Doing Business Simplified: Fintech (Lending Services)

Fintech (Lending Services)

Lending Services constitute a substantial part of the Fintech ecosystem in Nigeria. In recent times, there has been a steady rise in the number of startups providing short-term loans to individuals with little or no collateral. Consequently, startups within the lending subsector are the fastest growing as they account for a quarter of all Fintech startups.

Startups engaged in lending services can be categorised into Microfinance Banks (MFBs), Moneylending Companies, Peer to Peer Lending Services (P2P), and Mortgage Institutions. These startups are guided by different operational structures and regulatory regimes. Their services vary based on the type of lending services they provide and the extent to which they are licensed to perform different services (such as accepting deposits and investment services) amongst other factors.

Startups in the lending subsector typically register as MFBs because of its reach in terms of the services that can be offered. MFBs advance loans, accept deposits, invest same for higher returns, provide domestic fund transfers and other financial services to their customers.

MFBs are regulated by the CBN and are divided into 3 categories.

• Unit MFBs are licensed to operate in only one location and cannot have branches or cash centres. The minimum share capital for a Unit MFB is ₦200,000,000 (Two Hundred Million Naira).
• State MFBs can only operate within a particular state and can open multiple branches and cash centres within the state subject to prior approval from the CBN. An MFB with state-wide spread must have a minimum of ₦1,000,000,000 (One Billion Naira) share capital.
• National MFBs have a nationwide spread and can operate in multiple states with multiple branches and cash centres within those states subject to prior approval from the CBN. National MFBs are required to have an authorised share capital of not less than ₦5,000,000,000 (Five Billion Naira).

It is interesting to note that Fintech startups that are online focused are unlikely to be constrained by the physical restrictions placed per license on MFBs.

• Submission of application for grant of MFB license with the required documents.
• An Approval-in-Principle (AIP) is then granted by the CBN on receipt of the application and after being satisfied with the overall quality of the proposal within three (3) months.
• The grant of the AIP is a condition precedent for registration at the CAC. When this is done, the incorporation process would be concluded at the CAC (NB: Name must end with Microfinance Bank).
• An MFB with AIP will then be granted a final operating license upon the submission of the required documents such as the incorporation documents, share certificates of the shareholders, membership register and opening statement of affairs (NB: Before the MFB can begin operations, the CBN will conduct a physical inspection of its premises).

The regulatory requirements to establish an MFB might be too onerous for a startup with limited funding. Typically, startups alleviate funding problems by entering into Service Level Agreements, Partnership Agreements or other similar agreements with existing MFBs to use their licence for operations. Subsequently, the startup can then establish or acquire its own MFB after scaling and attracting significant funding.