Nigeria has a vibrant banking industry. As a matter of fact, banks dominate the entire financial services spectrum. Prior to 2010, the universal banking model permitted banks to offer other ancillary financial services.
Then we had banks that were involved in insurance, stockbroking, asset management and similar businesses. However, the repeal of the universal banking regime redefined the scope for banking business and allowed banks to focus on their core traditional service offering.
The Nigeria banking industry is highly regulated. Thus starting a bank here takes a rigorous process and require that the promoters engage consultants to help in different aspects of the process.
But the good news is that serious entrepreneurs, including foreign entities can obtain banking licenses. This is as long as they are patient enough to follow through the process and meet all regulatory requirements.
This post among other things, shows how interested entrepreneurs/investors can start a bank in Nigeria.
Nigeria Banking Industry Regulatory Framework
To start a bank in Nigeria, you must acquaint with the legal and regulatory framework within which banks operate.
The principal law regulating the establishment and operations of banks is the Banks and Other Financial Institutions Act (BOFIA).
This, along with the Central Bank of Nigeria Establishment Act, 2007 empowers the CBN to issue banking licenses, regulate and supervise banking institutions in Nigeria.
In addition, banks are companies. Thus, they are also subject to the provisions of the Companies and Allied Matters Act 1990 (CAMA). CAMA is the primary laws regulating the formation and operation of companies in Nigeria.
There are also other laws.
These include: the Nigeria Insurance Deposit Corporation Act, the Securities and Investment Act, and the Foreign Exchange Provisions and Monitoring Act.
The Central Bank of Nigeria is the Nigeria Banking Industry primary regulators.
Other agencies whose activities have bearing on banks include: The Nigeria Insurance Deposit Corporation (NDIC), the Corporate Affairs Commission, Financial Reporting Council and the Securities and Exchange Commission (for banks whose shares are publicly traded).
Types of Banks In Nigeria
There are three categories of banks that operate in Nigeria in line with the prescription of the Banks and Other Financial Institutions Act (ACT). These are
These are banks that accepts demand and time deposits from the general public and give loans individuals and businesses. They maintain savings accounts, current accounts and fixed deposits on behave of their customers as well as give loans to fund businesses and investment.
Recent development is in the categorization of commercial banks into International, National and Regional banks, according to their levels of capitalization and geographical coverage. In this regard, International banks are required to have a minimum capital of N50 billion and are allowed to have foreign branches in addition to operating in all the states of the federation.
National banks are required to have a minimum capital of N25 billion and can have branches across the Nigerian federation but they are not open branches outside Nigeria. Regional commercial banks are licensed to operate within an identified geographical regions in Nigeria. Regional commercial banks are required to operate with a minimum capital of N10 billion.
As at the time of writing this post, there are 22 commercial banks out of which eight are operating with international authorization, 10 operate with national authorization and four with regional authorization.
In 2010, the Central Bank of Nigeria abolished universal banking in Nigeria and reintroduced merchant banks. Merchant banks are wholesale banks which focuses on providing large corporates and high networth individuals with investment, funds management and trade finance services.
These banks are more or less investment banking companies except that their deposits are insured by the NDIC.
A typical merchant bank services include underwriting equity issues, funds raising, and financial advisory. They are also allowed to play in the foreign exchange market in line with prevailing regulations.
The minimum capital requirement to start a merchant bank in Nigeria is N15 billion. At the moment there are five merchant banks operating in Nigeria. These are FSDH Merchant Bank, FBN Merchant Bank, Rand Merchant Bank, Coronation Merchant Bank and Nova Merchant Bank.
These are banks that focuses on identified aspects of banking, economic activity, industry or development initiatives.
We can easily identify the following types of specialized banks operating in Nigeria.
Non Interest Banks
These are commercial banks that functions on non interest principles. In other words, the banks neither charge interest on the loans it gives to the general public nor pay interests on deposits.
These banks operate in line with Islamic principles. Though these banks are faith based, they open their doors to non Muslim banking public as well.
Two of such banks exist in Nigeria at the moment. These are: Jaiz Bank and Taj Bank.
Micro Finance Banks
These banks exist to provide financial services to the economically active segment of the society. That’s those that the regular commercial banks find it difficult to serve.
Micro finance banks are important in driving the financial inclusion programme of the government. This is because by their nature, these banks operate at the lowest rung of the society.
Again the regulation classify microfinance into Unit, State and National MFBs based on level of classifications. The minimum capital requirement for a Unit MFB is between N50 million and N200 million. For State MFB it is N1 billion and N5 billion for National micro finance banks.
They are also known as Primary Mortgage Institutions (PMI). These are banks that focus on provision of mortgage loans to individuals and institutions.
Mortgage banks exist to drive the real estate industry.
Payment Service Banks
The Central Bank of Nigeria recently released guidelines for the establishment of Payment Service Banks. The primary function of Payment Service Banks (PSBs) is to offer payment and remittance services, card services, deploy ATM and other technology enabled banking services.
To obtain a PSB license from the CBN, investors/entrepreneurs must provide a minimum capital of N5 billion.
Three Payment Service Banks have obtained operating licenses in Nigeria. These include: 9 PSB Ltd, Hope PSB Ltd and Moneymaster PSB Ltd.
Specifically, the processes are in three stages, namely:
Approval in Principle
Approval In Principle
The first step to establishing a bank in Nigeria is to obtain an Approval-In-Principle (AIP). The promoters shall submit an application for CBN to grant an Approval in Principle to establish the proposed bank.
The following shall accompany the application:
A feasibility/Business Plan;
A draft copy of the Memorandum and Articles of Association of the proposed Bank;
Standard Operating Manuals
A list of the shareholders, directors, and principal officers of the proposed Bank and their particulars;
The prescribed application fee; (at the moment, this is N500,000) and
Such other information, documents and reports as the CBN may, from time to time specify.
After the applicants have provided the foregoing documents and information, they shall deposit with the Bank a sum equal to the minimum paid-up capital as required for the class of banking license they seek to establish.
Upon the payment of the sum and satisfactory review of the application and documents submitted, the Governor of the CBN may issue an Approval in Principle with or without conditions.
On receipt of an AIP, the promoters shall immediately proceed to putting in place necessary structures in readiness for the grant of an operating license.
Six months after the grant of AIP, the promoters, having put in place all necessary structures for the bank to take off, shall apply to CBN for a final license.
Accompanying the application for final license, are the following information and documents
Prescribed licensing fee
3 certified true copies of Certificate of Incorporation of the Bank, Memorandum and Articles of Association, Form CAC 2 (Allotment of shares) and Form CAC 7 (Particulars of Directors) of the Bank;
Evidence of location of head office/branch building for the take-off of banking business;
Evidence of strong room, loading bay and banking hall facilities;
Bullion lorries with necessary security gadgets;
Evidence of installation of I.T. facilities/computerization;
Copies of letters of offer and acceptance of employment in respect of the management team
On satisfactory review of the above information and documents, the CBN shall send a team of inspectors to conduct a per-commencement inspection.
The board and management of the bank shall submit the following information and documents as evidence that the Bank is ready to commence banking business.
Evidence of admission into the clearing house;
Copy of Shareholders register;
Copy of share certificate issued to each investor;
Draft copy of opening statement of affairs signed by the directors and auditors;
Evidence of insurance coverage and the insurance policies;
Evidence of readiness of cheques and other security document;
Minutes of Pr-Commencement Board Meeting;
Evidence of adequate security arrangements.
This is in a nutshell is how to start a bank in Nigeria.
A duly licensed bank in Nigeria must operate in line with prevailing laws and guidelines by the Central Bank of Nigeria at all times. Contravention of these guidelines may lead to the withdrawal of the bank’s operating license.
As you can see banking is serious business and only serious investors or entrepreneurs can muster the patience to go through the process of setting up one.
It is also capital intensive.
The first step for entrepreneurs or investors who want to start a bank in Nigeria is to engage consultants with the expertise in different aspects of the start up process. Fund raising, legal and regulatory issues, technical advisory and documentation, are some of them.
Buchi provides small business owners with strategic, financial, and digital support to help them build strong, successful and profitable enterprises. He is a Blogger at night and by day, Team Lead at Stalwart Investment Partners Ltd, a research, business and investment advisory firm.