Traditional lenders in Nigeria have recently embraced online lending with a number of leading banks having set up online only entitles such as Alat by Wema bank and Specta by Sterling bank.
Banks play important roles in the economic life of a country particularly a developing nation like Nigeria through the provision of banking service. As agents of development, they provide loans and advances including a variety of contingent facilities. This explains why credit guidelines contained in government’s monetary circulars stipulate the aggregate ceiling on credit creation as well as the sectorial allocations which banks and other financial institutions must comply with during a fiscal year.
Nigeria’s banking industry experienced a major transformation in 2004 resulting from the CBN recapitalization programme, a radical initiative that resulted in the number of banks in Nigeria shrinking from 89 to 25 in January 2006.
The number of banks in 2018 has now reduced to 22 who are the dominant operators in the financial sector: they are licensed to offer all banking and financial services directly or through subsidiaries. The banking recapitalization and consolidation policy resulted not only in a lot of mergers and acquisitions, but also in a diversification of the banks’ ownership base, with a substantial dilution of large individual and government control.
Large banks play critical roles in the transmission of our monetary policy. But transaction costs to process micro loans are relatively high; as a result, banks are less likely to engage in lending at the smallest naira level. This is problematic as a significant proportion of small businesses are seeking loans of under N1m, leaving a critical gap in the small business loan market.
In general banks obtain most of their income from charging interest on the money they lend. A bank does, of course, have to pay interest to many of the depositors who have provided the money, but even when this is deducted from interest earned the profit left over is, for most banks, more than the profit from all of the rest of the bank’s business.
In a sense the importance of lending has declined as income from other sources has become relatively more important, but the actual amounts of money earned by the major Nigerian banks from lending have continued to rise. The rise in interest income generally exceeded the rate of inflation, and therefore represents a real increase in profit.
Microfinance banks provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner that would enable them to undertake and develop long-term, sustainable entrepreneurial activities to a designated geographical area with Local Government jurisdiction as unit locations.
This includes the provision of micro loans to support productive activity or self-employment. Three features distinguish microfinance loan from other formal financial products:
- Smallness of loans and savings,
- Absence or reduced emphasis on collateral, and
- Simplicity of operations.
Microfinance is growing rapidly in Nigeria; growth in the number of borrowers was of over 30%, 35% growth in savers, while the growth of the loan portfolio amounted to above 40% from 2010 to 2016. Although Microfinance banks tend to be concentrated in the Southern states, and that the Northern states are relatively very poorly served. This means that Microfinance banks do not completely fulfil the role that they were initially meant to serve, covering areas not served by the banks.
The central bank of Nigeria regulates microfinance banks in Nigeria and set the minimum paid up capital to operate at a
- Unit license MFB – ₦20 million;
- State MFB license – ₦100 million
- National MFB – ₦2 billion
The current framework has led to a MFB sub sector that consists largely of small, poorly capitalized institutions with low capacity and high risk of failure. More than 80% of the 942 registered microfinance banks in Nigeria hold a unit license. Furthermore, current geographic restrictions may limit growth opportunities. Online services would help microfinance banks to meet the CBN’s financial exclusion target of 20% by 2020.
Nigeria has increasingly been focusing on the inclusion of microfinance into the formal financial system, by either extending banking and non-banking financial legislation or issuing microfinance-specific laws and regulations. The CBN plans to increase the minimum capital requirement for Microfinance Banks in 2019, with a view to enhancing their performance.
Whilst there have contributed positively to some financial inclusion metrics, microfinance cannot be seen as a silver bullet for development and that profit-oriented microfinance institutions are problematic. To fulfil even some of its progressive goals, it must be further regulated and subsidized, and other strategies for viable financial inclusion of the poor and of small producers must be more actively pursue.
OTHER TRADITIONAL LENDERS
- Finance Companies: These are financial institutions whose business and primary function include lending to individuals. Finance companies cannot accept deposits. There are 64 finance companies in Nigeria.
- Primary Mortgage Institutions: These are usually private savings and loans institutions (or building societies) focusing on mortgages for the purchase of homes to clients who also save with the institutions. There are 36 Primary Mortgage Institutions in Nigeria.
- Development Finance Institutions: These are usually government-owned financial institutions established to finance certain development objectives of the government mainly in the agriculture, commerce, and industrial sectors of the economy. There are 6 DFIs in Nigeria;
- Bank Of Agriculture (BOA)
- Bank Of Industry (BOI)
- Federal Mortgage Bank Of Nigeria
- Nerfund (National Economic Reconstruction Fund)
- Nigeria Export Import Bank
- The Infrastructure Bank
- Cooperatives – they meet demand for financial services in Nigeria (especially in rural areas). Being member owned, financed and managed by, for and of its members