees’ tax forms filed for easy reference. Regardless of your location and size, you will need a computer, fax machine, printer, Internet access, other office supplies and most importantly Micro finance bank software.
Micro finance banks suffer huge losses in three situations: increases in interest rates, accounting control fraud and premature expansion. That is why to avoid these situations; banks are advised to use credit scoring software to determine the risk and credit value of a transaction. Credit-scoring system analyses data from a large pool of borrowers.
When a client’s name and address are entered into a credit-scoring program, a thorough and complete credit history is gotten from credit-reporting agencies. Through a series of calculations, the history is analysed and compared to the histories of other borrowers. As financial lender, you will be using all kinds of technology to originate process, approve and fund loans.
One of the key issues micro finance banks face is how to simplify processes and make it easier for customers to deal with financial institutions. When it comes to micro finances, after interest rates, the primary thing customers care about is speed.
They want to get their loans approved very fast, get their funds as quickly as possible and do what they want with it. As a micro finance banker, it is your duty to employ all avenues available to provide your customers those incentives. Start by creating a good business plan for your bank.
A business plan is a very important document which specifies the location where you intend to run the company, the employees you intend to hire, the types of clients you want to market your micro finance bank business to, the goals you created for the business and the ways in which you have decided to reach your target market with your marketing efforts.
The Service Delivery Process of the Business
You can actually start a micro finance bank in Nigeria with as little as N20 million operating from just one unit location within a state. Alternatively, you can start up as a state micro finance bank with N100 million startup capital or N1 billion for national micro finance bank.
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. But no business is easy to run, so you need to flow with the necessary trends and outcome. Things to do in other to run your micro finance bank without drawbacks may include:
- Create a business plan before even setting out to apply for your license. Understand industry laws regarding micro finance bankers and lenders before originating loans and beware that the CBN hardly issue micro finance bank licenses to sole proprietors.
- Secure your license before lending money to clients. To be on the safe side, don’t start business without being licensed. Doing this could bring about expensive penalties including fines and prison.
- Also understand that Marketing is the key to business and your success, and much of it can be outsourced.
- Your customers require extra attention and consistent follow up–be ready to make the phone calls to reassure them of your diligence and work
- Seek good legal advice from a good attorney
- Always carry appropriate insurance.
- Make sure you completely understand every document before you sign it.
16. Write a Marketing Plan Packed With ideas & Strategies
The micro finance bank business is a very lucrative venture that strives with interaction. You should know that without clients, your micro finance bank business will not succeed, that is the more reason why your marketing plan should be detailed and direct. The marketing plan can also help you develop your image and knowledge of your target market.
- Always add a headline in all your documents and media
- List your business with local media outlets and directories
- Create brochures, signage and business cards
- Write thank you notes to your customers
- Constant and Never Ending Improvement
- Learn from your competitors
- Be a good marketer
17. Develop Iron-clad Competitive Strategies to Help You Win
Note that successful banks in the micro finance bank industry are using data as a competitive edge in the industry. The fight for market share is not new in the micro finance bank business. But as industry policies and regulations become tighter and general loan volumes have reduced drastically, smart micro finance lenders are turning to data to obtain an advantage in this highly competitive market and you should too.
- Originating and boost more loans
- Increasing and measure customer engagement
- Providing customer, property and market intelligence
- Driving high quality loans
- Obtaining recorded documents accurately
18. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Have it in mind that for your business to grow you need to network. In this competitive market you will keep feeling the pressure to discover innovative ways to acquire and process loans. You can only stand out if you have domineering brand awareness. One of the best ways to boost your brand awareness and create a corporate identity is to invest in digital marketing. Ways to do that may include:
- Knowing your target audience
- Taking Advantage of Content Marketing
- Start using Facebook advertising
- Don’t Be Afraid of Pay-Per-Click Advertising
- Set up remarketing
- Use your email well
- Extensive Micro finance marketing strategies