Finance house vs. Microfinance: An overview of digital lending license

Although informal lending among friends, families, and groups still happens, formal lending organizations need government regulation. To operate a lending business in Nigeria, you must get a license. Figuring out which license suits your needs can be tricky. So, it’s necessary to understand what each license allows and doesn’t allow.

The Central Bank of Nigeria (CBN) licenses various entities, including merchant banks, microfinance banks (MFBs), finance houses, credit bureaus, etc. 

However, when considering lending at scale, the choice of license typically narrows down to finance houses and MFBs. While both licenses offer similar services, they differ significantly in their operational capabilities.

Let’s go over both licensing options, explaining what each one can and cannot do:

Microfinance banks (MFBs)

Microfinance Banks (MFBs) are financial institutions that serve micro, small, and medium enterprises (MSMEs). 

The Central Bank of Nigeria (CBN) designates them as banks for the unbanked. They often operate in rural areas where few people have access to banking services.

There are four categories of MFBs, as outlined in the Guidelines for the Regulation and Supervision of Microfinance Banks.

Tier 1 Unit MFB

Tier 1 Unit MFBs have authorization to operate in urban and high-density areas. They can open up to four branches outside their head office, but these branches must be within at most five Local Government Areas (LGAs). They are also authorized to operate in banked and high-density areas and must maintain a minimum paid-up capital of N200,000,000 (Two hundred million naira). 

Tier 2 Unit MFB

Tier 2 Unit MFBs are authorized to operate in rural, unbanked, or underbanked locations. They are allowed only one branch outside their head office, and both must be within the same LGA. They are required to have a minimum paid-up capital of N50,000,000 (Fifty million naira).

State MFB

State MFBs can operate within a single state and may have up to two branches in one LGA unless they already have at least one branch or cash center in every LGA of the state. A newly licensed State MFB shall not commence operations with more than ten (10) branches. State microfinance banks must maintain a minimum capital of one billion naira (₦ 1,000,000,000).

National MFB

National MFBs are allowed to operate in multiple states but can have up to ten branches as newly licensed National MFBs. They are required to maintain a capital threshold of five billion naira (₦5,000,000,000).

Finance House

Finance houses are non-banking financial institutions that provide various financial services, including lending, leasing, and financial advisory services. They may also offer other services like asset management and trade finance.

The Finance Houses Association of Nigeria is the self-regulatory body for all CBN-licensed finance companies. Founded on April 11, 1989, the association represents 102 finance companies. 

Its mission is to advance the business interests of its members, promote sound and ethical corporate governance, maintain high standards of conduct, and ensure compliance with statutory regulatory requirements.

They must maintain a minimum capital of N100 million (One hundred million naira only) in bank drafts made payable to the Central Bank of Nigeria.  

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What can you do with an MFB license?

• Deposit collection: accept various types of deposits from individuals, organizations, and groups, such as savings, time, target, and demand deposits, excluding public sector deposits.
• Lending, loan promotion, and monitoring: provide credit access and facilitate customer loan usage by offering additional capacity-building services in areas like record-keeping and small business management.
• Agency services: Serve as an agent for providing clients with mobile banking and microinsurance services.
• Non-banking functions: provide microfinance business development services, such as cooperative and group formation activities, rural industrialization, and other micro-enterprise support services.
• Payment services include salaries, gratuities, and employee pensions in various government tiers. 
• The provision of housing micro-loans.
• Integration with NIBSS

What can’t you do with an MFB license?

• Foreign currency transactions
• International electronic money transfers
• Handling international commercial papers
• Engaging in real estate activities, except for office space purposes

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What can you do with a finance house license?

• Consumer loans
• Fund management
• Investment
• Asset finance
• Project Finance
• NIBSS integration

What can’t you do with a finance house license?

• Deposit-taking
• Non-financial activities such as trading, construction, and project management;
• Other financial services include stock broking, issuing house business, registrar services, etc.
• Foreign Exchange transactions except through their correspondent banks/ authorized dealers

Featured read: What license do I need to lend?

Make the right choice for your lending business

Now that you’re informed about Finance House and Microfinance licenses, you can choose the one that best fits your business needs. The great news is that there’s no wrong choice. Lendsqr can support you regardless of your lending license. Go ahead and secure your license; we’re ready for you to start lending for free with Lendsqr!