Repositioning MFBs for Real Sector Growth

Godwin Emefiele

The microfinance sub-sector has the capacity to propel activities in the real sector, James Emejo and Nume Ekeghe write

Globally, microfinance banks (MFBs) are known for their intermediation role, especially in the provision of financial services to micro and small businesses with the primary aim of poverty alleviation and financial inclusion. MFBs were established to fill the gap created by the commercial banks by improving the socio-economic condition of the poor in the society.

As a result of the essential role micro, small and medium scale enterprises (MSMEs) that are largely described as the catalyst for economic growth, play in any economy, a vibrant microfinance banking system is always the target of policymakers.

Unfortunately, the MFB sub-sector in Nigeria has not been able to meet its objectives.
In fact, with over 37.07 million MSMEs accounting for more than 84 per cent jobs in Nigeria, the sub-sector has remained a critical tool for poverty alleviation and economic growth.

And the central bank has over the years continued to design policies to ensure that the sub-sector effectively plays its role in the financial system.
That was why the focus of the 27th seminar for financial journalists that was organised by the Central Bank of Nigeria in Gombe recently was themed: “Repositioning Microfinance Bank for Real Sector Growth.”
The uneven spread of MFBs in the country has remained a source of concern to the regulators who are seeking to achieve greater financial inclusion.

Role of MFBs
The existence of huge financing gap and unserved market had prompted the CBN to initiate a micro credit policy framework.
Although microfinance operations have been in existence in Nigeria, dating as far back as pre-independence years, they began in Nigeria as small-scale with traditional thrift saving system and activities of the traditional group networks such as esusu, ajo, adashi, rotating savings and credit associations amongst others.

Government’s initiative to meet the socio-economic complexities and needs of the rural communities and reach rural areas resulted in the establishment of community banks. Community banks emerged to meet the needs of the poor in order to increase their access to finance and improve their income generating activities. However, the failure of the community banks resulted in the establishment of microfinance banks in Nigeria. The objective behind the establishment of microfinance banks in Nigeria was to provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner.

The policy was meant to serve as a guide for the activities of informal unregulated institutions as well as new entrants in the sub-sector, as well as ensuring that operators within the sub-sector are guided by a set of rules, principles and a robust legal framework.
According to the CBN Director, Other Financial Institutions Supervision Department (OFISD), Mrs. Tokunbo Martins, the microfinance policy was to provide financial services to the poor who are traditionally not served by the conventional banks.

These financial services, she said includes credit, savings, micro-leasing, and money transfer and payment services.
Unfortunately, 14 years after their establishment, Martins noted that rather than mobilise funds and ease access to credit for micro businesses and rural communities, a lot of MFBs have been operating like mini commercial banks, with a large concentration in urban areas.

Martins stressed the importance of microfinance banks in poverty alleviation, in providing access to finance as well as in banking the banked population in the country.
She said: “Deposit mobilisation by many of the MFBs is not enough, otherwise why do we have so much currency outside the banking system? With the statistics within the CBN, what we are seeing is that the currency outside that banks is still huge.
“Cash should either be in vaults of banks or in vaults of CBN and we know how much we have issued. So when we minus the one in our vaults and we minus the one in the banks then where is the rest?

“What we are saying is that this is the money MFBs should pursue and encourage them to, not just keep it under their pillows or wherever they are putting it.”
She further pointed out that microfinance banks would be pivotal to economic growth if only they can enhance their reach and give out loans to MSMEs to further develop their businesses.

Martins said: “With over 80 per cent of the population working in MSMEs which contributes to over 80 per cent of the jobs and over 80 per cent of GDP.
“Specifically, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the Lagos Business School did a survey that there are 37 million SMEs and out of that, 36 million are micro and only one million are able to get access to loans.

“And I don’t mean to repeat the importance of borrowing because when you have a business that is profitable, you can enhance that business by borrowing to expand that business as long as the cost of borrowing is less than the return you get on that business.
“The micro finance banks are supposed to be more nimble, are supposed to serve and are supposed to be owned, exists to the rural areas and communities and are supposed to serve them better because these are the majority.”

Furthermore, she added: “It is unfortunate that some or many MFBs are not achieving what they should achieve. When you hear of stories of microfinance in other jurisdictions, like in Bangladesh, microfinance was a success and 50 million people were lifted out of poverty in Bangladesh.”

Also, the CBN Governor, Mr. Godwin Emefiele, disclosed that the aggregate loans granted by MFBs to MSMEs in the country stood at N482.896 billion as at December 2018.
He added that the CBN was working to increase the share of micro credit as percentage of total credit to at least 20 percent by 2020.

Emefiele noted that small businesses had been more successful in securing credit from the microfinance institutions rather than conventional deposit money banks (DMBs).
He noted that data from the licensed credit bureaus indicated that the operations of micro finance banks had helped to improve financial inclusion among smallholder peasant farmers, artisans and other small business operators.

Emefiele, nevertheless, bemoaned the inadequate spread in the location of the MFBs in relation to their target beneficiaries, demand for immovable collaterals for loans, high interest rate, and absence of a credit reporting system.
He added that the apex bank is currently working assiduously to address identified challenges.
He emphasised the fact that microfinance institutions exist to provide financial services to the economically active operators of the base of the income pyramid who are either undeserved or not served at all by conventional financial institutions.

Represented by CBN Deputy Governor, Corporate Services, Mr. Edward Adamu, the governor noted that the CBN had in 2005 formulated the Microfinance Policy Regulatory and Supervisory Framework in line with its developmental role.
“The policy was aimed among other at bringing microfinance institutions and activities into greater focus in order to deepen financial inclusion and alleviate the financing needs of micro, small and medium enterprises (MSMES),” he said.

According to him, “The bank has since then worked towards increasing access to financial services for the economically active poor in order to enhance job creation and poverty reduction.
“The bank remains committed to the economic empowerment of disadvantaged groups including women and actively seeks to achieve this through the instrumentality of microfinance amongst other initiatives.”

He further added: “Only recently, the bank took some actions including a thorough review of the subsector, increased surveillance and revocation, where necessary. These measures were intended to revitalise the sector to ensure the institutions remain mission-focused and to grow public confidence in sub-sector.

“In a developing economy like ours, the link between microfinance and the real sector is quite strong. Microfinance banks are conceived to serve as critical financial lubricants for the real sector, which is the pillar of sustained economic growth.

“At the moment, economic policy in Nigeria faces a major challenge of reviving growth which is the (only) sure path to ending pervasive poverty. Microfinance has worked in this regard in many climes and promises to work in Nigeria, if we get it right.”

The CBN governor added that by increasing access to credit and related services to the economically active segment of the low income population, microfinance directly contributes to expanding the production base and serves as credible strategy for increasing financial inclusion and reducing unemployment.

He added that the CBN, in collaboration with other agencies of government is currently implementing various intervention schemes in addition to promoting microfinance.
Emefiele, however, noted that the theme of the seminar was appropriate considering its recent efforts to prime the MFBs as catalysts for financial inclusion and poverty reduction.

Also, the National Coordinating Consultant FCT Project, Monitoring Reporting and Remediation Office, Steve Ogidan said: “A number of micro finance banks are not present in grassroots or rural areas the adult population of Nigeria 18 years and above is about 99.6m and out of this 99.6m ,63.1m leave in the rural areas, but 49.1 million are women and about 56.7m are 35 years above.

“What are we talking about here, majority of people micro finance banks are to serve are in the rural areas. Majority of them are women and majority of them are young and Microfinance bank as is presently configured even up till today is not reaching the people and central bank now has various interventions.”

He added: “The economy has existed economic recession, but is still recovering very slowly and the latest survey by National Bureau of Statistics and as the Gross Domestic Product (GDP) is growing, domestic value is coming down, oil revenue is increasing revenue sources is coming down and with the growth in GDP, more people that are leaving formal employment are for the private sector.”

He further added: “Micro finance banks are giving credit at 30 per cent and above. It is extremely difficult to take credit at that per cent and start getting a return. That is why the operators of NIRSAL micro finance bank, the regulators, the Bankers’ Committee and NIRSAL came together to see what can we do differently.”

On his part, the Registrar, National Collateral Registry Mr. Mohammed Mainasara, explained how the credit bureaux can facilitate credit to the real sector.
He said: “It is a data bank whereby you can also access information about movable assets. That is if I decide to use my wristwatch to take credit, and this wristwatch has a landmark that it can be identified by, you can endeavour to use that identification to access the level of the progress of that asset under the registry.”

“It allows the borrowers to prove their creditworthiness. The system has a lot of gold ornament that are being kept at home.
“Gold is a very expensive ornament, and if they are to carry all the golden cheque to the bank or sell them in the market, it attracts a lot of money; which means they are creditworthy, but they cannot use those assets to transact business in the financial space.”

Way Forward with NMFB
Speaking further, Ogidan highlighted the strategic objective of the NIRSAL MFBs (NMFBs), saying they are expected to drive financial inclusion, bring every farmer into the financial sector and create jobs.
“We will give loans to SMEs at reduce interest rate which has been fixed at five per cent per annum, then channel the fund to mostly the rural areas who are mostly in credit targeting.

“The business strategy is to serve farmers, SMEs, rural communities and the excluded sector of the economy and quite a number of government agencies are coming in. Last week we had meetings with Ministry of Women Affairs and social development.
“There is a lot of window within the Ministry of Women Affairs. The banks are collecting the money from the ministry and are not disbursing the loan to women, the ministry is coming back to NIRSAL MFB, saying ‘take this money, this is our target- the rural women, the disadvantage women in this location, use technology to deploy the money for them.”

For Martins, inspite of the plethora of challenges, several opportunities exist within the sub-sector. The growing entrepreneurial spirit, increased government interest, large unbanked rural area and high population of poor people are some of opportunities MFBs are expected to tap into.

She said: “The microfinance sector has continued to grow, attracting several players and service providers, offering diverse services. Repositioning the sub-sector for better service delivery especially in the wake of emerging digital age is crucial.

“The CBN envisions a viable and sustainable microfinance sub sector that will be market-oriented, where the private sector plays the major role and the government provides enabling environment through appropriate strategies and institutional policy framework.”
Microfinance has positively impacted on increased access to financial services for the poor and rural populace. Success stories abound, but many MFBs still have to reach sustainability without relying on subsidies.

According to her, despite the challenges the future is bright, with the right support and enabling environment.
These include MFBs adopting sound risk management practices as well as building institutional capacity, regulatory authorities creating an enabling environment, government proving basic infrastructure to support service delivery and enhancing inter-agency collaboration.