The Central bank of Nigeria released new banking license for microfinance banks which is mostly used by digital banks including Piggyvest and Kudi bank.
The MFBs are seen as instrument for poverty reduction and financial inclusion that provide credit services to businesses in formal sector, such as accepting deposits, providing loans and fund transfer.
Following the new revised license, most fintech and blockchain startups in Nigeria will need more funds to be able to catch up with the process. Moreso, the new revised banking standard does not support international fund transfer and other restricted functions.
The Microfinance Bank Revised Banking License
is mostly for MFBs and Fintech startups mostly digital banking startups.
The new banking license also had put an increase in the operational cost of running a startup through an increased regulatory funding requirements putting an extra pressure on startup finances.
For example, around september 2019, Kuda Bank raised $1.6 million (₦586.4 million). PiggyTech’s last fundraise was $1.1 million (₦403.2 million) in 2018. These are not large fundraises that can help the platform build its services and pay for the needed regulatory fees to operate.
According to the exposure draft from CBN, startups can use a loan, rather than capital, to meet the revised regulatory measures but they can’t borrow from a Nigerian lender.
“Where the source of funding the equity contribution is a loan, such shall be a long-term facility of at least 7-year tenor and shall not be taken from the Nigerian banking system.”
The financial regulator is giving companies 12 months to meet up with the new capital requirements once the guideline becomes active.
Moreso, Tier 2 holders must raise their minimums to ₦35 million ($95,009) by April 2020, and ₦50 million ($135,727) by 2021. While Tier 1 holders must raise theirs to ₦100 million ($271,455) by April 2020 and ₦200 million ($542,910) by 2021.
Additionally, rural location requirement of the Tier 1 licence is not clear. Most fintechs and blockchain startups operate in Lagos from locations like Yaba, Ikeja, Lekki and Ikoyi.
While these are not “rural” areas, they are required to remain compliant. But then these fintechs may either have to secure the Tier 1 Unit licence or move their offices to get the less costly Tier 2 banking licence in other to operate.
According to VFD Microfinance Bank, the new banking license is a good move.
“If you want to do this business, if you want to hold peoples’ deposit, you must have the capacity,” Azubike Emodi, Managing Director at VFD.
“I can’t take people’s deposits perhaps ₦500 million, ₦1 billion and ₦2 billion in deposit with a recapitalisation of N20million; it doesn’t augur well,” he added.
But VFD is based in Lagos Island, a relatively urban area and operates with a Unit licence.
Though for successful operation of Fintech and Blockchain startups, an MFB license is important. The regulators have been too slow to come up with robust license rights suitable for the fintech and blockchain startups.
Nevertheless, most Fintechs platforms have secured a better way to stay compliant to regulations though the situation is a huge threat to startups in the digital banking world.
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