Microfinance in Nigeria two years after CBN’s intervention

By Graham Orodje

Prior to CBN’s intervention, Microfinance in Nigeria was taking a swift decline into the abyss. The sector was riddled with fraud and mismanagement of funds. Some of the mismanagement may have been down to a lack of understanding of Microfinance by the senior managers in some of the Microfinance Banks. This assumption was corroborated by MFB’s renting lavish offices, providing their senior personnel with salaries and benefits similar to those offered by larger commercial banks. CBN’s intervention was late in coming, but was nonetheless welcomed.

CBN set about evaluating the entire sector and took action to address some of the issues that had plagued it. This included withdrawal of the licenses of some of the MFB it believed were not fit for purpose. CBN also disposed of the one size fits all license and created three licenses; Local, State and National. Each one required different starting capital and on-going minimum capital. Many MFBs recapitalised to meet the new requirement. CBN’s actions to sanitise the sector was complemented by NDIC’s (Nigerian Deposit Insurance Corporation), who commenced a repayment program for depositors of MFBs that had closed as a result of mismanagement or had their licenses withdrawn.

The actions have brought some stability to the sector, although there is still some way to go before the sector can start to fulfil its social remit of financial inclusion and poverty alleviation.

A few problems still continue to plague the sector. The key ones include rates of interest charged by MFBs, location of MFBs and financing.

There have been numerous articles suggesting the levels of interest rates charged by MFBs in Nigeria are too high. They range from 30% to over 60%. This level of interest will demotivate many but the desperate to seek loans from MFBs. The pressure of meeting the repayments with high interest rates can also be counterproductive. Any Microbusiness owners paying these levels of interest will not be able to grow their businesses and improve their lives. The damaging effect of high interest rates caused to Microfinance in India must be noted and not allowed to happen in Nigeria. The interest rates in India were much lower than the ones reportedly charged by MFBs in India, but were still too high and caused many to commit suicides. It is not advocated that interest rates should be regulated, but Microfinance Banks must be continually made aware of the need for responsible lending and the need to ensure interest rates are not excessive.  Any reported excessive interest rates must be investigated by CBN and punitive action must be taken against any MFBs found guilty of excessive profiteering.

Many MFBs are located in urban areas. There needs to be an increase in the number of MFBS located in rural areas. Whilst there is a need for some Microfinance Banks to be located in urban areas, the requirement for rural based Microfinance Banks is much more critical for wider financial inclusion because it is unlikely that larger commercial banks will have any presence in rural communities. Commercial banks should also be encouraged to open accounts for Micro businesses and those of low income.

The stability in the sector has encouraged international Microfinance Investors to provide finance to some MFBs. This is likely to continue as the sector continues to grow and eradicates past errors.

The stability in the sector has encouraged more international Microfinance Investors to provide finance to some MFBs. This is likely to continue as the sector continues to grow and eradicates past errors.

The introduction of a Microfinance Development Fund has been mooted. As yet this has not materialised. When the fund is finally introduced, most of it should be targeted at those MFBs that are either based in rural areas or have a good concentration of their business in rural areas.

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

Nigeria: Lack Of Funds Cripples Microfinance Banks

NIGERIA’S Microfinance banking (MfB) industry is facing a lot of challenges, The Guardian investigation has revealed.

It was discovered that several of the MfBs, especially those in Lagos, are just managing to survive. The vibrant ones are those, that rely on other big and financially strong backers for operational funds.

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. But the failure of community banks to meet the expectation of Nigerians warranted the MfB initiative.

Although the functions of MfB are not particularly different from those of the community banks, whereas the community bank could only be owned by a community or group of communities, microfinance banks, on the other hand, can be established by individuals or investors, who have a minimum capital base of N20 million. However, a microfinance bank owned by a state required a minimum of N1 billion-capital base.

Mr. Ihejerika Obasi, a manager in one of the Lagos-based MfBs, blamed the woes of the MfBs on poor loan repayment culture of Nigerians, stressing that, when the scheme was newly introduced, many MfBs granted loans to people on liberal terms but that many of the loans went bad and since the loans were granted to people who did not pledge collaterals, there was nothing the affected MfBs could do to recover the loans.

According to him, the bitter experience discouraged many of the MfB investors from pumping more funds into the scheme. “It is difficult to inject more funds into the scheme now,” he affirmed, adding, “most organisations (MfBs) do not have enough resources (no funding to give to their clients). If a microfinance bank wants to serve the people and it does not have access to funding, then it will be difficult to reach more people. That is one of the problems facing the industry. Though they can mobilise savings, but that is not enough to serve the clients.”

SOURCE: The Guardian

Nigeria: MfB woos small businesses

By Akinola Ajibade, The Nation

Lovonus Microfinance Bank Limited has promised exceptional banking experience to small businesses. This will be achieved through products and services tailored to migrate such businesses to medium and large scale concerns earlier than projected by the owners.

Chief Executive Officer of the bank, Usman Onoja said it was established primarily to revitalise savings and entrepreneurship through a business model that stands the test of time and ensures the bank is always there for the customer in an era where many have closed shop no sooner than they opened.

“The bank is there to fill a gap in the industry by offering savers and borrowers, a high standard and best practice transactions platform; one they can access their funds from anywhere in the country and get credit at a highly affordable interest rate,” he said.

Nigeria: Group plans microfinance bank for small entrepreneurs

From People Daily

A group of entrepreneurs have given a commitment to set up a microfinance bank to give loans to small and medium enterprises. President of the group, Mrs. Bose Oboh, told the News Agency of Nigeria (NAN) in Lagos that they would source funds from local and international organisations.

The entrepreneurs, who are operating under the aegis of Fate Foundation Alumni General Assembly, consist over 4000 members. She said that the aim was to help the members to solve financial problems that had retarded the growth of their businesses. Oboh said that already 100 members of the group had formed a cooperative society that would soon transform to the microfinance bank. She said that loans from the bank would not exceed five per cent. Oboh advised the Federal Government to creative conducive environment for entrepreneurs to thrive. “The government should have passion for entrepreneurs in the country by coming up with policies that will aid their contribution to the GDP,” Oboh said.

Nigeria: Nation, Others Challenged On Dev of Microfinance Banks

From Daily Champion

Nigeria and other third world countries have been urged to borrow a leaf from Bangladish by according top priority to the development of micro-finance banks to enable the government cater for the poor in their respective societies.

The challenge was given by the Nobel peace prize winner in Micro-finance, Prof. Mohammed Yunus recently in Lagos.

Prof. Yunus who was key speaker at the maiden edition of international conference on micro-finance; “A tool for poverty eradication & Economic Growth in Nigeria” focused his lecture on Bangladish experience, stressing that major complaints by poor is that conventional banking had remained exclusive reserve of the rich.

He was of the opinion that banking for the rich is the same thing as baking for the poor. In his word; “The rich people in the in the society are identified with conventional banking while the poor go the micro-finance banks. The grameen banks are owned by the poor women. It is simply doing the opposite”.

According to him, opposition to micro-finance banks and collateral for lending in Bangladish were restricted to rural areas.

Prof. Yunus explained that his reason for establishing the grameen banks was aimed at resolving the problem of the poor, saying, “Once your get there your problem is half way solved.

This is even as he revealed that of the 45 million population of Bangladish, about 8.5 million people with the grameen bank, representing one third of its population.

He also revealed that the bank generates about $1.5 million annually. This leaves the bank with more money that it could it give out to borrowers. Nearly half a million of the fund is coming from the people,. As every borrower is required to put savings.

In all, there are 2,600 branches of the bank located at accessible locations within the country. Members of the Bank’s Boards are equally among the borrowers.

The noble laureate said a minimum deposit rate of 12.5 per cent is available for the customers while borrowing rate is pegged at 10 per cent.

Also, no interest is charged on interest rate with highest rate pegged at two per cent principle. People should not borrow the bank, rather the bank should borrow the people, he explained.

While stressing that the available incentives were mapped out to guide against the children inheriting the poverty of their parents, he said 100 per cent of the children in Bangladish are presently in school.

“Presently, there are 52,000 students in the universities in Bangladish, borrowing for education is at zero interest. We want to make sure that they never get back to poverty, previously, if you get the children in Bangladish out of poverty, they go back to it. This had been stopped”, he asserted.

He further revealed that interest rate margin between conventional banks and grameen banks is current fixed at 16 per cent, adding that there is no time limit for repaying the loans.

Again, this is designed to assist the loan beneficiaries who usually complained of their inability to repay the life tonic because they were unable to secure jobs after graduation.

Prof. Yunus took a swipe on the Central Banks of the various nations, saying, “They do not understand micro-finance bank, they don’t know it”.

He therefore hoped that all Millennium Development would be concluded by the year 215.

It would be recalled that the pioneer Managing Director and Chief Executive Officer(CEO) of First Bank of Nigeria Micro-Finance Bank Limited, Mrs. Pauline Nsa had at a similar forum organized early in the year by the bank in Lagos bitterly complained that Central Bank of Nigeria had solely focused on commercial banks at the expense of poor populace who are in dire need of micro-financing.

Mrs. Nsa opined that there was need for mid-layer banks to handle SMEs as neither the SMEs nor the commercial banks are adequately set-up to serve them, yet MFBs engage more in SME banking than servicing the micro-sector for which they licensed.

She pointed out that one of the main issues plaguing micro-financing in Nigeria is the CBN’s conversion of community banks to MFBs.

In his own contribution, a financial expert and management consultant, Mr. Fela Durotoye highlighted the need for the poor to empowered with capacity and financing rather than being given aids or charity.

He contended that venture capitalists are unwilling to invest in micro-financing for the moral burden of profiting from the poor, reiterating that grameen success story was based on the founding intent to help the poor rather than profit from them.

Most of the participants at the forum agreed that the path to solving the challenges of micro-financing in Nigeria is multi-layered and range from adequate regulatory policies, social/angel sources of funds, direct research, adopting models that have worked, engaging credit bureaus, building and building capacity amongst others.

Nigeria: Expert Blames Distresses In MFBs On Wrong Banking Model

Amaka Ifeakandu, Leadership

An expert in microfinance banking has blamed the distress being experienced in micro finance banks (MFBs) in the country on the adoption of conventional banking model by operators in the microfinance industry .

The founder, Grameen Bank, Yunus Muhammad, who made this remark in Lagos, said that this system of operation has helped to increase the operating cost of MFBs, as most of them subscribe to flamboyant lifestyle like their counterpart in the banking sector.

The Nobel laureate opposed the microfinance banking operating system which focused more on the rich than the poor who should be target beneficiaries.

Yunus also said that the micro banks in the country operated in contrast to what their operation should be, adding that:“Micro-financing is non-conventional banking; it is not an extension of conventional banking.

Conventional banking is banking for the rich, whereas micro-financing is banking for the poor.”

Speaking further, he said: “Grameen’s interest rate for instance, is cost of fund plus 10 per cent per annum.

The interest rate is done on simple interest and not compound interest, as done in Nigeria.

The interest rate also has no hidden charges. In addition, loans for education attract five per cent interest and that the loan is payable after the borrower graduates and starts working.”

Loans for housing at Grameen Bank, he said were given at eight per cent interest rate, and loans were given to beggars at zero per cent interest rate.

“I firmly believe that we can create a world where not a single person will be a poor person and I say this, not because it is good to say, but because it is possible, poverty is a symptom of an improper society, the people are the victims,” he added.

He, however, said that conventional banks could be established in the cities,while MFBs could operate in the rural areas.

Speaking on interest rates, Yunus observed that Grameen bank’s interest rates were just four per cent above that of conventional banks, noting that any interest rate that was 15 per cent above the cost of funds for a microfinance bank, “is no longer serving the poor.”

“We go to our borrowers. They do not come to us. We meet our borrowers at their door steps every week. Our office is for us to meet and not for banking business,” he added.

The bank, he said, set up to provide financial services to the poor, decided to turn conventional banking upside down. “Whenever we encounter a problem, we ask ourselves how does the conventional banks do it, then we turn it upside down”.

He said Grameen Bank mobilises its credit mainly from its borrowers, who also own the bank. He also disclosed that all Grameen Bank branches, as a matter of policy, are located in the rural areas and not in urban centres.

Yunus also suggested that the best model was to create a separate regulator for microfinance banks, adding that experience has shown that conventional regulators like the central banks do not understand how microfinance banks work. He also suggested that regulators need to put a cap on interest rates on microfinance lending.

Nigeria: Yunus asks business chiefs to embrace social entrepreneurship

By Siaka Momoh, Businessday Online

Microfinance banking (MFB) icon and Nobel Laureate, Yunus Mohammad has called on the Nigerian business chieftains to embrace social business.

“You can do it. It is not right to think profit only. You can do non-for-profit business and be concerned only with recouping your capital; this is the way to give back to society, to lift the poor out of poverty,” he told a robust collection of bankers and business people that filled the Muson Centre Shell Hall on Monday, at a First Bank-organised conference.

Yunus argues that many of the problems in the world today, including poverty, persist because of a too narrow interpretation of capitalism. Capitalism, he argued, centres on the free market, as “it is claimed that the freer the market, the better is the result of capitalism in solving the questions of what, how and for whom. It is also claimed that the individual search for personal gains brings collective optimal result.”

He notes that the theory of capitalism assumes that entrepreneurs are one dimensional human beings who are dedicated to one mission in their business lives – maximise profit, arguing that this interpretation of capitalism insulates the entrepreneurs from all political, emotional, social, spiritual, environmental dimensions of their lives. “Many of these world’s problems exist because of this restriction on the players of free market,” he says.

Yunus, who is an advocate of doing things the opposite way, argues: “I have said that capitalism is a half-told story. By defining ‘entrepreneur in a broader way we can change the character of capitalism radically and solve many of the unresolved social and economic problems within the scope of the free market.

“Let us suppose an entrepreneur, instead of having a single source of motivation (such as maximising profit), now has two sources of motivation, which are mutually exclusive, but equally compelling – (a) maximisation of profit and (b) doing good to people and the world.”

Yunus tells the Nigerian business chieftains gathered that social business will be a new kind of business introduced in the marketplace with the objective of making a difference to the world.

How?  Investors in the social business can get back their investment money, but will not take any dividend from the company. Profit would be ploughed back into the company to expand its outreach and improve the quality of its product or service. A social business will be a non-loss, non-dividend company.

Nigeria: Seven fundamental flaws with microfinance banking in Nigeria

By Babajide Komolafe, Vanguard

It was obvious from the beginning. Only just that the regulators and operators were not humble enough to accept it, that the framework for microfinance banking in Nigeria is faulty and cannot achieve its objectives. This reality was made the more and undeniably obvious last week by the revealing and moving presentation of Professor Mohammad Yunus, the founder of the first microfinance bank called Grameen Bank.

From his keynote address delivered at the first  FirstBank Impact conference series, Yunus, a Nobel peace prize winner, indirectly told the gathering of regulators, top bankers, microfinance operators,  national assembly members and government officials that what we have in Nigeria is not microfinance banking but micro commercial banks.

Though he was not asked to  make an assessment of microfinance banking in Nigeria, the panel discussion before his speech might have prompted him to explain the fundamental principles behind the founding of Grameen Bank.

The panel discussion featured Mr. Fabanwo, Director, Other Financial Institutions Department (CBN), which is the supervising department for microfinance banks (MFBs), Professor Ibidapo Obe, former vice chancellor, University of Lagos, Mrs Bunmi Lawson, Managing Director, Accion MFB and Managing Director FirstBank Microfinance Bank,Mrs. Pauline Wandoo Nsa.

During the question and answer session, Oba Rilwan Akiolu, the Oba of Lagos, asked two questions. The first was directed at Nsa, CEO of First Bank MFB. He asked, “What is your interest rate? Rather than give a simple answer, Nsa began to educate the gathering about the high running cost of MFBs.

“Let me first provide a background. Runing a microfinance bank is expensive”, and she went on and on without answering the  question. Rather she said, “Our our rates are not that high. Some MFBs charge up to 10 per cent.  But ours is still reasonable”. But the Oba and the audience however insisted,  “Tell us your own rates or the range”.

Eventually she said, “Our rates range from three to four percent”. The rates she quoted are however monthly rates. This implies that some MFBs in Nigeria charge up to 100 per cent per annum, while First Bank MFB charges between 36 and 48 per cent.

The second question was directed at Fabanwo, the CBN Director that supervises MFBs. He was asked why CBN can’t create a fund that can be assessed by the MFBs so that they can lend cheaply. Responding,  Fabanwo first defended the high running cost of MFBs and then said there is actually a fund for such purpose but it is in the pipeline. He said it would come after the CBN had sanitised the sector and ensure that the operators understand what microfinance banking is all about.

Yunus presentation however show that it is not only microfinance banking  operators in Nigeria that does not understand and practice microfinance banking, the OFID director and the entire CBN also lack understanding of what they are regulating. It is a case of the blind regulating the blind and both are pretending to see.

According to Yunus, there are at least seven fundamental flaws with microfinance banking in Nigeria.

The first is that it is not for the poor, the poorest poor. Rather it is for traders, suppliers and importers and this explains the cut throat interest rates Nigerian MFBs charge. Yunus said, “We should remember where microfinance came from; it is banking for the poor. I am not saying that banking cannot be done for the rich.

There is banking for the rich but the complaints we hear is that banking is too restricted to the rich. That is why we decided to start by reaching out to the poor and the poorest. This is the most important part of it and this is the beginning of the whole idea and movement called microfinance. So the conventional banks go to the rich we went to the poor”

Secondly, because it for commerce, microfinance banks in Nigeria are predominately in the cities and urban areaa, a sharp contrast to the rural based nature of the first microfinance bank. “Conventional banks go to the cities, particularly the big banks, they have the largest branches, we went to the villages, and the most remote villages. The remoter you are the more exited we are.

That was what Grameen Bank was all about. Grameen means rural and when we were enacting the law that set it up we incorporated a clause that says this bank would never work in an urban center, never. It  still today has never worked in any urban area, 35 years after inception, not even in the municipalities. In fact anything covered by the municipality is a no-fly zone”, Yunus said.

Thirdly, Nigerian microfinance banks insist on collateral and they don’t lend to start a new business. This according to Yunus is not microfinance.

He said, “We dismiss the idea of collateral. Conventional banks want collateral, we said, “Forget it”.  The more collateral one can provide the more exited conventional banks are but in our case, the less collateral people have, the more exited we are. If you have nothing, we get more excited about you.

We say yes we have gotten our customer.  “Conventional banks ask the borrower, how much do you know about this business”. The more he or she can convince the conventional banks he or she is an expert in the business the more excited the conventional banks, we reversed that, when a client says I don’t know anything about this business, we get excited about him, that is the person we want.”

Fourthly, microfinance banking according to its founder is women oriented and focussed. In Nigeria that is not the case. It is who ever can pay the interest rate. “Conventional banks go to the men, we went to women”, Yunus said.

Fifthly, Nigerian microfinance banks are owned and are regulation required to be owned by the rich hence the minimum capital base of N20 million. But according to the founder it should not be so, it should be owned by the poor who are also its customers. “Conventional banks are owned by rich men, Grameen Bank is owned by the poor women”, Ynus said.

The sixth flaw is that microfinance banks are allowed to charge any interest rate. But in the Gremeem Bank concept, the interest rate is capped at 10 per cent margin between the cost of funds and interest rate. Yunus said the highest interest rate which is for income yielding activities is 20 per cent simple interest and for housing loan it is 8.0 per cent simple interest.

For its education loan, given to children of the poor, the interest rate is 5.0 per cent simple interest and they don’t start paying until they graduate from school and start working.

To achieve this interest rate, Yunus said Grameen Bank bounded itself never to allow its cost of operations to exceed the ten per cent interest margin. And this is done by doing most of the banking at the door step of their customers. “We believe that people should not go to banks, rather banks should go to people. So we make sure we visit all our customers at least once in a week. Hence there is no need for expansive offices and this helps reduces our running cost”.

In Nigeria, it is the opposite. Microfinance banks have expansive, tastily furnished offices that can easily pass for the head office of a conventional bank.

However, the greatest flaw with microfinance banking in Nigeria is that it is profit oriented. The promoters saw it as a cheap access to owning a bank and making money. Hence they set target for staff and management. Grameen Bank on the contrary, according to Yunus was founded to solve a problem-poverty. “Microfinance is a social business; it is not for profit but to help people out of poverty. This is because poverty is the fault of the society, the individual is just a victim of poverty”, he said.

Yunus said it indirectly, but Professor Ibidapo had earlier said it bluntly that the current microfinance banking framework in Nigeria cannot work, it can’t achieve the cardinal objective of poverty eradication.

Thus far it has only produced micro-commercial banks, and no matter the amendments and adjustments, it would not produce anything different or near Grameen Bank.

The solution is to scrap the framework and design a new one. This of course requires a lot of humility on the part of the leadership of the Central Bank of Nigeria.

Nigeria: Yunus, Nobel Laureate, faults Nigeria’s microfinance banking

By Siaka Momoh, Anthony Osae-Brown & Blessing Anaro, Businessday Online

World renowed microfinanace expert and Nobel laureate, Mohammad Yunus, yesterday criticised Nigeria ‘s microfinance banking, saying it is tilted to favour the rich, at the expense of the poor.

Business stakeholders at the ‘International Conference on Micro financing’ organised by First Bank of Nigeria, roared in applause, as Yunus analysed micro finance banking in Nigeria and painted a picture of what it should be.

He said: “Micro financing is non conventional banking; it is not an extension of conventional banking. Conventional banking is banking for the rich, whereas micro financing is banking for the poor.

“What we did, is look at conventional banking and do it the opposite way. Conventional banking is for the rich so we decided it should be for the poor. Conventional banking is for men; we set up Grameen Bank for women. Conventional banking is set up in the city, whilst microfinance bank is for the rural area. Conventional asks for collateral, we do not ask for collateral.

“The conventional bank goes to the rich, we go to the poor, conventional banks go to the cities, we go to the rural areas. Conventional bank lends to men, we lend to women. Conventional bank wants collateral, we say forget it, the less collateral our customers have, the more excited we are, when the conventional asks what you know about the business, we ask what don’t you know about the business? Conventional banks are owned by the rich, Grameen bank is owned by the poor”.

He argued that the purpose of micro credit is not to make money, as is the case in Nigeria but to solve the problems of the poor.Yunus’ Grameen Bank has more money than it gives out and 50 percent of its deposits come from borrowers. The bank attracts more savings than it gives out. It is a net lender of money.

Stephen Olabisi Onasanya, managing director, First Bank, agreed with Yunus that micro financing was not being properly run in Nigeria.

Olabisi said: “It is clear from the deliberations here today that what we practise in Nigeria is not micro financing; that it is not about the rush to make profit, it has got to provide solutions to problems. We are not truly lending to the poor. Our customers still have to produce documents before we can lend to them. First Bank is set to do it right.

“ We will enter into discussion with Mohammad Yunus and see how we can partner with Grameen Bank to do it right”.

Yunus told the audience that microfinance should be a social business, attracting very low interests. According to him, Grameen’s interest rate for instance, is cost of fund plus 10 per cent per annum. The interest rate is done on simple interest and not compound interst, as done in Nigeria.The interest rate also has no hidden charges.

In addition, he explained that loans for education attract 5 per cent interest and that the loan is payable after the borrower graduates and starts working.

Similarly, loans for housing are given at 8 per cent interest rate. He stated that loans are given to beggars at zero per cent.

“I firmly believe that we can create a world where not a single person will be a poor person. I say this, not because it is good to say, but becuase it is possible, poverty is a symptom of an improper society, the people are the victims”, Yunus said.

He described how the Grameen Bank, the bank he set up to provide financial services to the poor, decided to turn conventional banking upside down. “Whenever we encounter a problem, we ask ourselves how does the conventional bank do it, then we turn it upside down”.

Speaking on interest rates, Yunus observed that Grameen bank’s interest rates are just 4 percent above that of conventional banks, noting that any interest rate that is 15 percent above the cost of funds for a micro finance bank, is no longer serving the poor.

He said Grameen bank mobilises it’s credit mainly from it’s borrowers, who also own the bank. He also disclosed that all Grameen bank branches, as a matter of policy, are located in the rural areas and not in urban centres.

“We go to our borrowers. They do not come to us. We meet our borrowers at their door steps every week. Our office is for us to meet and not for banking business.”

Yunus also suggested that the best model is to create a separate regulator for micro finance banks. He said his experience shows that conventional regulators like the central banks, do not understand how micro finance banks work. He also suggested that regulators need to put a cap on interest rates on micro finance lending.

He further narrated how he has successfully been able to replicate the Grameen bank model in New York, where most people argued that “it would not work”.

“Now we have four branches in New York and we are opening in two other cities in the US soon,” he said.

Speaking to newsmen at the end of the lecture, Onasanya, the managing director of First Bank, said Yunus speech had been insightful and that First Bank would restructure its micro finance model in line with some of the suggestions made by Yunus in his lecture.

He said the impact series of lectures was aimed at adopting the best practices from anywhere in the world locally.

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