The implementation of the Naira redesign and cashless policy in early 2023 did not come out of the blue for microfinance banks or indeed other operators in the financial sector in Nigeria.
The Central Bank of Nigeria (CBN) had spent the months and years leading up to the initial announcement in October 2022 urging microfinance banks and other financial institutions under its regulatory purview towards digitalisation to ultimately support achieving the goal of a cashless society.
However, by the time the deadline for the old currencies and transaction limits rolled around in February 2023, the shortness in the levels of preparedness of the technology infrastructure for microfinance banks and the financial system in general was laid bare for all to see.
- An estimated 20 trillion naira was lost in the Nigerian economy due to failed and uncompleted transactions in the first quarter of 2023 according to the Centre for the Promotion of Private Enterprise.
The impact of the shortage of legal tender in circulation and failed electronic transactions was more acute on the microfinance banking industry in Nigeria. The micro and small business clients of microfinance banks bore the brunt of decline in commercial activities witnessed given the heavy reliance on cash transactions in these economic segments. This led to a sizeable drop in the sales and profitability of the obligors of microfinance banks, negatively impacting loan repayments.
- The limited cash in circulation further hindered the ability of microfinance banks to disburse loans and satisfy customer cash demands. Thus, based on data from the CBN’s Financial Stability Report June 2024, in 2023, the microfinance banking industry’s portfolio at risk ratio (PAR) stood at 14.29%, a notable increase from 11.25%
- in 2022 and above the regulator’s maximum threshold of 5%. Following the easing of the cash scarcity challenges, PAR moderated to stand at 12.25% as at 30 June 2024, based on CBN’s figures.
Nigeria’s microfinance banking industry has, thus, found itself forced to accelerate its shift towards digitalisation. Transitioning from a heavy reliance on cash disbursements and brick-and-mortar facilities, to making significant investment in technology. As well as developing digital infrastructure, traditional microfinance banks have embraced new strategies such as digital banking, agent networks, and financial literacy initiatives to drive cashless transactions.
However, the hefty upfront costs required to build robust technology infrastructure have slowed the transition to full digital and automated models. Nonetheless, the Naira redesign policy’s cash crunch sparked a nationwide surge in digital payment adoption, with mobile transfers, Unstructured Supplementary Service Data (USSD) transactions, and point-of-sale payments becoming increasingly mainstream.
According to the Nigeria Interbank Settlement Systems (NIBSS), electronic transactions have increased by 79.6% from N600 trillion in 2023 to N1.08 quadrillion in 2024. This trend indicates a significant decline in cash transactions, highlighting Nigeria’s ongoing transition towards a digital-first and cashless economy.
The microfinance banking industry has also been reshaped by the rising technology adoption and heightened competition, particularly from the entry of neo-banks operating with microfinance banking licences such as Kuda MFB, Fairmoney MFB, and Moniepoint MFB. Increasing competition from commercial banks, fintech firms, and mobile money operators is also driving microfinance banks to accelerate investment in digital innovations such as POS terminals and mobile banking platforms.
This digital shift, led by operators such as Moniepoint MFB, has resulted in instant transactions and improved market share, forcing other microfinance banks to adopt similar technologies to remain competitive. Notably, with the increasing transition to digital banking models, microfinance banks are attracting cheaper funds through deposit accounts. The microfinance banking industry’s deposit liabilities surged by 168% between Q2-2023 and Q2-2024, from N466.89 billion to N1.25 trillion, funding 44.7% of total assets6. However, the regulatory pressures have also intensified, with the CBN revoking 179 microfinance bank licences in 2023 due to non-compliance issues such as inadequate capital and poor governance.
Despite the significant operational and liquidity challenges induced by the naira redesign policy and the ensuing cash crunch, the Nigerian microfinance banking industry is charting a path forward centred on digital transformation in operations. In the short to medium term, traditional microfinance banks are expected to continue strategic investments in digital infrastructure, expanding agency networks, and enhancing customer engagement through digital onboarding processes.
These steps will be critical to transitioning from a cash-dependent model to a more agile, cashless, and efficient digital banking system. Agusto & Co. expects that the continued investment by microfinance banks in digital infrastructure and the notable shift of client behaviour to cashless transactions will continue to enhance the portion of non-interest income in the earnings base. We also recognise that the push towards a cashless economy brings greater convenience, more service options, reduced risks associated with handling bulk cash, more affordable access to banking services in comparison to traditional branches, and improved access to credit and financial inclusion for consumers.
