COVID-19 Expected to Push Microfinance Banks to Accelerate Technology Investments – Agusto & Co.

Microfinance banks in Nigeria have been awakened by the COVID-19 pandemic to accelerate investments in digital channels for loan disbursement and collection, according to the credit rating agency, Agusto & Co.

While many operators have since developed web portals for loan applications and are actively exploring the use of payment services such as Remita, Paystack and ultimately mobile money for collections, Agusto & Co. said the The effectiveness of these channels in Nigeria, however, may be limited. by the low digital literacy of the unbanked, underbanked and low-income target market of the microfinance industry.

“We believe that the future success of digital channels in the microfinance space (especially for collections and therefore disbursements) will depend heavily on the adoption of digital payments by low-income people and MSMES in day-to-day transactions. buying and selling, ”said Agusto & Co ..

The strong physical presence of microfinance banks in various geographic locations in Nigeria is said to be the main driver of the industry’s success. The largest microfinance banks have branches across the country and are easily identifiable with the target market of low income people and MSMES operating in the surrounding region.

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Apart from licensing three payment service banks (PSBs) – Hope PSB Limited, 9 PSB Limited and Moneymaster PSB Limited – which are expected to offer possible solutions similar to Safaricom’s popular M-Pesa platform in Kenya said Agusto & Co. if the underlying economic activities continue to be executed in the form of banknotes and coins, the fundamental challenge of converting collections into a digital transaction would remain.

“Users of the M-Pesa platform in Kenya and other East African countries can pay digitally to and from a mobile number to shop at a market stall, for transportation in common or for the services of a craftsman, for example. This ‘mobile money’ can be used to settle loan obligations using the same platform, thus facilitating digital collections, ”said Agusto & Co.

Speaking on the COVID-19 pandemic and the technology shortcomings of microfinance banks, Agusto & Co. said in its recent report on the microfinance industry in Nigeria that, like in most developing countries where penetration of electronic channels is relatively low, the impact of the pandemic helped trigger a doubling of obligations past due for up to 30 days (PAR 30) during the first wave of the pandemic and lockdown restrictions at the start of 2020.

“Despite up to N5 billion naira spent by major national and state microfinance banks in Nigeria for the implementation of internet, mobile and USSD banking services, the industry remains heavily dependent on physical branches for customer acquisition. and loan disbursement. and collecting banknotes and coins for reimbursement.

Given the country’s low technological culture, Micro, Small, and Medium-Sized Enterprise (MSMES) collections were on hold during the six-week lockdown, even in areas classified as essential and in areas that would not otherwise be subject to lockdown. restrictions. The economic environment was also not conducive to loan disbursements given the sharp decline in business activities as many microfinance banks were caught off guard by the pandemic, few of them having the infrastructure. in place to digitally lend to MSMES.

However, Agusto & Co. expects that the two-step increase in minimum capital requirements for all categories of microfinance banks, which is expected to come into effect in April 2021 and April 2022, will lead to a reduction in capital requirements. number of operators from over 900 to around 500 through consolidation activities as well as failures to meet new requirements. The outcome of the recapitalization exercise is expected to help boost the adoption of digital infrastructure.

The credit rating agency also expects the microfinance industry to perform better in 2021, supported by the global rollout of COVID-19 vaccines, the accelerated digital transformation of microfinance banks and businesses in general. , renewed focus on critical sectors and government support for MSME enterprises. . The industry, however, continues to be highly vulnerable to macroeconomic challenges, as was the case in 2020.

According to the Central Bank of Nigeria (CBN), microfinance banks operating in unbanked and underbanked rural areas (level 2) are expected to reach the capital threshold of 35 million naira by April 2021 and 50 million naira in April 2022.

Those operating in urban and high density bank areas (level 1) are expected to reach the capital threshold of 100 million naira in April 2021 and 200 million naira in April 2022;

State-approved microfinance banks are due to increase their capital to 500 million naira in April 2021 and to 1 billion naira in April 2022.

National microfinance banks are expected to reach a minimum capital of 3.5 billion naira by April 2021 and 65 billion naira by April 2022.

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