How to secure your Finance House license in Nigeria

Getting the right license is a must if you want to run a lending business in Nigeria, but figuring out which one is the right fit can feel overwhelmingly tedious. Yes, you want to get a lending license, but why go for a Finance House license in the first place? Why not an MFB license? Or a state lending license? Each option has its own rules and limitations, so understanding what each option allows (and doesn’t allow) is necessary.

For digital lenders, there are several licenses to pick from. But if you’re looking to scale up and go big, the choices tend to narrow down to two main options: Finance House and Microfinance Bank (MFB) licenses.

We’ve already broken down the differences between these two in a previous article. Today, though, we’re diving into the nitty-gritty of how to get a Finance House license. Don’t worry. We’ll walk you through the steps and show you precisely what you need. But first, let’s do a quick refresher on what a Finance House license is all about.

What exactly is a Finance House?

In Nigeria, a Finance Company (a.k.a. Finance House) is a company specifically licensed to provide various financial services. There are currently 102 licensed (by the Central Bank of Nigeria) Finance Houses in Nigeria, regulated by the Finance Houses Association of Nigeria (FHAN)​. The association helps maintain a standardized environment and ensures that finance companies comply with regulations, making it a well-organized sector to operate in.

What Finance House license can and can’t do

Unlike other types of licenses, a Finance House license allows you to perform a variety of services, and they include:

Consumer loans: With a finance house license, you can provide personal loans to individuals for various purposes, such as education, medical expenses, or short-term needs. 

Asset finance: This involves financing for the purchase of assets like machinery, vehicles, or equipment. The finance company buys the asset on the client’s behalf, who then repays the loan in installments.

Project finance: Used to fund long-term infrastructure and industrial projects, where the repayment is typically structured around the project’s cash flow rather than the borrower’s balance sheet.

Local and international trade finance: Finance Houses can facilitate domestic and international trade by offering services such as letters of credit, invoice discounting, and trade guarantees to help businesses manage cross-border transactions.

Debt securitization and factoring: Finance Houses bundle loans and receivables into securities to sell to investors or offer factoring services, allowing businesses to sell their invoices at a discount to improve cash flow.

Financial consultancy: They provide expert advice on financial planning, investment strategies, and risk management to individual and corporate clients.

Investment: Unlike deposit-taking institutions, Finance Houses can take investments from clients, providing structured investment products that yield returns based on underlying financial activities.

Now let’s take a look at some of the limitations of a finance house license:

Deposit taking: Finance Houses can’t accept deposits like commercial banks or Microfinance Banks (MFBs). However, they can take investments. Confused? Think of it this way: you can offer structured investment products to clients, but you’re not legally allowed to hold deposits like a traditional bank.

Non-financial activities: Finance Houses are restricted from engaging in non-financial activities such as real estate, construction, or trading. They must strictly focus on providing financial services.

Other financial services:  Activities like stockbroking, issuing house business, and registrar services are also prohibited.

Foreign exchange transactions: You cannot conduct foreign exchange transactions independently with a finance house license. However, they are allowed to facilitate such transactions through authorized correspondent banks.

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How does a finance house compare to other licenses?

Choosing a Finance House license over other licenses like an MFB or a state moneylender’s license can impact what your business can and cannot do. Here’s a quick breakdown:

Deposit taking:

• Finance Houses: Can’t take deposits but can accept investments.
• MFBs: Can take both deposits and investments, making them more versatile.
• Money Lenders: No deposits, no investments — they focus purely on lending.

Regulatory burden:

• Finance Houses: Have a lower regulatory burden compared to MFBs, as they’re not taking public deposits.
• MFBs: Stricter regulations since they handle deposits and can mobilize grassroots financial agents.
• Money Lenders: Minimal regulations but also limited in service offerings.

Operational flexibility:

• Finance Houses: Can engage in complex financial products like project finance, trade finance, and investments. They can also join the NIBSS network, allowing direct fund transfers like MFBs.
• MFBs: Can offer basic banking services and grassroots financial inclusion through agent banking, which Finance Houses cannot.
• Money Lenders: Focus on smaller, short-term loans to individuals and small businesses.

With this in mind, a Finance House license is ideal if your focus is to scale your loan business to offer more structured financial services without the heavy regulatory requirements.

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Process and requirements for securing a Finance House license 

To obtain a Finance House license in Nigeria, companies must follow a structured application process and meet specific regulatory requirements set by the Central Bank of Nigeria (CBN). Below is a detailed, consolidated guide to help you navigate through the steps:

Prepare and submit your application

Begin by preparing a comprehensive application package that includes the following key documents:

Application letter: Addressed to the Governor of the Central Bank of Nigeria, stating your intention to secure a Finance House license.

Non-refundable application fee: A bank draft of ₦100,000 payable to the Central Bank of Nigeria.

Minimum capital deposit: Deposit a minimum paid-up share capital of ₦100 million. This amount must be verified and paid into a designated bank account at the CBN. The capital, along with any accrued interest, will be released once the final license is granted.

Verifiable proof of capital payment: Evidence that shareholders have fully paid the required capital amount.

Draft memorandum and articles of association: These should outline the objectives of the Finance Company, aligning strictly with permissible operations for Finance Houses.

Submit a detailed business plan

A comprehensive business plan is crucial and should contain:

Business model and feasibility study: A detailed overview of the types of financial services to be offered.

Five-year financial projections: Include profitability estimates, expected growth, and key financial assumptions.

Risk management strategies: Outline measures to mitigate risks in the operations.

Corporate governance framework: Clearly define the roles and responsibilities of the management team and Board of Directors.

Branch expansion plan (if applicable): Include a roadmap for potential branches over the first five years.

Management succession plan: A strategy for developing leadership within the organization.

Provide shareholder and management information

The CBN will thoroughly review the background and qualifications of key stakeholders, so it’s essential to include the following:

List of proposed shareholders: Include business and residential addresses, bank details, and a letter of intent from each subscriber.

Names, CVs, and directorships of proposed board members: Each director should have a verifiable track record and relevant experience.

Organizational structure: Define the company’s structure with clear reporting lines and designated roles for top management.

Capital verification and compliance

The CBN will verify the source and legitimacy of the company’s capital. You must provide:

Certificate of capital deposit: A statement showing that the required ₦100 million has been deposited.

Evidence of source of funds: Documentation supporting the origin of the capital to ensure compliance with anti-money laundering regulations.

Background checks and “fit and proper” tests

The CBN conducts rigorous background checks on the company’s directors, shareholders, and key management personnel to ensure they meet the regulatory standards and have no legal or financial infractions.

Provisional approval

Upon satisfactory review of your application, the CBN will issue a Provisional License. This license allows you to set up operations and fulfill additional requirements set by the CBN. During this period, you must establish the company’s infrastructure, hire qualified staff, and ensure the business complies with all regulations.

Fulfill provisional license conditions

To transition from provisional to full licensing, the Finance House must:

• Establish a physical office.
• Implement the corporate governance structure outlined in the business plan.
• Submit copies of employment letters, shareholders’ register, share certificates, and evidence of directors’ appointments.
• Submit an opening statement of affairs audited by a recognized firm in Nigeria.

Final license approval

Once all the conditions of the provisional license are met and the CBN conducts a successful inspection, the company will receive a Full License to operate as a Finance House in Nigeria. Only then can the company register its name with the Corporate Affairs Commission (CAC).

Annual license renewal

Finance Houses must renew their licenses annually within the first quarter of each year. The CBN determines renewal fees based on its current stipulated rates, and they are non-refundable.

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Important considerations

Standalone operations: A Finance House must operate strictly as a standalone entity, solely focused on finance services. The CBN does not allow a mix of financial and non-financial activities under the same business.

Scope of operations: Finance houses cannot take deposits, engage in non-financial activities, or offer certain financial services like stockbroking and forex transactions.

By adhering to these requirements and ensuring compliance at every step, your Finance House can secure its license and operate legally within Nigeria’s financial sector.

Right license + right technology = lending success!

Choosing the right license depends heavily on your business goals. Need grassroots reach and deposit-taking abilities? Consider an MFB license. Just want to focus on lending? A Money Lender’s license might work.

But if you want to provide a broad spectrum of financial services with flexibility and growth potential, the Finance House license could be your ticket to success. But remember, obtaining a license is just the beginning. The real magic happens when you combine that regulatory approval with the right technology and support. 

That’s where Lendsqr steps in. Our comprehensive loan management software and robust decision engine empower you to meet all regulatory requirements while thriving in a competitive market. With Lendsqr, you can focus on growing your loan business while we handle the complexities of the technology you need to succeed. Book a free demo.