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How Much Do You Need To Start A Money Lending Business In Nigeria

Nigeria’s expanding consumer lending industry offers various opportunities for businesses, including banks, microfinance institutions, fintechs, and peer-to-peer (P2P) lending platforms. 

The consumer lending market in Nigeria is projected to reach a volume of US$78.6m in 2023. Fintech companies and various financial institutions are involved in online lending businesses. 

Money Lending Business In Nigeria

Many lending platforms are taking over the consumer lending industry in Nigeria, unlike traditional banks, which offer loans with high-interest rates, lengthy paperwork or regulations, and the requirement of guarantors, among other things. 

Fintech businesses, also known as lending platforms, offer loans straightforwardly and efficiently. Some of the top lending startups and companies in Nigeria include Zilla, AjoCard, Loanith, SPLEET, Ajocash, Shield Finders, Yamilowo, and Payqart. 

Peer-to-peer (P2P) lending, invoice financing, buy now pay later, merchant cash advance, and traditional bank models are some of the lending models available in Nigeria. 

The mortgage is still underdeveloped, and home ownership rates are very low, but some banks have registered growth. 

SoLo Funds, a peer-to-peer loan platform designed to make credit available to consumers underserved by U.S. banks, is expanding to Nigeria.

Microfinance and Credit Bank Licensing in Nigeria

In Nigeria, acquiring a license for microfinance banks (MFBs) and credit banks involves several fees. 

Microfinance and Credit Bank

Let’s delve into the details of these licensing fees:

Microfinance Bank (MFB) License:

1. Non-refundable Application Fee:

  • Unit MFBs: N50,000
  • State MFBs: N100,000
  • National MFBs: N250,000

2. Non-refundable Licensing Fee:

  • Unit MFBs: N250,000
  • State MFBs: N500,000
  • National MFBs: N1,000,000

These fees serve as crucial steps in the process of obtaining a Microfinance Bank license in Nigeria.

Credit Bank License:

1. Non-refundable Application Fee:

  • N5,000,000

2. Non-refundable Licensing Fee:

  • N5,000,000

For Credit Banks, the fees are notably higher, emphasizing the unique nature of these financial entities.

Additional Costs:

1. Apart from the aforementioned fees, there are other costs associated with obtaining a microfinance or credit bank license. These include legal, consultancy, and regulatory fees. The specific amounts may vary, contingent upon the requirements outlined by the Central Bank of Nigeria (CBN) and other regulatory bodies.

Considerations for Fintech License Selection:

It is vital for prospective licensees to carefully consider these costs and evaluate their industry’s nature. Here are some key points to ponder:

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1. Nature of Operations: Assess the scope and scale of your financial operations. Different licensing tiers cater to various levels of financial activities.

2. Regulatory Compliance: Stay abreast of the specific requirements set forth by the Central Bank of Nigeria (CBN) and other regulatory bodies. Ensure your operations align with these guidelines.

3. Consultation: Engage with legal and financial consultants to navigate the intricacies of the licensing process. Their expertise can prove invaluable in ensuring a smooth and compliant licensing journey.

4. Budget Planning: Develop a comprehensive budget that incorporates all potential costs. This includes not only the licensing fees but also the associated legal, consultancy, and regulatory expenses.

By considering these factors, businesses can make informed decisions when choosing a fintech license in Nigeria. The detailed breakdown of fees and additional considerations provides a clearer picture for those venturing into the microfinance and credit banking sector.

Setting Up Your Lending Institution

Are you thinking about starting a lending institution in Nigeria? The Central Bank of Nigeria (CBN) has laid out some important guidelines for the minimum capital requirements for different types of lending institutions. 

Let’s break down the details in a simple way.

Microfinance Bank (MFB) License:

1. Unit MFBs: For small Microfinance Banks, you’ll need a minimum capital (shareholders’ funds) of N200,000,000.

2. State MFBs: If you’re aiming for a bigger State Microfinance Bank, the minimum capital requirement is N1,000,000,000.

Fees for Microfinance Bank License:

1. Application Fee: When applying for a license, Unit MFBs need to pay a non-refundable fee of N100,000, while State MFBs must pay N200,000.

2. Licensing Fee: Unit MFBs have a licensing fee of N250,000, and State MFBs must pay N500,000.

Credit Bank License:

1. Application Fee: Getting a Credit Bank License comes with a non-refundable application fee of N5,000,000.

2. Licensing Fee: The licensing fee for a Credit Bank is also N5,000,000.

Additional Costs:

Apart from the licensing fees, there are other essential costs:

1. Legal, Consultancy, and Regulatory Fees: These are additional expenses that you’ll need to consider.

2. Setting Up Your Office: Costs for establishing an office, obtaining necessary software, and hiring staff can vary depending on your business’s specific requirements.

Funding Options:

When it comes to sourcing funds for your lending institution, consider various options:

1. Personal Investment: Invest your own money to kickstart your venture.

2. Love Money: Seek funds from family and friends who believe in your vision.

3. Venture Capital: Explore investment from venture capital firms.

4. Angel Investors: Connect with individuals willing to invest in promising startups.

5. Crowdfunding: Engage the community through crowdfunding platforms.

6. Business Incubators: Join programs that provide support and resources for startups.

7. Grants and Subsidies: Look for government or private sector grants and subsidies.

8. Loans: Explore loan options to secure additional financial support.

Considering these factors and the nature of your lending institution is crucial when planning to raise startup capital and cover operating costs. Take the time to explore your options and make informed decisions for a successful venture.

Working Capital Needs

Launching a lending institution in Nigeria involves careful consideration of upfront capital requirements. The amount needed varies based on the type of lending institution and the stipulations set by the Central Bank of Nigeria (CBN).

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Minimum Capital Requirements:

1. Microfinance Bank (MFB) License:

  • Unit MFBs: N200,000,000
  • State MFBs: N1,000,000,000

2. Credit Bank License:

  • Non-refundable application fee: N5,000,000
  • Non-refundable licensing fee: N5,000,000

Determining Working Capital:

To calculate the minimum working capital required for initiating lending operations, a simple formula can be employed:

Working Capital=Current Assets–Current Liabilities

Financial Planning:

Consider the costs associated with setting up the institution:

  • Office setup
  • Software acquisition
  • Staff hiring
  • Other overhead expenses

Funding Options for Entrepreneurs:

Aspiring entrepreneurs in Nigeria have several funding avenues to explore:

1. Personal Investment:

  • Using one’s savings to finance the venture.

2. Love Money:

  • Funds from family and friends can provide initial support.

3. Venture Capital:

  • Attracting investment from professional firms.

4. Angel Investors:

  • Individual investors who offer financial support.

5. Crowdfunding:

  • Raising funds from a large number of people online.

6. Business Incubators:

  • Joining programs that provide support and resources.

7. Grants and Subsidies:

  • Seeking financial assistance from government or private organizations.

8. Loans:

  • Borrowing from financial institutions.

Consideration of Time:

The duration to raise the required capital depends on the funding source and the nature of the business. It is crucial to factor in these considerations, along with the minimum capital requirements, when planning to establish a lending institution in Nigeria.

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Other Pre-Operation Costs

In order to establish a lending institution in Nigeria, there are several expenses to consider, such as fees, capital requirements, and other necessary costs. 

Here’s a detailed breakdown of the key information you need:

1. Application Fees and Regulatory Charges:

  • The Central Bank of Nigeria (CBN) sets specific capital requirements that vary based on the type of lending institution.
  • These requirements are crucial for acquiring the essential licenses to operate.
  • A detailed understanding of the application fees and regulatory charges is necessary for a smooth setup process.

2. Capital for Marketing and Credit Risk Models:

  • Beyond the minimum capital requirements, additional funds are essential for marketing initiatives and creating credit risk models.
  • The amount required can vary, depending on the size and nature of the lending institution.
  • Allocating funds for marketing and risk models is vital for effective business development.

3. Contingency Buffer:

  • Having a contingency buffer is a prudent measure to handle unforeseen expenses and mitigate risks during the initial operational stages.
  • This buffer acts as a safety net, providing financial flexibility and ensuring a resilient start for the lending institution.

4. Insurance Costs:

  • Consideration must be given to insurance costs, as they play a significant role in the overall risk management framework of the lending institution.
  • Understanding and budgeting for insurance expenses contribute to the institution’s financial stability and regulatory compliance.

5. Funding Sources:

  • Entrepreneurs in Nigeria can explore a variety of funding sources to secure capital for setting up a lending institution.
  • Possible funding options include personal investment, funds from family and friends (love money), venture capital, angel investors, crowdfunding, business incubators, grants, subsidies, and loans.
  • Careful assessment and strategic planning of these funding sources are essential to ensure financial stability and regulatory adherence.

6. Pointers for Financial Stability:

  • Diversifying funding sources reduces dependence on a single channel, enhancing financial stability.
  • Regularly reviewing and updating financial plans helps adapt to changing circumstances.
  • Seeking professional financial advice can provide valuable insights for effective financial management.
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Ongoing Capital Needs 

In Nigeria, banks need to follow rules set by the Central Bank of Nigeria (CBN) to keep their financial strength in check. These rules involve maintaining what’s called a Capital Adequacy Ratio (CAR). 

The CAR shows how strong and stable a bank is financially. Let’s break down what this means in simpler terms.

What is Capital Adequacy Ratio?

The Capital Adequacy Ratio (CAR) is like a measure of a bank’s financial health. For banks allowed to operate internationally and the big ones known as Domestic Systemically Important Banks (D-SIBs), the minimum CAR should be 15%. Other banks have a slightly lower requirement, with a minimum CAR of 10%.

How is CAR Calculated?

The CAR is a percentage, and it’s calculated by looking at different things a bank owns and the risks it takes. They look at what’s called risk-weighted credit exposures and other risk-weighted assets. It’s a bit like checking how much weight different parts of the bank carry in terms of risk.

Types of Capital: Tier 1 and Tier 2

The money a bank needs to keep itself strong is divided into two types: Tier 1 and Tier 2. Think of Tier 1 as the most important money. It includes common stock (like shares everyone can buy), disclosed reserves (money they’ve told everyone about), and retained earnings (money they’ve made and kept). Tier 2, on the other hand, includes some types of preferred stock and money they haven’t told everyone about yet.

Total Capital Ratio

Now, the total capital ratio is just the sum of Tier 1 and Tier 2 capital. According to the rules, it should not be lower than 8%. It’s like saying, “Hey, banks, you need to have at least this much money to stay strong and safe!”

Why is Capital Important?

Imagine you have a lemonade stand. You need money to buy lemons, cups, and everything else. Banks are similar; they need money to lend to people and help businesses. So, they have to make sure they always have enough money to do that. This is where raising Tier 1 and Tier 2 capital comes in.

Raising Capital for Growth

Banks can get more money by saving some of the money they make (retaining earnings), selling more shares to people (issuing new shares), or asking for more money from people who already own shares or other investors (seeking additional investments).

The Big Picture

Meeting the minimum CAR and getting the right amount of capital is like playing a smart game of money chess. Banks need to plan carefully and make good decisions to stay strong, lend money, and follow the rules set by the Central Bank. It’s all about keeping the financial world spinning smoothly!

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Conclusions

Starting a lending institution in Nigeria involves various costs and capital requirements, including licensing fees, capital requirements, and additional costs such as legal, consultancy, and regulatory fees. 

The minimum capital requirements for different types of lending institutions are set by the Central Bank of Nigeria (CBN) and can vary depending on the institution type. 

Entrepreneurs in Nigeria can explore various funding sources, such as personal investment, love money, venture capital, angel investors, crowdfunding, business incubators, grants, subsidies, and loans, to raise startup capital.

When creating a fundraising plan to cover the license approval stage and post-launch, it’s essential to develop a solid business plan and financial projections to attract investors. 

Entrepreneurs should explore various funding sources and be prepared to provide detailed financial statements, projections, and other relevant information to potential investors or lenders. 

It’s also important to demonstrate commitment to the business and be open to negotiating terms and conditions with investors.

The amount of own equity capital that should be prepared will depend on the personal financial situation and the scale of the lending institution. 

Entrepreneurs should be prepared to invest time, effort, and resources into the business and consider seeking professional advice and guidance when necessary.

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