In today’s rapidly evolving global economy, microfinance plays a crucial role in fostering inclusive growth, empowering millions to start businesses, create jobs, uplift communities from poverty, and advance financial inclusion. The global microfinance industry, projected to reach US$506 billion by 2030 (12.3% annual growth), comprises approximately 10,000 institutions, with Asia-Pacific (47%), Latin America & Caribbean (19%), and Africa & Middle East (19%) dominating the landscape. The prominence of MFIs in Asia-Pacific and Africa reflects their role in delivering non-traditional banking services to drive financial inclusion, alleviate poverty, and foster employment in countries such as India, Bangladesh, Kenya, Egypt, and Nigeria.

Evolution of Microfinance Banks in Nigeria

Nigeria’s microfinance banking industry (“The Industry”) has evolved significantly over the past two decades. Initially characterised by informal and unregulated operations in the early 2000s, the Industry began its transition following the Central Bank of Nigeria’s (CBN) introduction of the Microfinance Policy, Regulatory and Supervisory Framework in 2005 – subsequently revised in 2011. This regulatory intervention formalised the industry and encouraged greater operational structure and transparency. Today, Nigerian microfinance banks (MFBs) cater predominantly to micro, small, and medium-sized enterprises (MSMEs), as well as low-income individuals. Loan sizes typically range from as little as ₦10,000 to as much as ₦100 million, allowing a broader segment of the population – often excluded from traditional commercial banking – to access formal credit facilities.

However, the Nigerian microfinance banking industry exhibits significant regional disparities. Over 39.1% of MFBs are concentrated in the South West region, with Lagos accounting for 53% of these institutions due to its dense population and superior infrastructure – including reliable electricity and advanced communication systems. Conversely, regions such as the North East and North West face challenges such as economic instability and infrastructural deficits that hinder MFB penetration.

Technology Adoption and Competitive Dynamics

Technology adoption has also reshaped Nigeria’s microfinance banking landscape. Neo-banks operating under microfinance banking licences, such as Kuda MFB, Fairmoney MFB, and Moniepoint MFB, are driving innovation through digital platforms. As at December 2024, there were 729 CBN-licensed MFBs categorised into three tiers: nine national MFBs operating nationwide; 121 state-level MFBs serving specific states; and 599 unit-level MFBs with localised operations. The Industry’s total assets surged from ₦1.5 trillion in 2023 to ₦2.8 trillion by December 2024 – a remarkable growth fuelled by a 168% increase in deposit liabilities to ₦1.3 trillion. This expansion reflects heightened demand for fixed-income instruments amid rising yields and increased adoption of technology facilitating affordable savings options for previously unbanked populations.

Risks & challenges

Despite this growth trajectory, several systemic challenges threaten the industry’s medium-term prospects. Chief among these is Nigeria’s macroeconomic instability, exacerbated by recent policy reforms. The removal of fuel subsidies and the transition to a managed float exchange rate regime triggered significant currency depreciation, with the naira plunging from ₦898.89/$ in December 2023 to ₦1,550.00/$ by December 2024. This sharp depreciation has inflated the cost of imported digital infrastructure – a critical input for tech-driven MFBs – thereby exposing institutions to heightened foreign exchange risk. Furthermore, a shrinking customer base poses a material threat to the credit ecosystem. Between January 2023 and June 2024, circa 8 million micro and small businesses ceased operations due to economic headwinds, significantly reducing the pool of creditworthy borrowers. The phased removal of electricity subsidies, resulting in sharply increased energy costs, has further eroded household and SME purchasing power. Consequently, loan default risk has intensified, prompting MFBs to strengthen their credit assessment and risk management frameworks.

The prevailing macroeconomic headwinds, characterised by high inflation and rising interest rates, are also contributing factors to increasing non-performing loans (NPLs) across the sector, evidenced by the portfolio at risk (PAR) to total loans ratio standing at 12.7% as at 30 June 2024, a stark contrast to the 4.1% recorded within commercial banks on the same date. Simultaneously, escalating operational expenditures, fuelled by high inflation which reached 34.8% in December 2024 before experiencing a sharp decline to 24.48% in January 2025, attributed to the rebasing of the Consumer Price Index (CPI), exert considerable pressure on MFB profitability. Regulatory scrutiny within the Industry has also intensified, underscored by the CBN’s revocation of 179 microfinance bank licences in 2023, primarily citing issues of non-compliance, including inadequate capitalisation and deficient corporate governance practices.

Outlook

Amidst these headwinds, Agusto & Co. maintains a cautiously stable outlook for Nigeria’s microfinance banking sector, underpinned by strategic adaptations. Forward-thinking MFBs are increasingly embedding ESG frameworks, including Environmental and Social Management Systems (ESMS), to attract cost-effective capital from global investors such as the Global Climate Partnership Fund. Concurrently, accelerated digital transformation and targeted branch network expansions – coupled with Nigeria’s recent minimum wage hike – are poised to stimulate loan book growth by broadening financial access and consumer demand. However, the sector’s resilience hinges critically on policy interventions. Structural reforms addressing foreign exchange illiquidity, moderating interest rate volatility, and curbing inflationary pressures remain imperative to unlock sustainable growth. Without such measures, the industry’s potential to catalyse inclusive economic progress risks being stifled by macroeconomic fragility.