A small business that could expand with microfinancing
In this report, Olaseni Durojaiye takes a look at the Microfinance banking subsector and how myriad issues continue to undermine the subsector from contributing to national development through economic empowerment and entrepreneurship financing
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). Since it was introduced in Bangladesh in the mid 1970s, several countries have copied the model of financing, Nigeria inclusive.
MFB has proven to be a successful practice and plays a major role in the development of many African nations. In recognition of its importance, the United Nations (UN) declared year 2005 to be “The international year of microfinance,” in order to remind everyone that millions of people worldwide benefit from microfinance activities.
Its introduction into Nigeria, in 2005, recognises existing informal financial institutions and brings them within the supervisory purview of the CBN to enhance monetary stability and to expand the financial infrastructure of the country to meet the financial requirements of MSMEs as well as the unbanked rural population.
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.
A Lagos-based economist with a leading economy advocacy group, Rotimi Oyelere, argued that, “The provisions were good on paper but implementation has been really weak. Poor corporate governance is preponderant and compliance on full disclosure is not adhered to.”
One analyst insisted that the industry had been largely unregulated and operate fairly independent of the formal financial markets adding that although the CBN has improved on oversight functions, it is still far from adequate in effectively ensuring that microfinance banks operate as expected.
Though MFBs have great potential and hold the key to economic development and poverty eradication especially at the grassroots level, the subsector is challenged by myriad factors. THISDAY checks revealed that the aggregate of the challenges is under-performance as the sub-sector has not recorded as much success as its counterparts in countries like Kenya, Sierra Leone and Bangladesh. Findings also revealed that beside societal distrust arising from people’s experiences with its precursor, community banks, legal framework and weak capacity were some of the challenges that caused the subsector to underperform. Analysts also insisted that the other challenges are self-induced.
“Microfinance subsector’s performance has been disappointing based on the overarching objective of introducing the banking scheme in the first instance: providing financial services to the poor who are traditionally not served by the conventional financial institutions,” Oyelere argued.
Speaking further, he stressed that, “using this yardstick, (its founding objective) the sector has not performed well. The financial inclusion rate in Nigeria is a little above 50 per cent, a far cry from 80 per cent CBN target. The worrisome dimension is the number of Nigerians who operate account with the Micro finance banks. According to CBN, as at July 2011, “Only 82 MFBs service the North-West and North-East geopolitical zones combined – the regions with the highest unbanked rate – compared to over 500 in the South-West and South-East geopolitical zones. The apex bank also stated that the MFB network serves 3.8 per cent of the adult population (3.2 million clients). Of the 3.2 million MFB clients, 65 per cent use savings products, 14 per cent use credit products and 4 per cent have an ATM card. According to EFInA Access to Financial service in Nigeria 2014, only 2.6 million adults have microfinance bank account. This is not surprising since these banks do not operate in real rural centres across Nigeria,” he stated.
Stressing the self-induced cause of the industry’s underperformance, Executive Director, Corporate Finance, BGL Capital Ltd, Olufemi Ademola, told THISDAY that, “rather than focus on the grassroots, Nigerian microfinance banks practically compete with larger commercial banks in terms of liability generation and risk assets creation, especially consumer lending. They chase the same formal employees usually served by commercial banks rather than the unbanked and under-banked.”
One factor that informed the fact that microfinance banks’ performance is below average is their concentration in Lagos rather than in up countries where their markets are expected to be located,” he added.
But, a managing director of a Lagos-based Microfinance bank said, “microfinance banks will go to where business is.”
Speaking with THISDAY in an interview, the microfinance bank boss who did not want his name mentioned stressed that “microfinance banks will go to wherever business is; we’re in business to survive. We have stakeholders whose expectations we must meet. More so, MFBs are not helped by the government. Nothing stops the government from paying local government staff salary through microfinance. Local governments can also deploy microfinance banks to collect certain rates and levies. This will serve as an endorsement and it comes with multiplier effects,” he argued.
Prospect for MFBs
Even with the challenges, analysts surveyed by THISDAY agreed that MFBs could be major drivers of the financial inclusion drive of the CBN, particularly in the rural areas. According to Port Harcourt, Rivers State based economist, Ezeh Wordu, “Nigeria’s growing entrepreneurial awareness, large unbanked rural areas and high population of poor people are potential markets for the MFBs.”
Oyelere on his part agreed that, “with proper regulatory interventions and commitment of other stakeholders to the core mission of microfinance banking, its challenges can be addressed and its prospects enhanced.”
In his own view, Ademola said that, “large volumes of financial transactions are carried out by microfinance institutions in Nigeria with little or no publicity around them. Their operations are not explicitly captured in official statistics and their activities are hardly reported, yet their transactions impact directly on a large section of the population, especially the poor.”
Also, the microfinance bank chief executive explained that government at all levels were not encouraging MFBs. He noted that certain government levies and rates, especially at the local government level, ought to be channeled through MFBs as a way of encouraging their operations.
“Microfinance banks are pivotal to the economy. MFBs are specialised financial institutions by virtue of the reason of the type and reach of their customers base, the bulk of which are unbanked Nigerians who constitute significant percent of the nation’s population. The customer base of the sub-sector are the most vulnerable members of the society, the subsector has great potential for higher positive impact on national development. But people don’t realise this. You see artisans rushing to the big banks. Which big banks will advance them loan facility without collaterals? You find a great market of microfinance banks rush to the commercial banks which is not helping their cause; there is need for a re-orientation so much that every stakeholder will appreciate the importance of MFBs and accord it the needed support so that the subsector could play its role towards national development,” he stated.