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Steps to Start a Lending/Microfinance Institution (MFI) With Low Budget in Nigeria

A Step By Step Practical Guide

Steps to Start a Lending/Microfinance Institution (MFI) With Low Budget in Nigeria
Steps to Start a Lending/Microfinance Institution (MFI) With Low Budget in Nigeria

Steps to Start a Lending/Microfinance Institution (MFI) With Low Budget in Nigeria

 

Introduction

Micro-credit has been in Nigeria for long time. It all started as a forms of rural or informal credit market operations, Non-governmental Organizations (NGOs) governed by cooperative rules and regulations which later manifested in the activities of moneylenders, regulated under the Moneylenders Act found in the different state in Nigeria. Having the true picture of how lending business work is the very first factor to consider before deciding to embark in the business and this is the reason this article would be addressing the steps to start a lending/Microfinance Institution (MFI) With Low Budget in Nigeria

 

Distinction of Institutions

Starting a lending business in Nigeria happens to be one of the best decision any potential investor should make.

If your plan is to start a microfinance bank in Nigeria? There are recommended links you can read to learn more on how to start one. Professionals have written several articles on how to start. I’ll recommend one written by Adolphus Abraham. Find one of the link below; and do make sure you read more of his articles about Microfinance banks on LinkedIn.

https://www.businessamlive.com/microfinance-bank-licence-steps-to-obtain-cbn-approval-part-3/

Also, read from;

https://www.legit.ng/1153292-requirements-establishing-a-microfinance-bank-nigeria.html

The above are guides to help you set up a Microfinance Bank from the start in Nigeria if you do not want to hire the service of a consultant. But for guidance and technicality sake, it is recommended that the service of a professional be sought.

Back to our discussion. We are going to be looking at adequate step to starting a lending business with little fund while making good revenue and at the same time touching lives

 

First of all, you need understand the difference between a Microfinance Bank (MFB) and a Microfinance Institution (MFI)/Lending Institution

In the book (The Functional Microfinance Bank) written by Henry Oster Onyemah. There are five basic areas in which a Microfinance Bank focuses on. They are

  • Micro Credit
  • Micro Saving
  • Micro Leasing
  • Micro Insurance
  • Micro Transfer

While all the above are typically what a microfinance bank offers, a lending institution/MFI offers mainly Micro Credit which is what it is limited to do.

We have at one point in time heard question like “What can I do with N500, 000″ or I have

N300, 000, what business can I invest in“. There are many things one can invest in but if you aspire to go into lending, then pay adequate attention to what you are about to read.

 

For clarity sake, the distinction between the two institutions

MICROFINANCE BANK MICROFINANCE / MONEY LENDING INSTITUTION
Can give loan and accept deposit Can give loan but cannot accept deposit
Regulated by supervisory authority (CBN) Regulated by State Authority (State Government)
License granted by CBN License granted by State Government
Formal sector loans Informal sector loans
Engages customers on savings, credit, insurance, transfers and leasing Engages customers mainly on credit.
Serves varieties of customers with different services Focuses only on granting small credits to the active poor
Promotes Social development is part of their mandate Promotes character development is part of their mandate

 

Both institutions act as providers of small loans to people who ordinarily wouldn’t have access to credit. Also, both loans are not secured by collateral assets as would be the case for conventional banking Institutions. The increase in the amount being granted by Microfinance banks has now prompted them to ask for collateral to back up for loans requested.

You must have heard how people literally start their lending business with little fund and it sure surprises you how possible that came to be. Statistics has shown that the number of small and medium sized businesses in Nigeria that needs finance to fund their operations but unable to get access is rising enormously. Most microfinance really do not understand that their biggest competitors are not their next door rival microfinance bank but, the informal lenders who gives funds out without stringent control measures.

Also, we have it that less than 54% of Nigerians have bank accounts and interestingly many of these people enjoy the services of lending institutions to meet their financial needs.  The number of informal lending institution is not enough to take care of the growing financial needs of the active poor which makes it one of the best period to invest in lending.

 

Why Start a Lending Company?

In other to learn the Steps to start a lending/microfinance institution (MFI) with low budget in Nigeria. It is important to consider which approach would be adopted. Just like in a conventional microfinance bank, the microfinance institution can operate using the below method;

  • Traditional Lending solution
  • Digital lending solution

 

Tradition Lending Solution: This is the traditional brick and mortar approach that allows lenders interact with their customers directly with documentation done manually through paper. Those that took the steps to Start a Lending/Microfinance Institution easily start with a very low budget and it also help to interact more on cordial relationship with their client base.

Digital Lending Solution: Modern day money lenders are making use of standard Financial Technology (FINTECH) to provide basic financial services to their clients in the state they intend to hold their operations. . The deployment of technology allows for simplicity and access to reach a wider audience for efficiency.

A ton of entrepreneurs are interested in starting a lending/microfinance institution but find it difficult to understand the process involved. The process for obtaining a lending licensing is far more flexible and low compared to that of a microfinance bank. Bear in mind, that the lending license is limited to Micro credit alone. Most digital/mobile lending operators in Nigeria operate with lenders license which will come as a surprise to most people.

 

To start a lending business in Nigeria we need to understand that every business has its risk, so it is advisable to do the following

  • Conduct due diligence before venturing into the business, you are likely not going to run at a loss if you do the right thing before stating. Get knowledge about the industry.
  • Have adequate experience in the financial industry. It will pay you to background experience finance or have worked in a lending institution.
  • Study the competitor that operates in and outside of your projected area. Study their strength and weaknesses.
  • Learn from their mistakes and in turn come up with a better and more preferred services

·     Understand the business while seeing through your customers. They have been in business   way before many of us entered the financial industry.

·         Conduct adequate market research and feasibility studies.

·         Choose a Suitable Location for your Business

·         Write a Marketing Plan Packed With ideas & Strategies

  • Understand that Marketing is the key to your success.
  • Note that a lending institution can be established by, Individuals, groups of individuals, community development associations, private corporate entities or foreign investors.

 

Conclusion

It is important to legitimize your company so as to be entitled to legal remedy while carrying out your lending services.

Finally, the content of this article is intended to provide a general guide on how you can start and be profitable in your lending business. I recommend that the service of a specialist be sought on your specific needs.

 

Do you have plans to start a lending business? Register on the link below to attend a free webinar on HOW TO START YOUR LENDING BUSINESS IN NIGERIA

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Written by henryoster

Admin at Microfinance Arena

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