A Direct Settlement Framework for Microfinance Banks and Fintechs in Nigeria

DOI

https://www.doi.org/10.59256/indjcst.20260503097

Published In

Volume 5, Issue 3 (2026)

Published Online

September-December 2026

Pages

829-834

Article Type

Original Article

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Microfinance Banks (MFBs) play a critical role in advancing financial inclusion in Nigeria by providing banking services to underserved individuals, microenterprises, and rural communities. Despite their contribution to the financial ecosystem, MFBs continue to face barriers in accessing major payment infrastructures because they depend on commercial banks for settlement support and settlement guarantee letters. In the case-study institutions examined in this paper, the settlement arrangement reportedly requires collateral coverage equivalent to approximately 130% of approved settlement exposure. This requirement can lock up capital above the amount required for settlement and reduce the funds available for lending and other financial-inclusion activities.This study proposes a Direct Settlement Framework (DSF) consisting of Domiciled Account Direct Debit (DADD), Provider-Managed Prefunded Wallets (PMPW), and a Settlement Orchestration Layer (SOL Microfinance Banks (MFBs) play a critical role in advancing financial inclusion in Nigeria by providing banking services to underserved individuals, microenterprises, and rural communities. Despite their contribution to the financial ecosystem, MFBs continue to face barriers in accessing major payment infrastructures because they depend on commercial banks for settlement support and settlement guarantee letters. In the case-study institutions examined in this paper, the settlement arrangement reportedly requires collateral coverage equivalent to approximately 130% of approved settlement exposure. This requirement can lock up capital above the amount required for settlement and reduce the funds available for lending and other financial-inclusion activities.This study proposes a Direct Settlement Framework (DSF) consisting of Domiciled Account Direct Debit (DADD), Provider-Managed Prefunded Wallets (PMPW), and a Settlement Orchestration Layer (SOL). The framework seeks to replace dependence on commercial-bank settlement letters with prefunded settlement positions, automated liquidity management, direct-debit mandates, and continuous settlement monitoring. Memphis Microfinance Bank and Okuku Microfinance Bank are used as illustrative unit-MFB case studies. Memphis processes approximately 4,500 monthly transactions with an average monthly transaction value of ₦100 million, while Okuku processes approximately 2,800 monthly transactions with an average monthly value of ₦45 million. The institutions reportedly maintain settlement coverage of approximately 130% of approved exposure under the current arrangement.Using the supplied operational profiles and a scenario-based comparative evaluation, the study estimates that the current model requires ₦130 million of collateral support for ₦100 million of Memphis settlement exposure and ₦58.5 million for ₦45 million of Okuku exposure. The excess locked amounts are therefore ₦30 million and ₦13.5 million respectively, or ₦43.5 million across the two institutions. Under the proposed PMPW-DADD model, the settlement position is designed at 100% of the approved exposure, subject to risk limits, monitoring, and regulatory approval. The resulting liquidity-efficiency ratio improves from approximately 0.77 under the 130% model to 1.00 under the proposed model.The paper concludes that prefunded settlement positions can improve liquidity efficiency and reduce dependence on settlement guarantees, but they do not eliminate operational, fraud, legal, or liquidity risk. Implementation would require explicit approval by the Central Bank of Nigeria, an appropriate role for NIBSS, approved service providers, segregated settlement positions, transparent collateral rules, and a controlled regulatory-sandbox pilot). The framework seeks to replace dependence on commercial-bank settlement letters with prefunded settlement positions, automated liquidity management, direct-debit mandates, and continuous settlement monitoring. Memphis Microfinance Bank and Okuku Microfinance Bank are used as illustrative unit-MFB case studies. Memphis processes approximately 4,500 monthly transactions with an average monthly transaction value of ₦100 million, while Okuku processes approximately 2,800 monthly transactions with an average monthly value of ₦45 million. The institutions reportedly maintain settlement coverage of approximately 130% of approved exposure under the current arrangement.Using the supplied operational profiles and a scenario-based comparative evaluation, the study estimates that the current model requires ₦130 million of collateral support for ₦100 million of Memphis settlement exposure and ₦58.5 million for ₦45 million of Okuku exposure. The excess locked amounts are therefore ₦30 million and ₦13.5 million respectively, or ₦43.5 million across the two institutions. Under the proposed PMPW-DADD model, the settlement position is designed at 100% of the approved exposure, subject to risk limits, monitoring, and regulatory approval. The resulting liquidity-efficiency ratio improves from approximately 0.77 under the 130% model to 1.00 under the proposed model.The paper concludes that prefunded settlement positions can improve liquidity efficiency and reduce dependence on settlement guarantees, but they do not eliminate operational, fraud, legal, or liquidity risk. Implementation would require explicit approval by the Central Bank of Nigeria, an appropriate role for NIBSS, approved service providers, segregated settlement positions, transparent collateral rules, and a controlled regulatory-sandbox pilot.