Sources of Funding and Revenue for Microfinance Banks

A few years ago, I was to embark on a business venture in an industry that the regulators had called for recapitalization and like the typical Nigerian setting, with a short deadline that made investors and the industry panic. I reached out to a very senior friend who was not only serving in government as an adviser to the presidency but a frontline consultant. I wanted him to guide me. After our meeting, he promised to send me a power point presentation and requested that I provide the information required. He kept his word. The power point presentation contained pages with questions and blank spaces for answers. One question that stood out then was the page on “What are the sources of Revenue?”  In other words, how do you make money?

Many potential investors delve into industries where they lack knowledge of funding/revenue generating sources. A sound knowledge of a business revenue sources will tell you how much work you have to do to generate enough revenue to cover your cost.

In microfinancing, the sources are regulated and the need to adhere to regulatory provisions cannot be over emphasized. I will breakdown revenue sources from funding sources for ease of understanding.

Funding Sources

These are the sources through which cashflow necessary for the business to run is expected. The CBN clearly states that the sources of funding of a MfB shall include:

a. Shareholders’ funds (Paid-up share capital and reserves): This is the owners’ equity. The funds put together by the owners verified and approved by CBN. It usually comes at no cost to the business.

b. Deposits/Savings of customers: As operation progresses, the business is expected to generate cashflow through the sale of products and services designed for customers. Here, products can be designed to attract savings, deposit with fixed term and interest, with a view to creating liquidity for the business.

c. Debenture/Qualifying medium to long term loans: Where the MfB is unable to mobilise sufficient deposit to fund the business, it can resort to longterm borrowings at a fixed cost and tenor. Such funding can take the shape of overdraft to cover short term gaps, medium term loans from other financial institutions or long term funds that can be categorized as secondary capital of the MfB. Where applicable, these borrowings may require security in the form of debenture.

d. Grants/Donations from individuals, organizations, national government, and international sources: Since MfBs are closer to the grassroots, individuals and organizations whether for profit or not for profit usually would like to leverage on the coverage and proximity to express their philanthropic tendencies and corporate social responsibility. Some are target specific such as technology, food security, poverty alleviation, women empowerment, financial inclusion, agriculture, etc. In Nigeria, government and policticians have also found the use of MfB platform as a veritable tool to reach out to their target audience.

Revenue Sources

These are the various sources through which financial value is added when your cashflow is put into use through the sale of MfBs product and services. The CBN has provided for the following:

i). Fees and Commissions: These are the rewards MfBs receive on rendering specific services. Management, processing, commitment, transfer fees are familiar to customers when loans are disbursed to them or when they request for local transfer services.

ii). Interest income: This is the reward the MfB receives when loans are granted to customers. It usually constitutes over 70% of the total MfB revenue.

See you next week.