It may come as some surprise, but in Nigeria over 1000 Microfinance Bank licenses (MFBs) have been issued by the central bank to small finance institutions in less than 10 years.
The purpose of these institutions is to broaden access to finance to low-income earners and small, micro businesses. Similar initiatives are at play across other developing nations, with India being one of the more prominent and well-known countries to created tiered access to banking licenses.
And while basic access to credit and savings accounts are important on the consumer front, the flow on effects for underdeveloped countries when business financing is addressed are significant.
Research shows that while SMEs account for, on average 51 percent of GDP in high-income countries, for less developed nations this figure stands at a paltry 15.6 percent. This lag is an effective handbrake on pulling many of these nations out of poverty.
A big part of this differential is down to a lack of access to growth funding for SMEs and micro businesses. Currently the International Finance Corporation (IFC) has estimated a financing gap of US$2.1 – 2.6 trillion currently exists amongst developing nations. And while finding funding to meet this need is one challenge, the bigger piece of the puzzle is how to get it to those in need in fast, reliable and secure manner.
To address exactly this, the Nigerian Central Bank announced this week that plans are afoot to build a new core banking system specifically for the nations MFBs. With a branchless mentality from day one, the core banking system will dramatically lower delivery costs for MFBs, and allow them to further extend their reach into the under-banked markets they seek to service.
A new core banking system designed specifically for a new breed of bank is something developing nations, starting with little legacy infrastructure are well positioned to achieve. Similar new banking or new payments platforms in developed markets are far more difficult, requiring deep stakeholder engagements with powerful incumbent players – many of whom need to retrofit their own systems to be compatible.
It will certainly be interesting to see the speed at which Nigeria can deliver on this new infrastructure. But if it can, the rewards for the economy as a whole are immense.