Nigeria: Why Microfinance Banks Failed In Their Role As Grassroots Economic Developers
By Florence Udoh, Leadership
While microfinance banks were established to grow the economy from the lower wrung of the ladder, their performance in recent times is indicative of failure to support the unbanked sector and the downtrodden. FLORENCE UDOH examines the challenges and efforts by financial regulators aimed at repositioning the banks.
Microfinance banks in the country were introduced to grow small businesses, provide credit facilities to micro-businesses, cooperative societies and individuals who ordinarily cannot obtain loans from the Deposit Money Banks (DMBs) due to stringent collateral requirements.
Rising from the ashes of community banks, this category of banks, by virtue of their size and accessibility, was believed to be closer to the people, hence, hundreds of them were either licensed by the CBN, or the numerous community banks hitherto in operation in all parts of the country metamorphosed into microfinance banks.
Their precursor, the community banks had failed after years of existence for reasons of weak capital base, poor management and inability to lend to micro-entrepreneurs.
In 2005, only 75 of the nation’s 600 community banks had their financial statements endorsed by the CBN. The vacuum created by the collapse of community banks was filled by informal institutions like ‘magic banks’, money lenders, friends, relatives and various unregulated credit unions. Hence, the emergence of the MFBs, and the CBN enshrined the policy framework for Microfinance Banks in the country to take care of the about 70 per cent of the nation’s unbanked population.
They were designed to provide poor people and low income earners who are not serviced by conventional financial institutions, access to soft loans to enable artisans buy tools, pay for shops and providing business capitals to budding enterprises, as conceptualised during the tenure of the then Central Bank boss, Prof. Charles Soludo.
The CBN document, released in 2005, predicated the philosophy behind the establishment of MFBs on the existence of a huge, untapped potential for financial intermediation at the micro and grass root levels of the Nigerian economy. Hence, existing community banks were ordered to transform to microfinance banks within 24 months of approval of this policy, by increasing their shareholders’ funds unimpaired by losses, to a minimum of N20million.
The essential distinguishing features of MFBs were the smallness of the loans advanced and the savings collected in absence of assets-based collateral and simplicity of their operations.
In the final analysis, the framework for microfinance banks was to ensure the diversification of enhanced services on a long term sustainable basis for the low income groups, reduce poverty through empowering the people by increasing their access to production, especially credit.
They were expected to engender self-reliance, increase employment opportunities, enhance household incomes and create wealth. This was premised on the fact that robust economic growth would be a mirage without a well-focussed set of grassroots- oriented, organised financial empowerment programmes.
Between dreams and real reality
However, after over five years of operation, most of the MFBs have failed to grow the economy at the lowest level as anticipated. A number of them lacked the structure, capacity and capability to do the business for which they were licensed.
Those who pretended to be doing it carried on like regular commercial banks, buying expensive official cars for their managers and engaging in business promotional activities, which included promises of car gifts to depositors.
Executives and owners of these MFBs, allegedly embezzled depositors’ funds. They have also mismanaged depositors’ funds, awarding huge salaries and benefits, providing subserviced loans and approved facilities above CBN’s guidelines some of them speculated on the stock market.
Other MFBs were engulfed in internal management and ownership crises which, in no time, left them with visible signs of distress.
Many of them assumed a larger than life clout, attempting to finance big projects and other traditional functions of commercial banks, even without the capital base and managerial capabilities. In so doing, they strayed from the policy framework establishing them, leaving the micro-economy to suffer.
It got to a level in February 2010, when the CBN and the Nigeria Deposit Insurance Corporation (NDIC) embarked on a Target Examination of all MFBs in Nigeria, to identify the problem and ascertain the scope, as well as the extent of damage done to the affected institutions.
Examined were 820 microfinance banks across the country, out of which 224 or 27 per cent were found to be ‘Terminally Distressed’ and ‘Technically Insolvent’ and/or had closed shop for at least six months. Some of the problems identified include lack of good corporate governance, unhealthy risk management strategy, and weak internal control systems.
As a result, the operating licences of the affected 224 MFBs were revoked, pursuant to Section 12 of the Bank and Other Financial Institutions Act (BOFIA) of 1991 (as amended).
The CBN later granted provisional approval for new licences to 121 microfinance banks while 103 were liquidated by the NDIC.
Since then, many depositors of the failed MFBs are yet to receive their deposits. Yet, the Nigeria Deposit Insurance Corporation (NDIC), the liquidator of 103 micro finance banks whose licenses were withdrawn in 2010 by the Central Bank of Nigeria over mismanagement of depositors’ fund and failure to adhere strictly to the CBN’s guidelines is expecting depositors to claim their funds.
“So far, the corporation has concluded payment of N2.03bn to 69,000 depositors of 91 of the 92 microfinance banks who showed up to claim their deposits”, the Head, Corporate Affairs of the NDIC, Alhaji Hadi Birchi disclosed.
He added that arrangements have also been concluded to continue with the payment through Unity Bank.
The repayment exercise has been bedeviled by several problems; including lack of proper documentation. Investigations showed that due to these irregularities, including the inability of the depositors to produce passbooks or cheque books, the NDIC could not pay many customers their funds.
Even some management of the banks failed to produce right document to the NDIC to process customers’ deposits. “As at even now the managements of some liquidated banks failed to show up when we called them to submit names of their depositors, how do they expect us to locate their customers?” Birchi pointed out.
He explained further that due to communication gap and distance, lots of the customers have not claimed their deposits, adding that the problem emanated from the bank workers, especially those in the marketing department, whom customers accused of insincerity.
A customer of King’s Microfinance Bank claimed that he has not received his deposits from the bank and each time he gets to its office at Oba Akran, Ikeja, Lagos, the officials have always been absent from office. Majority of customers of Integrated Microfinance Bank, and Eagle Eye Microfinance banks both located in Lagos, could not receive their money because the banks could not trace their names. These claims could not be verified.
Preventing further collapse
President of National Association of Microfinance Banks, Mr. Matthias Omeh, pointed out that some of the customers have been receiving their deposits. He added though that there is nothing the association could do about those who could not receive theirs, because the liquidated banks have ceased to be their members.
He explained that to forestall the Central Bank of Nigeria’s hammer on the outstanding Microfinance Banks in Nigeria, the banks have started training their staff to install preventive measures aimed at forestalling losses incurred through fraudulent practices by early detection and identification of fraudsters’ traits. He said that 869 internal auditors of the banks were trained a fortnight ago on the success of the banks.
According to him, the internal auditor is the bridge between the board of directors and the management, and a guide for a managing director and his team to ensure board decisions are implemented and the regulators’ policies and regulatory guidelines are complied with.
An internal auditor with Unicredit Microfinance Bank, in Lagos, Mrs. Olubunmi Sofowora who is one of the beneficiaries of the training, said it afforded them the opportunity to know that auditor’s report should be submitted to the bank’s chairman instead of the managing director. “We were told that if you submit the report to the director, he may have an issue in one of the comments and may tinker with it before submitting it to the chairman”, she said.
The Chairman, South West Zone of the association, Mr. Fola Adegbite stressed that the capacity building training was designed to equip the auditors with the necessary knowledge and skill that will be required to run profitable institutions. “We are the private sector-driven entities and we have all the necessary structures in place to be very relevant in our economy.
The CBN has reviewed policies guiding the operations of the banks and the new guidelines will ensure stability in the system”, he said. He blamed the liquidation of 103 MFBs on Nigerians’ attitude to loan from banks. “From the day a customer receives loan from banks, he stops coming to the bank and you would begin to pursue him, spending almost the money lent out to look around for the customer”, he said.
He explained that the issue of lending to customers is no more business as usual as the CBN guidelines on loan discouraged loan defaulters. He said, “The CBN gives limit of what we can loan out, which is one per cent of shareholders’ fund. It is unlike before when we gave customers up to 10 per cent of shareholders’ fund.
“Microfinance is the last hope of the low income entrepreneur and the economically active poor who cannot meet the lending conditions of the commercial institutions. Microfinance services are also essential tools required by us to achieve the Millennium Development Goals and Vision 20-2020”.
The Chairman, National Association of Microfinance Banks, Lagos State, Mr. Olufemi Babajide said the association has recognised not only to train its members and equip them with necessary tools to do the job, but also to carry out their banking operations within the guidelines provided by the CBN. “Micro financing is about service delivery and we discover that our members needed to be trained so that they will be able to deliver of our promises and reasons for existence”, he noted.
Looking back at the operations of MFBs, he said: “You know that micro financing in this part of the world is still new. We started in 2006, compared to Asian countries that started out 50 to 60 years ago; and Gambia, Senegal and Kenya that are about 25 years old in the business.
In Nigeria, it is not long ago we started here and we are in the transformation stage”. “When licences were granted to MFBs, public expectations on the part of employees and executives of MFBs were very high. We were expected to adhere to regulatory policies and we have a responsibility to provide the services that customers expect. Sadly, many MFBs have betrayed this trust and failed in their responsibilities,” he said.
CBN’s rescue mission
In continuation of its holistic overhaul of the banking sector, the CBN, in June, 2011 released a new set of guidelines for microfinance banks operating in the country.
According to the apex bank, over five years after the launch of Microfinance Policy, Supervisory and Regulatory Framework for Nigeria, some issues had emerged in the course of its implementation, necessitating a review of the policy framework.
The bank added that the review of the policy was in exercise of the powers conferred on the Bank by BOFIA. In carrying out the review, the apex bank requested for inputs from about 900 key stakeholders in the microfinance sub-sector.
Under the new guidelines, MFBs would now operate under three categories, which include unit, state and national microfinance banks. A one-unit microfinance bank is authorised to operate in one location without branches/cash centres and is required to have a minimum paid up capital of N20m.
The state microfinance bank is authorised to operate in one state or the Federal Capital Territory (FCT). It is required to have a minimum paidup capital of N100 million and is allowed to open branches within the same state or the FCT, subject to prior written approval by the CBN for each new branch.
A national micro-finance bank is authorised to operate in more than one state, including the FCT. It is required to have a minimum paid up capital of N2billion and it can open branches in all states of the federation and the FCT, although subject to prior written approval by the CBN.
On ownership, the apex bank said MFB could be established by individuals, groups of individuals, Community Development Associations, private corporate entities, non-governmental organisations or foreign investors.
However, no individual, group of individuals, their proxies or corporate entities and/or their subsidiaries shall own controlling interest in more than one MFB, except as approved by the CBN.
Meanwhile, the commercial banks may relinquish firm control of their microfinance banks, in line with the directives of the CBN which has directed them to divest from their subsidiaries. Under the divestment policy, banks are required to focus more on core banking practices, by stripping off shares in their wholly-owned subsidiaries.
By this, the banks may stop running their microfinance banks as separate entities or subsidiaries. The banks that would be affected here are the United Bank for Africa, First Bank of Nigeria Plc, and Afribank (now Mainstream Bank Limited). Part of the measures being considered includes subsuming the operations of microfinance banks into the larger banking services.
Through this, the banks are planning not only to run microfinance banks as departments, but to operate them under different titles as being done by then Oceanic Bank International Plc, now ECO Bank.