The rollout of the naira redesign and Nigeria’s cashless policy in early 2023 did not take microfinance banks by surprise.
For years, the Central Bank of Nigeria (CBN) has been pushing financial institutions to embrace digital transformation in support of a cashless financial system.
Despite this, when the February 2023 deadline for phasing out old notes and enforcing transaction limits arrived, it exposed significant gaps in the digital readiness of the financial sector—particularly among microfinance banks (MFBs).
According to the Centre for the Promotion of Private Enterprise, failed and incomplete transactions led to a ₦20 trillion loss for the Nigerian economy in Q1 2023.
MFBs, which primarily serve micro and small business clients reliant on cash, were particularly hard hit. The shortage of currency and high failure rates of electronic transactions hampered commercial activities, weakened loan repayments, and restricted banks’ ability to meet cash demands.
Consequently, the industry’s Portfolio at Risk (PAR) ratio rose from 11.25% in 2022 to 14.29% in 2023—well above the CBN’s 5% benchmark—before moderating slightly to 12.25% by June 2024.
To adapt, many MFBs fast-tracked their shift to digital operations—investing in tech infrastructure, expanding agent networks, and promoting digital literacy.
However, the cost of digital transformation remains a significant challenge. Despite these hurdles, the cash crunch accelerated digital payment adoption across the country, with mobile transfers, USSD codes, and POS transactions becoming mainstream.
Data from the Nigeria Interbank Settlement System (NIBSS) shows that electronic transactions rose by 79.6%, from ₦600 trillion in 2023 to ₦1.08 quadrillion in 2024—marking a clear shift from cash to digital payments.
The competitive landscape has also changed. Digital-first microfinance banks like Kuda, FairMoney, and Moniepoint are gaining market share, pressuring traditional MFBs to digitise or risk becoming obsolete. These newer players, supported by robust infrastructure, offer faster, more accessible services.
This shift has brought in cheaper funds through deposits, which surged 168% from ₦466.89 billion in Q2 2023 to ₦1.25 trillion in Q2 2024—financing nearly 45% of industry assets. Still, tighter regulatory oversight has led the CBN to revoke 179 MFB licenses in 2023 for non-compliance and governance issues.
Despite these challenges, Nigeria’s microfinance sector is on a steady path toward digital transformation. With continued investment in digital systems, broader agent outreach, and a focus on customer engagement, traditional MFBs are redefining their operations for a digital-first era.
Agusto & Co. projects that this transformation will lead to increased non-interest income and broader financial inclusion—offering users improved access to credit, reduced cash-handling risks, and more convenient banking experiences.
