Nigeria: Fixing Nigeria’s Microfinance Banks
REPORTS that most of Nigeria’s Microfinance Banks (MFBs) are facing hard times is cause for concern.
Two years ago when the CBN conducted its target examination on the existing 820 MFBs in the country, it discovered that a good percentage of them were found to be terminally distressed and technically insolvent and have closed shop for at least six months.
Latest reports say the situation is no better.
Microfinance banking, as a scheme, was introduced in the country in 2007 by the then Governor of the Central Bank of Nigeria (CBN), Prof. Chukwuma Soludo. Before then, community banks were the only established institutions extending credit facility and other financial services to people at the grassroots. MFBs were licensed in line with what obtains in Bangladesh, India, Pakistan and other countries that have successfully established such banks with astounding impact on the style of living of the poorest of the poor.
It was therefore seen as the possible answer to empowering men and women in both the rural and urban areas in the country. As drivers of economic growth, Small and Medium-sized Enterprises (MSME’s), were also a target group of MFBs, as part of a strategy to support small businesses and keep them afloat.
Unfortunately, soon after the MFB’s started operation many failed and could no longer perform their roles of giving credit to their clients.
Among other flaws, the CBN observed that the MFBs were operating like “micro commercial banks” with flamboyance, fleet of branded cars and high expenditure profile.
The Apex Bank therefore introduced a capacity building programme that made it compulsory for chief executive officers of MFBs to pass some prescribed examinations or lose their jobs.
Even now, most MFBs are still characterised by poor corporate governance and are susceptible to insider abuse, especially in the granting of loans.
Most members of their boards are incompetent and inefficient in carrying out their mandatory oversight functions, while poor risk management and weak internal controls are still pervasive.
The global financial crisis has also had its debilitating effect on the MFBs. Following on the global financial crisis, many lost their investments in the Nigerian capital market and the resultant diminution in the value of investments in the capital market. Consequently, most of them could no longer provide the necessary credits to their target market.
At the same time they could no longer compete with the commercial banks who are much more equipped to mobilise deposits from the banking public than the MFBs.
Indeed, the structure of MFBs in the country today shows that they are for traders, suppliers, importers and other customers of the conventional banks.
This explains their cut throat interest rates and why they prefer to be located in the cities where they can service the needs of the same customers of the regular banks, rather than to be established in the rural areas to provide credits to the poor. That the Nigerian MFBs insist on collateral before giving credit to their customers, is an indication that they are not for the poor who cannot meet such demands.
Above all is the fact that the MFBs are owned by rich men who are out to make profit, as opposed to the famous Grameen Bank model in Bangladesh, which requires that MFBs should be owned by the poor, who contribute the minimum capital base.
The shortfalls in performancehave brought to the fore, the need for the CBN to review the framework and focus of the MFBs. CBN must accept that the current framework for the operation of MFBs in the country is faulty and cannot achieve the objectives for which they were set up to do.
A situation where MFBs regard themselves as micro-commercial banks and tend to compete with the commercial banks, is not the kind of framework envisaged for them and cannot make any impact on the vision to alleviate poverty.
The framework and focus of the MFBs must be reviewed in line with what obtains in countries like Bangladesh, India and Pakistan, where the initiative has been successful in pulling millions of the poorest of the poor out of poverty.
Capacity programmes can be extended to all those who take decisions on the granting of credits and those who mobilise deposits in the MFBs.
The CBN must adequately monitor the MFBs and ensure that the capacity building programmes cover the critical roles of MFBs in improving the standard of living of the poorest of the poor in the urban and rural areas.
Additionally, any new framework must delineate the location and functions of MFBs and that of the commercial banks. That way, the MFBs would be robust and possess the operational capacity achieve their mandate of empowering the poor and supporting small businesses.
SOURCE: Nigerian Compass