A financing gap has been identified in the Nigerian economy within the middle tier of the financial system, particularly among the Micro, Small and Medium Enterprises (MSMEs) segment. MSMEs are the drivers of job creation and economic growth, and the lack of access to finance is one of the biggest hurdles MSMEs face in Nigeria, which prevents them from developing, and creating jobs and opportunities.
The importance of MSMEs to the creation of wealth and sustainable development in Nigeria cannot be underestimated. A 2018 survey conducted by the Small and Medium Enterprises Development Agency (SMEDAN) found that MSMEs contributed approximately 48.47% (i.e.
N38.8 trillion) to the nation’s Gross Domestic Product. In addition, it was deciphered that there are over 37 million MSMEs in operation in Nigeria, which provide employment to over 58 million people.
Finance companies emerged in Nigeria in 1959 with the formation of Bent worth finance limited with the main business being the provision of finance by way of hire purchase and equipment leasing facilities, principally to those engaged in the transport and allied industries. Thereafter, the number of finance houses increased tremendously however, they were not regulated by any supervisory body.
In 2002, with a view to strengthening the country’s economic output by creating an enabling environment for MSMEs and regulating the Finance company sub-sector the Central Bank of Nigeria (CBN) enacted the Guidelines for Finance Companies, 2002 (the “2002 Guidelines”). According to the CBN, Finance companies in Nigeria are non-bank financial intermediaries involved in funds mobilization particularly short-term fund and were charged with the mandate of operating as middle tier financial institutions to cater to the financial needs of MSMEs in the country. Nonetheless, the major challenge with the 2002 Regulation was the vagueness of the legislation. Stakeholders lacked a detailed expression of the scope of services of a Finance Company and its limitations, although it provided for the services of a Finance Company, it did not provide for the non-permissible activities of such a company.
The Central Bank of Nigeria Revised Guidelines for Finance Companies in Nigeria, 2014 (the “Guidelines”) addressed the issues identified in the 2002 Guidelines. It allowed a Finance Company to provide a wider range of services, which includes consumer loans, project finance, asset finance, loan syndication, debt securitization and covered bonds among other services. The current Guidelines was also extensively aimed at corporate governance and risk management within a Finance Company, whereas the 2002 Guidelines only made provision for internal control measures in the company.
This report will provide an overview of the enabling law for the establishment of a Finance Company in Nigeria. It also notes the general operation of a Finance Company License and the procedure for its acquisition. Furthermore, this report will highlight the main bottlenecks encountered in the acquisition of the Finance Company License and how the procurement process can be improved.
A. Regulatory Overview
The Central Bank of Nigeria (CBN) in exercise of the powers conferred on it by the Central Bank of Nigeria Act of 2007 as amended and the Banks and Other Financial Institutions Act of 2004 (BOFIA) issued the Revised Guidelines for Finance Companies in Nigeria 2014 (the “Guidelines”) to regulate the establishment, operations and other activities of Finance Companies in Nigeria.
The Guidelines replace the Guidelines for Finance Companies (2002) and should be read in conjunction with the provisions of the CBN Act, the BOFIA, as well as written directives, notices, circulars and guidelines that the CBN may issue from time to time.
B. Operation of a Finance Company in Nigeria
The Guidelines operate to allow a Finance Company license to be awarded to institutions that meet the minimum requirements as prescribed by the CBN.
The Guidelines describes a Finance Company as a company licensed to carry on Finance Company business, which includes the business of providing financial services to individual consumers and to industrial, commercial, or agricultural enterprises. The Guidelines enumerate the activities that may be carried out by a Finance Company to include the provision of the following services:
- Consumer loans
- Funds management
- Asset finance
- Project finance
- Local and international trade finance
- Debt factoring
- Debt securitization
- Debt administration
- Financing consultancy
- Loan syndication
- Warehouse receipt finance
- Covered bonds
- Such other businesses as the CBN may from time to time stipulate.
The Guidelines prescribe measures that are aimed at improving best corporate practices in the financial services industry. It also endeavors to protect FCs from insolvency and problematic debtors by limiting the lending to a single borrower. The maximum loan by a Finance Company to any person or corporate organization or maximum investment in any venture by a Finance Company shall be 20% of the Finance Company’s shareholders’ funds unimpaired by losses. Any contravention will attract a penalty of
N100,000 on the Finance Company and a fine of N10,000 on the directors/managers who failed to comply.
The Guidelines prohibit Finance Companies from accepting deposits from the public. In addition, Finance Companies are excluded from carrying out capital market activities, providing registrar services, foreign exchange trading and non-financial activities such as trading, construction and project management.
These exclusions are required to limit the services of Finance Companies to the aforementioned list and prevent them from undertaking specialised services, which could become cumbersome or lead to uncontrollable risk. As stated earlier, Finance Companies were created to bridge the financing gap created between MSMEs and large financial institutions such as commercial banks, which would otherwise be discouraged from investing or granting a loan to a small business due to the high-risk nature of such a transaction.
The CBN has therefore made it possible for individuals or corporations with a desire to foster sustainable development in the country to operate under the regulatory umbrella of the CBN as a Finance Company. With a capital requirement of
N100 million, a Finance Company is cheaper to establish and operate when compared to other financial institutions such as micro finance banks, development finance institutions or mortgage refinance companies.
C. The Systematic process of acquiring a Finance Company Licence.
Under Section 58 of the BOFIA, no person shall carry on other financial business in Nigeria, (other than insurance and stockbroking) except it is a company duly incorporated in Nigeria and holds a valid licence granted in accordance with the provisions of this Act. Section 59 additionally specifies that said licence must be applied for in writing, to the CBN accompanied with certain key documentation of the company.
The BOFIA read in conjunction with the Guidelines states that any person or company wishing to carry on financial company business in Nigeria shall apply in writing to the CBN for the grant of a license and shall accompany the application with the following:
- A non-refundable application fee of
N100,000 in bank draft, payable to the Central Bank of Nigeria.
- Deposit of the minimum capital of
N100 million in bank draft made payable to the Central Bank of Nigeria. The capital thus deposited together with the accrued interest will be released to the promoters on the grant of the final licence.
- Satisfactory, verifiable and acceptable evidence of payment by the proposed shareholders of the minimum capital of
- Detailed business plan or feasibility study in accordance with the guidelines,
- A copy of the draft Memorandum and Articles of Association (MEMART). The objectives of the Company as disclosed in its Memorandum and Articles of Association should agree with the services listed under the scope of permissible operations for Finance Companies.
- A letter of intent to subscribe to the Finance Company, signed by each subscriber.
- A copy of the list of proposed shareholders in tabular form, showing their business and residential addresses and the names and addresses of their bankers.
- Names and curriculum vitae of each of the proposed members of the Board of directors including other directorships held. The CVs must be personally signed and dated. The promoters would also be required to submit the names and curriculum vitae of the proposed management team.
Upon a satisfactory appraisal of the application and all supporting documentation, the Governor of the CBN may grant or refuse a license to a Finance Company. Where an application for a license is granted, the CBN will give written notice of that fact to the applicant and a non-refundable licence fee of
N250,000.00 shall be paid.
Conditions Precedent to the Commencement of Operations as a Finance Company
Before a Finance Company is permitted to commence operations, the promoters will be required to submit the following documents to the Central Bank of Nigeria
- A copy of the shareholders’ register in which the equity interest of each shareholder is properly reflected [together with the original for sighting] and a copy of the share certificate issued to each shareholder.
- A certified true copy of Form C02 [Return of Allotments] filed with the Corporate Affairs Commission.
- A certified true copy of Form C07 [Particulars of Directors], and written confirmation that the Board of Directors approved by the Central Bank of Nigeria has been installed.
- A certified true copy of the Memorandum and Articles of Association filed with the Corporate Affairs Commission.
- The opening statement of affairs audited by an approved firm of accountants practicing in Nigeria.
- A certified true copy of the certificate of incorporation of the company [together with the original for sighting purposes only].
- A copy each of the letters of offer and acceptance of employment by management staff and a written confirmation that the Management team approved by the Central Bank of Nigeria has been put in place.
- A letter of undertaking to comply with all the rules and regulations guiding the operations of Finance Companies.
- Evidence of registration with the Finance Company’s association umbrella body.
The Finance Company is further required to inform the CBN of the location and address of its Head Office and shall subsequently be informed in writing by the Central Bank of Nigeria that it may commence business after physical inspection of its premises.
D. Regulatory Bottlenecks encountered in the acquisition of the License and how the procurement process can be improved
The complicated administrative procedures associated with liaising with the CBN is reportedly the main difficulty experienced by any institution operating a Finance Company or attempting to acquire a Finance Company license. The Guidelines stipulate that the following corporate practices must be approved by CBN: requirement for increase in share capital, revaluation of fixed assets, filing of quarterly periodic returns to mention but a few. Where these frequent procedures have to pass through a large regulatory agency such as the CBN prior to its approval, it could cause the Finance Company to lose money and/or discourage business entities from establishing a Finance Company due to the undue delays in granting necessary approvals.
In exercise of its supervisory powers, the CBN created the Financial Policy and Regulation Department and the Other Financial Institutions Supervision Department as a medium for maintaining financial system stability. It is being suggested that the roles of these units need to be re-defined to ensure the provision of efficient financial and corporate services.
The financial policy and regulation department grants approvals and licenses for banks and other financial institutions in addition to developing and implementing policies and regulations aimed at ensuring stability of the financial system.
The Other Financial Institutions Supervision Department supervises community banks and other non-bank financial institutions but does not implement regulations or resolve financial or corporate problems, rather it conducts off-site surveillance and on-site examination of microfinance banks, primary mortgage institutions, Bureau-de-Change, Development Finance Institutions, Primary Mortgage Institutions and Finance Companies.
Financial issues often require immediate attention and timely resolution. In order to expedite processes and resolve operational issues that may arise with corporate practices in financial institutions in Nigeria, it is imperative that the CBN separates the department handling the regulatory affairs of Banks from those managing other financial institutions. The CBN should create an adjunct body under the Financial Policy and Regulation Department that would be charged with solely managing the affairs of other financial institutions. Alternatively, the objectives of the Other Financial Institutions Supervision Department can be re-structured to accommodate incidents resulting from the implementation of the Guidelines.
The Finance Company Guidelines 2014 are succinct yet comprehensive particularly when compared to the previous Finance Company Guidelines of 2002. It allows Finance Companies to offer a wider range of financial services to MSMEs, whilst protecting the interests of all the stakeholders involved. However, it is necessary for the CBN to implement an efficient system for managing and responding to challenges encountered by Finance Companies and entities in the process of establishing Finance Companies.