Nigeria’s Microfinance Banks in a Cashless Economic system: Evolving for a Digital-First Future 

The implementation of the Naira redesign and cashless coverage in early 2023 didn’t come out of the blue for microfinance banks or certainly different operators within the {financial} sector in Nigeria.

The Central {Bank} of Nigeria (CBN) had spent the months and years main as much as the preliminary announcement in October 2022 urging microfinance banks and different {financial} establishments below its regulatory purview in direction of digitalisation to in the end assist reaching the purpose of a cashless society.

Nevertheless, by the point the deadline for the previous currencies and transaction limits rolled round in February 2023, the shortness within the ranges of preparedness of the expertise infrastructure for microfinance banks and the {financial} system normally was laid naked for all to see.

• An estimated 20 trillion naira was misplaced within the Nigerian financial system on account of failed and uncompleted transactions within the first quarter of 2023 in line with the Centre for the Promotion of Personal Enterprise.

The affect of the scarcity of authorized tender in circulation and failed digital transactions was extra acute on the microfinance banking business in Nigeria. The micro and small enterprise purchasers of microfinance banks bore the brunt of decline in business actions witnessed given the heavy reliance on money transactions in these {economic} segments. This led to a sizeable drop within the gross sales and profitability of the obligors of microfinance banks, negatively impacting mortgage repayments.

• The restricted money in circulation additional hindered the power of microfinance banks to disburse loans and fulfill buyer money calls for. Thus, primarily based on information from the CBN’s {Financial} Stability Report June 2024, in 2023, the microfinance banking business’s portfolio in danger ratio (PAR) stood at 14.29%, a notable enhance from 11.25%
• in 2022 and above the regulator’s most threshold of 5%. Following the easing of the money shortage challenges, PAR moderated to face at 12.25% as at 30 June 2024, primarily based on CBN’s figures.

Nigeria’s microfinance banking business has, thus, discovered itself compelled to speed up its shift in direction of digitalisation. Transitioning from a heavy reliance on money disbursements and brick-and-mortar amenities, to creating vital funding in expertise. In addition to creating digital infrastructure, conventional microfinance banks have embraced new methods resembling digital banking, agent networks, and {financial} literacy initiatives to drive cashless transactions.

Nevertheless, the hefty upfront prices required to construct sturdy expertise infrastructure have slowed the transition to full digital and automatic fashions. Nonetheless, the Naira redesign coverage’s money crunch sparked a nationwide surge in digital cost adoption, with cellular transfers, Unstructured Supplementary Service Knowledge (USSD) transactions, and point-of-sale funds turning into more and more mainstream.

In keeping with the Nigeria Interbank Settlement Programs (NIBSS), digital transactions have elevated by 79.6% from N600 trillion in 2023 to N1.08 quadrillion in 2024. This development signifies a big decline in money transactions, highlighting Nigeria’s ongoing transition in direction of a digital-first and cashless financial system.

The microfinance banking business has additionally been reshaped by the rising expertise adoption and heightened competitors, notably from the entry of neo-banks working with microfinance banking licences resembling Kuda MFB, Fairmoney MFB, and Moniepoint MFB. Growing competitors from business banks, fintech corporations, and cellular cash operators can also be driving microfinance banks to speed up funding in digital improvements resembling POS terminals and cellular banking platforms.

This digital shift, led by operators resembling Moniepoint MFB, has resulted in instantaneous transactions and improved market share, forcing different microfinance banks to undertake comparable applied sciences to stay aggressive. Notably, with the rising transition to digital banking fashions, microfinance banks are attracting cheaper funds by means of deposit accounts. The microfinance banking business’s deposit liabilities surged by 168% between Q2-2023 and Q2-2024, from N466.89 billion to N1.25 trillion, funding 44.7% of whole assets6. Nevertheless, the regulatory pressures have additionally intensified, with the CBN revoking 179 microfinance {bank} licences in 2023 on account of non-compliance points resembling insufficient capital and poor governance.

Regardless of the numerous operational and liquidity challenges induced by the naira redesign coverage and the following money crunch, the Nigerian microfinance banking business is charting a path ahead centred on digital transformation in operations. Within the quick to medium time period, conventional microfinance banks are anticipated to proceed strategic investments in digital infrastructure, increasing company networks, and enhancing buyer engagement by means of digital onboarding processes.

These steps might be essential to transitioning from a cash-dependent mannequin to a extra agile, cashless, and environment friendly digital banking system. Agusto & Co. expects that the continued funding by microfinance banks in digital infrastructure and the notable shift of consumer behaviour to cashless transactions will proceed to reinforce the portion of non-interest earnings within the earnings base. We additionally recognise that the push in direction of a cashless financial system brings higher comfort, extra service choices, decreased dangers related to dealing with bulk money, extra reasonably priced entry to banking providers compared to conventional branches, and improved entry to credit score and {financial} inclusion for shoppers.