MICROCAPITAL STORY: Royal Exchange PLC Gets Approval from Central Bank of Nigeria for Microfinance Bank

Royal Exchange Plc, a Nigerian insurance company, has received approval from the Central Bank of Nigeria (CBN) to operate a microfinance bank according to a report on Nigeria’s Business Day Online. Having satisfied all statutory requirements for opening a microfinance bank, Royal Exchange is currently making preparations to begin operations in the next few months. The new venture is in line with the company’s mission to evolve into one of the leading financial service firms in the world. According to Royal Exchange Group Managing Director Allan Walmsley, “That vision has seen us strategically restructure our operations while a comprehensive and integrated rebranding project also is currently underway.” Other components of this vision include technology upgrades, human capital development, risk management, product enhancement and diversification. Walmsley also stated that the company envisions “a number of strategic acquisitions to assure our future in the non-banking, financial services industry.”

Royal Exchange intends to capitalize on its 90 years of experience in financial services to help ensure the new microfinance bank quickly attains market leadership, for example by implementing the latest technologies at its new venture, such as real time online banking. Royal Exchange is quoted on the Lagos Stock Exchange, as of March 25, 2009 the company had a market capitalization of approximately USD 50 million. According to the latest company release, as of September 30, 2008 Royal Exchange reported gross premiums of USD 7.4 million.

The Nigerian government, NGOs, and microfinance institutions have been trying to increase the number of institutions offering microcredit. As reported by MicroCapital, in 2005 the Central Bank of Nigeria issued the Microfinance Policy, Regulatory, and Supervisory Framework for Nigeria with the goal of promoting the establishment of microfinance banks, NGOs, and institutions that support the development and growth of microfinance service providers and clients. Also last year as reported by MicroCapital, the Lagos State Government announced a new microfinance bill which makes it mandatory for all local governments in the state to contribute a minimum of one percent of their allocations to the operations of the State’s microfinance banks.

Efforts to improve the outreach of financial services to the poor in Nigeria through microfinance have run into a variety of obstacles. As reported in a recent story on MicroCapital, Nigerian MFIs are often located in major cities and thus inaccessible to the rural poor, many end up competing against wholly commercial banks in an effort to enter the commercial market without going through the more rigorous licensing process required of commercial institutions. Onerous capital adequacy requirements, and lack of skilled personnel create more problems.

According to a recent report on Microfinance Gateway, approximately 40 million Nigerian people are in need of microfinance services but currently less than 1 million people have access to these services.

Last year, as reported on MicroCapital, the International Fund for Agricultural Development (IFAD) instituted a seven-year plan to strengthen rural microfinance institutions in Nigeria. The plan, known as the Rural Finance Institution-Building Programme (RFIBP), is supported by a USD 27.2 million loan, and a USD 400,000 grant, both from IFAD.

Another reason for the lack of outreach is that a large percentage of Nigerians are Muslim and reject conventional microfinance. As detailed in a recent MicroCapital story, 50 percent of the Nigerian population, or about 67 million people, are Muslim. Many of these potential borrowers avoid microfinance because it is not compliant with Islamic law, particularly in its use of interest. One solution to this problem may be the introduction of Islamic microfinance using what is known as murabaha contracts (cost plus markup contracts), or musharaka contracts (profit sharing contracts).

By Laura Anderson, Research Associate

Additional Resources:

Royal Exchange Plc: Home

Business Day Online: Royal Exchange gets approval of CBN to operate microfinance bank

Microfinance Gateway: Home

Central Bank of Nigeria: Home

MicroCapital Story March 9, 2009: Nigerian Microfinance Banks Struggle to Meet Their Expected Goals

MicroCapital Story, March 25, 2009: Malam Ahmad Dogara Advocates Islamic Microfinance Banking in Nigeria to Eradicate Poverty

CGAP August 2008: “Islamic Microfinance: An Emerging Market Niche”, by Nimrah Karim, Michael Tarazi, and Xavier Reille

International Fund for Agricultural Development: Home

MicroCapital Story March 2008: The Federal Executive Council of Nigeria Approves $27.2m Loan from the International Fund for Agricultural Development for Rural Microfinance

Microfinance Gateway: “Microfinance in Nigeria and the Prospects of Introducing Its Islamic Version There in the Light of Selected Muslim Countries’ Experience” by A. Mohammed & Z. Hasan