Building a Strong Treasury Framework: Essential Policies & Procedures for MFBs

As a Microfinance Bank (MFB) in Nigeria, managing your treasury functions effectively is vital to navigating the complex financial landscape and achieving long-term success. A well-structured treasury framework enables MFBs to optimize liquidity, mitigate financial risks, and make informed investment decisions. Despite the fact that many MFBs have adequate control over their daily cash flows, they must prioritise a well-structured approach rather than reactive measures to achieve long-term success. Building a strong Treasury Framework is necessary, with clear policies and procedures in place.

But what exactly constitutes a treasury framework? In essence, it is the formal framework of rules, guidelines and processes under which an MFB governs its treasury activities. Typically, these activities involve managing liquidity, handling financial risks such as interest rate fluctuations, managing banking relationships, and carrying out investment or funding transactions. Establishing this framework through documented policies (defining what should be done and why) and procedures (detailing how it should be done) transforms treasury from an ad-hoc function into a controlled, strategic discipline.

A well-structured treasury framework enables MFBs to optimize liquidity, mitigate financial risks, and make informed investment decisions.

Why Formalise Your Treasury?

The adoption of an official treasury framework provides significant benefits. First, it presents a methodical approach to risk management. Key risks such as liquidity shortfalls, adverse interest rate movements, foreign exchange volatility (where applicable), counterparty credit risk, and operational errors or fraud are identified through a well-defined framework for managing and measuring them. This risk mitigation program is essential for ensuring the sustainability of the MFB's capital.

Secondly, a well-defined framework for governance and control is of increasing importance to ensure regulatory compliance. All financial institutions, regardless of their size, must adhere to strict internal controls mandated by the Central Bank of Nigeria (CBN). Also, it becomes much simpler to ensure that the MFB's treasury activities are in line with their overall strategic goals, whether they are focused on growth, consolidation, or specific social impact goals.

Furthermore, by establishing procedures that are clear and transparent, processes can be made more efficient and controlled. The probability of mistakes decreases, duties are clarified and safeguards against unauthorised acts or possible deception. This framework fosters improved management, offering distinct directives and delegated powers to treasury officers. The presence of a strong treasury system significantly enhances MFB's credibility, making it more likely to receive financial support from DFIs or other responsible management partners.

Core components of an effective MFB Treasury Framework.

The treasury structure is usually composed of two primary components: the overall policy and detailed supporting procedures.
Treasury Policy is the top-level governing document. The objectives of the treasury function, such as maintaining adequate liquidity and optimizing returns, should be clearly defined in it and the scope of activities covered. The policy must define the MFB's approach to risk management, including its risk appetite and specific limits for key risks like liquidity coverage ratios or interest rate sensitivity gaps. It should also incorporate the institution's funding strategy, outlining principles for managing liabilities and accessing diverse funding sources, alongside investment guidelines that stipulate permissible instruments, counterparty limits, and diversification requirements for managing surplus cash. Lastly, clear reporting requirements – specifying what information is reported, to whom (e.g., Management, Board Committee), and its frequency – are essential for oversight.

Supporting the policy is the Treasury Procedures. The Treasury Procedures documents provide detailed, step-by-step instructions for executing treasury tasks consistently and securely. Key procedural areas for an MFB would typically include the methodology for cash flow forecasting, outlining how forecasts are prepared, updated, stress-tested, and utilised for decision-making. Procedures for daily liquidity management detail how cash positions are monitored, bank accounts managed, funding shortfalls addressed, and surplus funds invested according to policy. Guidelines for bank relationship management ensure relationships are actively maintained and periodically reviewed. Robust procedures for payment processing and control are vital for security and efficiency, often incorporating dual controls and segregation of duties. Furthermore, procedures must detail how risks are monitored against established limits and how any breaches are escalated and addressed. For MFBs undertaking investments, clear procedures for investment execution and settlement are necessary to ensure compliance with policy and manage operational risk.

Steps to Building Your Framework

Creating a comprehensive treasury system does not have to be arduous. To achieve this, it's recommended to start simple and gradually expand the framework as required by size and complexity of the MFB. Focus on the most important areas initially -- daily liquidity control, basic payment controls. Engaging key stakeholders across Management, Finance and Operations, and Risk or Compliance functions is also important to ensure their buy-in through the development process.
It is important to tailor the framework to your specific MFB, while best practices provide guidance and generic templates must be customized to reflect your unique activities, risk profile, and resources. Provide comprehensive documentation of all policies and procedures in plain language, which are easily accessible to relevant personnel. To ensure effective implementation, staff must be trained on their roles and responsibilities as well as the importance of adhering to the framework. Recognise that the treasury framework is not static and must be updated regularly, perhaps once every three years when significant changes occur in the MFB's strategy, operations, or external market environment.

Structure Enables Control.

Consider a scenario where two MFBs are experiencing a sudden drop in market liquidity. MFB 'A', operating with a robust treasury framework, has clear contingency funding plans, pre-defined reporting lines, and established authority levels. Its treasury team can act swiftly and decisively within approved parameters. MFB 'B', lacking such a framework, descends into confusion. Responsibilities are unclear, information is lacking, and decisions are delayed or made under duress, potentially exacerbating the situation. This simple contrast highlights how a strong framework provides the structure necessary for control and effective response under pressure.

To ensure effective implementation, staff must be trained in their roles and responsibilities as well as the importance of adhering to the framework.

How RightShore Africa Can Assist.

Developing and executing an effective framework for the treasury requires special skills. Why? RightShore Treasury Solutions services are designed to support Nigerian financial institutions, including MFBs, in this critical endeavour. We leverage our deep understanding of treasury best practices and the local operating environment to help clients to: Examine the current treasury operations and identify any gaps. Draft distinct, tailored Treasury Policies that are compatible with your strategy and risk tolerance. Design efficient and sequential Treasury Procedures for crucial activities. Link the treasury structure to your risk management strategy. Offer instruction to ensure efficient implementation and comprehension of the rules by your team.

Our approach ensures that your framework is not only compliant, but also truly valuable by enhancing control, managing risk effectively, and supporting your strategic objectives.

Conclusion: Investing in Stability and Growth

Building a strong, documented treasury framework is a vital investment for any Nigerian MFB serious about long-term stability, effective risk management, and sustainable growth. It moves treasury from a potentially overlooked operational function to a strategically managed discipline. By establishing clear policies and procedures, MFBs gain greater control, enhance decision-making, improve resilience, and build credibility with regulators, investors, and other stakeholders. In Nigeria's evolving financial sector, a robust treasury framework is no longer optional; it is essential architecture for success.

Take Control of Your Treasury Function

Is your MFB operating with a clear, documented treasury framework? Are your policies and procedures fit for purpose in today's environment?

We welcome your insights.

What is the biggest treasury challenges your MFB faces? Share your thoughts in the comments below.