In May 2023, the Central Bank of Nigeria (CBN) revoked the operating licenses of 185 Financial Institutions. This was a significant event in the Nigerian financial sector, and it has raised several questions about the future of the industry.
In this blog post, we will delve into the invaluable learnings derived from this event. We will engage in discussions about the significance of technology and digital transformation, the benefits of collaborative initiatives, internal control practices in Financial Institutions and potential future actions for the regulatory body. We will also offer insights into the potential impact of this event on the Nigerian financial sector as a whole.
Overview of the Revocation
The CBN revoked the licenses of 185 Financial Institutions. This list is comprised of 178 Microfinance Banks, 4 Mortgage Banks and 3 Finance Companies. This was done for several reasons including:
· Lack of traction: Some of the institutions had been struggling to attract customers and generate revenue or transactions.
· Failure to meet regulatory obligations: The institutions had failed to comply with several regulatory requirements, including the recently defined and elevated capital requirements.
· Poor corporate governance: Several of the institutions had poor corporate governance practices, which led to a lack of transparency and accountability.
The revocation of licenses in Nigeria’s financial sector provides a wealth of insights and has given rise to several valuable lessons. Here, we delve deeper into the critical takeaways and reflect on the potential strategies that institutions can adopt to avert similar situations in the future.
1. Government Involvement in Technology Investments
The crucial role of government in driving technology adoption within the financial sector has been sharply brought into focus. Without robust technology infrastructure, Financial Institutions are prone to operational inefficiencies and regulatory non-compliance — two key factors that dominated the list of root causes of license revocation.
The government has the capacity to devise a more potent and efficient strategy to bolster technology investments within Financial Institutions. This could encompass procedures like
· Implementation of a government-funded, fully functional, and dependable Shared Cloud-Native Core Banking platform, overseen by an organization that has demonstrated consistent success in delivering similar infrastructures
· Scrutinizing, endorsing and shortlisting technology providers and subsequently instituting direct payment infrastructures to approved providers based on carefully audited invoices from Financial Institutions
· Implementing rigorous supervisory mechanisms to verify the apt utilization of funds
Such a calculated engagement can deliver the necessary confidence that technology investments are being made wisely and with the highest possible return potential.
2. Strategic Focus on Technology by Institutional Boards
The indispensable function that governing boards of financial institutions play in ensuring long-term viability by prioritizing technology and internal control mechanisms has been emphatically highlighted. It is indisputable that these boards must perceive technology not as a discretionary supplement but as an essential pillar of their strategic planning. Investing in proper technology infrastructure, like modern cloud-native Core Banking Software, is not just about modernizing operations but also about ensuring the survival and growth of the institution.
The recent license revocations should resonate as a compelling alert to institutional boards, signaling the necessity to reallocate investments from less effectual ventures toward game-changing technologies. These advanced tools not only promote best practices but also assure the success of internal control policies.
The striking observation that among the 21% of Microfinance Banks whose licenses were revoked, a mere 5% were active users of the modern cloud-native core banking software Bankone, despite BankOne’s commanding hold on roughly 50% of the market share, emphatically underscores the importance of this insight.
3. The Need for Speed and Strategic Partnerships for Fintechs and Digital Banks
One of the striking lessons from the revocation episode is the importance of speed to market and strategic partnerships for Fintechs and Digital Banks. The traditional approach of building everything from scratch has shown itself to be not only time consuming, but also value eroding.
Fintechs and Digital Banks should leverage existing infrastructures and form strategic partnerships to expedite product development and rollout. In a world where there are platforms such as Qore’s BankOne suite, that provide comprehensive banking solutions, infrastructure, and security in a service-based model, it could be safe to expect deeper collaborations.
4. Emphasis on Compliance and Internal Control Best Practices: Last but certainly not least is the need for all stakeholders within financial institutions, including employees, management, governing boards, regulators, technology providers, fintechs etc., to prioritize compliance with internal control best practices. The financial sector is a complex ecosystem that requires the concerted effort of all parties involved to function optimally. Therefore, fostering a culture of compliance and internal control best practices across all levels of operation is imperative for the success and sustainability of these institutions. This includes adhering to regulatory requirements, maintaining transparent operational processes, actively monitoring risks, and ensuring that policies and procedures align with the institution’s overall strategic goals. Compliance should not be viewed as a mere box-ticking exercise but rather as an integral component of an institution’s operations, instrumental in mitigating risks and enhancing the institution’s reputation and trust among customers and investors. This cultural shift towards adherence to best practices and strict compliance will significantly contribute to preventing future occurrences like this event.
Anticipated Regulatory Measures: A Proactive Approach to Financial Stability
Following the revocation of licenses, the Central Bank of Nigeria, as the regulatory body, is expected to take several steps to mitigate future occurrences and ensure the stability and robustness of the financial sector.
· Promotion of Technological Investment: As a key lesson from the recent event, the regulator would likely encourage financial institutions to invest more heavily in technology and digitization. This could be done through incentives, clear guidelines, or direct and indirect funding mechanisms as stated above.
· Partnerships and Collaboration: The regulator might foster an environment that more deeply encourages partnerships and collaborations between financial institutions, tech providers, and even fintech startups. Such collaborations can drive innovation and efficiency in the sector.
In the aftermath of this event, the contours of the Nigerian Finance sector are poised for a substantial metamorphosis. This occurrence could fuel constructive competition, stimulate technological progress, and induce crucial regulatory shifts, thereby carving out fresh opportunities for Financial Institutions. To stay relevant in this dynamic terrain, these institutions must draw lessons from past incidents, adjust to regulatory modifications, nurture innovation, and keep a constant eye on their performance indicators.
In conclusion, the revocation of licenses serves as a wakeup call for all stakeholders in the Nigerian financial sector. A collaborative effort between government and financial institutions, coupled with a greater emphasis on technology and innovation, is necessary to promote a sustainable and resilient financial sector in Nigeria.