How To Start Microfinance Bank

Mega Banking is for the rich and probably middle class, but microfinance banks serve the poor. This article describes how you can establish your own microfinance bank and profit from it.

Businesses for which there are ready markets provide the owners quick return on their investments and are more likely to generate profits for a longer time than those whose buyers are not readily available.

In developing economies like Nigeria, where statistics has continuously put the number of the poor people at more than half of the total population, investments which markets are the people at the lower rung of the economic ladder, have high prospects of meeting and surpassing owners’ expectations. With a ready market of over 70 million people, businesses that serve the poor remain veritable channels of investment in Nigeria. One of such is the microfinance bank.

The Regulatory and Supervisory Guidelines for Microfinance Banks in Nigeria, issued by the Central Bank of Nigeria (CBN), defines a microfinance bank as “any company licensed to carry on the business of providing microfinance services, such as savings, loans, domestic funds transfer, and other financial services that are needed by the economically active poor, micro, small and medium enterprises to conduct or expand their businesses.”

And according to Mr. Biodun Akinyemi, Managing Director, Crest Microfinance Bank Limited, the word “bank” does not mean a business in the mould of the universal (commercial) banks. There are marked differences in the modes of operations of a universal bank and a microfinance bank.

The regulations and supervision of microfinance banks in Nigeria rest with the CBN, through its development finance office and other financial institution departments.

The customer (client) of a microfinance bank are predominantly the active poor, with any or combination of the following characteristics as explained by the CBN: The person has a monthly income of not more than twice the monthly per capita income of Nigeria, or minimum wage; he has a total productive asset of not more than N500,000; he has a meagre means of sustenance or livelihood and has a total annual income that is less than the minimum taxable limit set out in the law relating to income tax.

So, microfinance is all about providing services to the active poor.

How to start

Any individual or group wishing to invest in microfinance bank requires a minimum deposit of N20 million for a unit microfinance bank or N 1 billion for a state microfinance bank with the CBN as share capital.

A unit microfinance bank has the authority to operate within the local governments in the particular state of its jurisdiction, while a state microfinance bank can spread its tentacles to other states within the federation.

But as Akinyemi stated, “That is not the amount that is sufficient to start a microfinance bank.” This is because the amount is to be deposited with the CBN, and it would not be released to the bank until after a minimum of three months. It is a sort of commitment which the CBN needs from the proposed investors.

Having earmarked the fund, the licensing requirements, as provided by
the CBN, are followed to the letter. According to the regulating guidelines, applications to the CBN shall include the said amount and “(a) a non-refundable application fee of N50,000 for a unit microfinance bank or N100,000 for a state microfinance bank. (b) a copy of the feasibility report, disclosing relevant information such as the objectives and owners of the proposed banks, the services to be rendered, five-year financial projection for the operation of the organisation, organisational structure, and a copy of the memorandum and articles of association.

A microfinance expert, Mr. Bolaji Oladele, observed that many businesses had failed because the owners did not put all necessary things into consideration. “When an investor does not prepare a detailed feasibility study for his business, he cannot guarantee the success of such endeavour,” he said.

The same view was expressed by Akinyemi who harped on the business plan. He said that after arriving at a suitable name for the proposed bank, the next thing to do was the business plan. But according to him, consultants were normally contacted, who utilised their vast experience in preparing the plan. The price charged by the consultants, he said, is a function of the working capital, adding that a unit microfinance bank with a working capital of about N25 million would be charged between N500,000 and N750,000. The business plan would contain details of the projections and plans, based on the geographical area, market, population, expansion and others.

All the documents are remitted to the CBN, which considers them and grants an approval-in-principle. This is attached to the application that is then filed to the Corporate Affairs Commission (CAC) for registration as a limited organisation.

Then, the recruitment stage comes in. Here, capable individuals are employed to carry out the business. Oladele advised that preference be given to field officers in the recruitment plan. That is, the organisation should employ more of the marketers, “because they are the main essence of operations of microfinance banks.” He condemned the practice of some microfinance banks who had placed higher premium on the administrative staff to the detriment of the field workers. The registration certificate from the CAC allows the business to commence while the final licence from the apex bank is being awaited.

Important tips for success

• A Service to the poor

According to Akinyemi, the first thing to note by microfinance investors in order to guarantee success was that the business was a service to the active poor. So, the bottomline is patience.

“It is a business that grows gradually,” he said, noting that when services were rendered to the poor, it was at a piecemeal. The business would mature slowly but positively.

Then the investor, he also said, should adjust his social outlook. That is, ability to come down to the level of the clients, speaking the language they understand and showing them the need to be banked.

•Start small

Oladele and Akinyemi stated that a small office was enough to start the business and not a flashy complex. And probably with just a car, the business can commence. Appoint about five principal officers only and about 10 field workers to start with.

•Do not invest much on capital projects at the initial stage.

Much emphasis on capital asset would eat away the expected profit, and that can discourage prospective investors.

- Place your field workers on target

It has been observed that workers do not always show total commitment until they are pushed to. Placing them on target would help you realise your objectives.

- Widen your client base

Akinyemi advised that a wider client base, say 2,000 people, even with a deposit as little as N500 each would allow the investor realise his targets than a client base of just 300 people with a deposit of N2 million each. “Such large depositor can withdraw their money anytime and that would spell doom for the business,” he noted.

- Create and nurture your brand

It is better to design products that are unique in the market and focus on alleviating poverty, experts have said.

- Challenges

Akinyemi stated that the first challenge is power generation. An investor should be ready to provide alternative source of generating power, with the collapse of electricity supply in Nigeria.

Then, there is the need to liaise with the banks already in place, probably joining an association, if such is in place.

- Profitability

Oladele and Akinyemi stated that all things being equal and with enough prudence in spending, the money invested in a microfinance bank would be recovered within two years.

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