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By Gabriel Okoro and Adebayo Animasaun
The importance of microfinance banking (MFBs) subsector to the development of any country cannot be overemphasised. The subsector’s importance in developing economies is seen in its contributions to Micro, Small and Medium Scale Enterprises (MSMEs).
The microfinance banking model was introduced in Bangladesh in the mid 1970s and several countries, including Nigeria have keyed into the model.
Microfinance services refer to loans, deposits, insurance, fund transfer and other ancillary non-financial products targeted at low-income clients. Three features distinguish microfinance from other formal financial products: (i) smallness of loans and savings, (ii) absence or reduced emphasis on collateral, and (iii) simplicity of operations.
Before the emergence of Microfinance Banks (MFBs) under the Microfinance Policy, people that were unserved or under-served by formal financial institutions usually found succour in non-governmental organization-microfinance institutions (NGO-MFIs), moneylenders, friends, relatives, credit unions, etc. These informal sources of funds have helped to partially fill a critical void, in spite of the fact that their activities were neither regulated nor supervised by the Nigeria’s apex bank, Central Bank of Nigeria, CBN.
Background
MFB was inaugurated in line with Banks and Other Financial Institutions Act (BOFIA) 25 1991 (as amended). The Central Bank of Nigeria designed the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria 2005 and Revised in April, 2011. Under the framework, microfinance banking is of three categories: MFBs licensed to operate as a unit bank, and with a minimum of N20 million paid-up capital for each branch. MFBs licensed to operate in a state are to operate with a minimum paid-up capital of N1 billion, later adjusted to N100 million. National Microfinance Bank are to operate with a minimum paid-up capital of N2 billion. Other regulatory provisions include even spread agenda, single ownership, corporate governance and full disclosure in line with Money Laundering Act.
However checks by TNG revealed that since its inception in Nigeria in 2005, the banking void that led to its establishment is yet to be filled.
Joy Adams, though not her real name, have dreamt of establishing a lifetime business that will make her bid farewell to poverty. To achieve this, she engaged some local money lenders for loan after initial patronising their daily savings services. However, her dream of exiting poverty is yet to be fulfilled as she is yet to access tangible loans from the lenders.
The money lenders total fund is not enough to assist Joy due to low customer patronage. This low patronage according to findings may not be unconnected to non legal backing of this money lenders business.
Like Joy, a large percentage of Nigerians in the country have been excluded from such financial services from banks in the past. According to a 2010 report by EFInA, a marginal increase of formal services by commercial banks which was at 35.0 percent in 2005 rose to 36.3 percent in 2010, five years after the launching of the microfinance policy. When those that had financial services from the informal sector such as savings clubs/pools, Esusu, Ajo, and money lenders were included, the total access percentage for 2010 was 53.7 percent which means that 46.3 percent or 39.2 million adult population were financially excluded in Nigeria.
The aforementioned growth in the banking subsector have today become possible owing to the enactment of the 2005 Microfinance Policy, Regulatory and Supervisory Framework in Nigeria as conceived by the then governor of the Central Bank of Nigeria, Professor Charles Soludo.
Although in April 2011, the policy was later revised based on stakeholders demand on the need to enhance financial services delivery. Here the powers are conferred on the Central Bank of Nigeria by the provisions of Section 28, sub-section (1) (b) of the CBN Act 24 of 1991 (as amended) and in pursuance of the provisions of Sections 56-60(a) of the Bank and Other Financial Institutions Act (BOFIA) 25 of 1991 (as amended). The policy recognizes existing informal institutions and brings them within the supervisory purview of the CBN creating a platform for the regulation and supervision of microfinance banks (MFBs) through specially crafted Regulatory Guidelines.
Stakeholders speak
TheNewsGuru (TNG) interviewed some of the Microfinance Bank managers in Abuja and they share their experiences on the development and challenges faced in the subsector. They opined that MFB remains the most efficient way to reach ordinary Nigerians only if government, regulatory agencies, the banks and customers alike play their roles as expected of them.
For Ag. Managing Director of Waila Microfinance Bank Ltd, Mr. Abimbola Olaborede, the Microfinance Bank have been able to provide loans from the bottom of the pyramid and have been supporting small and medium businesses. He noted that if the government can support the subsector like the commercial banks, they have every right to do more by offering services to the people.
Speaking about the policy, Mr. Abimbola who acknowledged that it has been favourable called on government to assist in reviving Microfinance Banks that are crumbling.
“We have a lot of Microfinance banks that have gone down over the years and CBN have not really done something to support them to see how they can come back to life again. So we have not been receiving support like commercial banks from CBN. So if we can get support from CBN we are going to do more than what we are doing”, he said.
He said the patronage notwithstanding the downturn of the economy has been good as most people at the pyramid find it difficult to access loan in the commercial banks but they (customers) see the subsector as alternative which they have been doing to support their businesses and families.
The manager however expressed that the major challenge in the banking subsector has been the issue of high interest rate.
According to him, the funding we have been getting as microfinance banks are all on high side. Most of us get our funding majorly from our directors and which they want their money returned.
Corroborating this, Managing Director of Baobab Microfinance Bank limited, Dr. Kazeem Olanrewaju said “most of the funds we use today, over 35 percent are purchase funds, meaning that we have taken loans from local commercial banks and international lenders. Well the supply is there, but because of the sources, some of the fundings are adjudged expensive.”
The Microfinance Bank managers however hope that with the intervention of the CBN through its recapitalisation policy, the high interest rate will be reduced.
X-raying on Customers challenge on property confiscation by the banking subsector, Mr. Olaborede of Waila Microfinance Bank limited appreciated CBN on its plan to introduce collateral registering. He said if comes into full effect it will help in reducing confiscation of property adding that people will know that a property use as collateral in bank ‘A’ may not be acceptable in bank ‘B’. “If the CBN plan takes effect it will help both customers and banks in this subsector”, he said.
Recall that the fear of property confiscation by the Microfinance Banks especially if agreed interest rate were not met have today scared many young entrepreneurs from seeking loans.
CBN revises operational policy, capital base of all MFBs
Microfinance banks operating presently in Nigeria (whether at the rural, urban, state or national levels) now have until April 2021, to increase their capital requirements to N50miilion, N200million, N1billion and N5 billion respectively, if they must remain in business.
The directive from the Central Bank of Nigeria (CBN) in a circular titled: “Re: Review of Minimum Capital Requirement for Microfinance Banks in Nigeria”, issued by the Financial Policy and Regulation Department, was an upgraded version of a similar circular issued by the apex bank to microfinance banks in October 2018.
According to Kevin Amugo, Director, Financial Policy and Regulation Department, CBN, the latest directive from the bank aims at broadening the scope of operations of MFBs in the country to enable them to continue to operate in the rural, unbanked and underbanked areas of the economy.
“Accordingly, unit microfinance banks shall comprise two tiers: tier 1 microfinance bank, which shall operate in the urban and high-density banked areas of the society; and tier 2 unit microfinance bank, which shall operate only in the rural, unbanked and underbanked areas,” Amugo said.
To help microfinance banks to achieve the capital requirement with a measure of ease, CBN has allowed them (MFBs) to raise their capital in two tranches in a space of two years.
Tier 1 unit microfinance bank shall meet a N100million capital threshold by April 2020 and N200million by April 2021; while tier 2 unit microfinance bank shall meet a N35million capital threshold by April2020 and N50million by April 2021.
A state microfinance bank shall increase its capital to N500million by April 2020 and N1billion by April 2021; and National microfinance bank shall hold a capital of N3.5billion by April 2020 and N5 billion by April 2021.
The CBN first announced the upward review of the minimum capital requirement in a circular dated October 22, 2018 to all microfinance banks in the country.
The minimum capital requirement for unit and state microfinance banks was raised by 900 per cent each to N200million and N1billion, respectively from N20million and N100million, while that of national microfinance banks increased by 150 per cent to N5 billion from N2 billion.
The microfinance policy, regulatory and supervisory framework was introduced on December 15, 2005 and revised in 2011.