As microfinance banks in Nigeria commence the race to increase their capital base to levels sufficient enough for them to perform their statutory functions of increasing financial inclusion rate in the country; improve access to financial services for the active rural poor; and pursue poverty eradication. Bamidele Famoofo examines the impact of the proposed exercise on Nigeria’s economy
Background
Microfinance Banks came into existence in Nigeria in 2005 after the community banks were phased out by the Central Bank of Nigeria (CBN), due to their inability to withstand the test of time.
Weak institutional capacity and capital base were two major factors identified by the CBN that led to the collapse of the community banking institution.
Incompetent management, weak internal controls and lack of deposit insurance schemes as well as poor corporate governance, lack of well-defined operations and restrictive regulatory/supervisory requirements are the results of weak institutional capacity. On the other hand, the banks due to weak capital base could not adequately provide a cushion for the risk of lending to micro entrepreneurs without collateral.
In 2005 therefore, the CBN came up with the policy to establish the microfinance institution as a viable alternative to the inefficient community banking system in the country. According to the apex bank, the establishment of microfinance banks became imperative to provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, which would enable them to undertake and develop long-term, sustainable entrepreneurial activities.
Other reasons the micro-banking system was conceptualized by the CBN was for them to mobilise savings for intermediation; create employment opportunities and increase the productivity of the active poor in the country, thereby increasing their individual household income and uplifting their standards of living. They are also meant to enhance organised, systematic and focused participation of the poor in the socio-economic development and resource allocation process and to provide veritable avenues for the administration of the micro-credit programmes of government and high net worth individuals on a non-recourse case basis.
Economic Targets
The CBN expects that the microfinance institution will cover the majority of the poor but economically active population by 2020 thereby creating millions of jobs and reducing poverty. It is also expected that the activities of the banks will increase the share of micro credit as percentage of total credit to the economy from 0.9 per cent in 2005 to at least 20 per cent in 2020; and the share of micro credit as percentage of GDP from 0.2 percent in 2005 to at least five per cent in 2020; promote the participation of at least two-thirds of state and local governments in micro credit financing by 2015; eliminate gender disparity by improving women’s access to financial services by five percent annually; increase the number of linkages among universal banks, development banks, specialized finance institutions and microfinance banks by 10 per cent annually.
Operational Structure
From inception, the plan of the CBN is to encourage the private sector to establish microfinance banks that are well-capitalised, technically sound, and oriented towards lending, based on the cash flow and character of clients. The banks were in two broad categories namely unit and state microfinance banks.
MFBs licensed to operate as unit banks are allowed to operate as community- based banks. The unit banks operate branches and/or cash centres subject to meeting the prescribed prudential requirements and availability of free funds for opening branches/cash centres. The minimum paid-up capital for this category of banks was N20.0 million for each branch. On the other hand, MFBs licensed to operate in a stare are authorized to operate in all parts of the state with a minimum paid-up capital of N1.0billion.
“The recognition of these two categories of banks does not preclude them from aspiring to having a national coverage, subject to their meeting the prudential requirements. This is to ensure an orderly spread and coverage of the market and to avoid, in particular, concentration in areas already having large numbers of financial institutions”, the CBN disclosed.
Also, an existing NGO which intends to operate an MFB can either incorporate a subsidiary MFB, while still carrying out its NGO operations, or fully convert into an MFB.
As at September 30, 2018, there are 882 licensed microfinance banks operating in Nigeria according to information made available by the CBN.
Fresh Capital
The CBN through a recent circular announced new capital base structure for the microfinance banks which cuts across all the categories. The increases are 150 per cent and 900 per cent. According to CBN, the unit banks will need not less than N200million to continue to operate while State MFBs will now require N1.0billion instead of the N100million current capital base. Also for any of the two categories to upgrade to a national player, it will need to raise its capital base to N5.0billion. At the moment it requires only N2.0billion to run a national MFB in Nigeria.
In a circular to all MFBs signed by Director, Financial Policy and Regulation department, CBN, Kevin Amugo, the apex bank stated that the capital requirements of the MfBs was raised in order to curb the challenges of capital inadequacy facing the sector, while repositioning it to meet critical targets in the Microfinance policy. The apex bank said it had reviewed the state of health of the sub-sector and is of the view that the MFBs, as presently constituted, would be unable to meet the critical targets set out in the Microfinance Policy, hence the need for specific reforms to strengthen the subsector and reposition the institutions towards improved performance. The new minimum capital requirement takes immediate effect for new applications while existing MfBs shall be required to fully comply with effect from April 1, 2020.
It would be recalled that the state of health of microfinance banks has been a major worry for the CBN and the Nigeria Deposit Insurance Corporation (NDIC). Specifically, in September this year, the CBN said it would revoke 154 microfinance banks’ licences over insolvency issues.
The apex bank claimed that 62 of the microfinance banks had already closed shop; 74 insolvent; and 12 terminally distressed; while six voluntarily liquidated.
The NDIC said it had previously paid billions of naira to depositors in failed microfinance banks. For instance, in 2016, the NDIC said it paid N2.9 billion to 81,328 insured depositors of failed MFBs across the country as at December 2015. It said a total of 187 MfBs whose licences were withdrawn by CBN were closed down within the same financial year.
Also at the end of September 2017, the corporation claimed to have paid a cumulative sum of N2.88 billion to 525, 009 depositors of closed Microfinance banks (MFBs).
Opinion
Given the developing worrisome trend in the microfinance industry in Nigeria, experts are of the opinion that the microfinance banks needed to be strengthened to be able to contribute their quota in the economy as small depositors who are mostly customers to microfinance banks were losing money. Experts also said the corporate governance architecture of the micro finance banks must be strengthened in addition to the minimum capital raise. They also said the management expenses of the micro finance banks should also be put under scrutiny as a lot of the micro finance banks owners are not living within their means.
“With sufficient capital, these Microfinance banks will be in a stronger position to engage competent staff and invest in the right technology. The development will also enhance their corporate governance. This CBN directive will no doubt sanitise the Microfinance sector and further stabilise the financial system” an expert, who did not want to be named, said.
He noted that, “The reality is that many of the unit microfinance banks in particular with a minimum capital base of N20 million are financially sick with very high non-performing loans. The weak capital base hinders their ability to engage professionals in their operations as well as put proper risk management framework in place. Little wonder many of them are closing shop and their licenses being withdrawn by the CBN.”
Managing Partner at Trispeed Consulting, Mr. Rislanudeen Muhammad, acknowledged that a good number of the microfinance banks had weak capital due to years of high non- performing loans, adding that a strong capital base was important to enable them remain in sound health and also have capacity to perform their financial intermediary services.
