The Reserve Bank of India on Tuesday reaffirmed the need for regulations of the micro-finance industry by way of setting a separate category of NBFC-MFIs, in a move that may clear air on regulatory concerns, which the industry was facing so far, especially after the Andhra crisis.
The regulatory framework for this category will now be based broadly on the Malegam committee recommendations, which were earlier in May accepted by the apex bank with a tweak.
“By way of allowing a separate category for NBFC MFIs, the RBI has agreed to develop a framework of regulations that are designed to meet the specific needs of the industry, rather than addressing in the general umbrella. This had been a long-standing demand of the industry,” said Alok Prasad, chief executive officer of Microfinance Institutions Network.
Since May, NBFC MFIs followed the broad guidelines of RBI based on the Malegam Committee recommendations which included parameters like capping the interest rate at 26 per cent, margin cap at 12 per cent and also increasing the annual income limits for eligible households. Disallowing an individual to borrow from more than two MFIs, the credit limit now stands at Rs 60,000 for rural, Rs 1,20,000 for urban and semi-urban households.
Meanwhile, the Andhra Pradesh Government observes that the move may not bring about any change in the AP MFI Act.
“There will be no change in the state government’s role at least as of now, in protecting the borrowers from the fleecing MFIs. Any changes in the present MFI Act will happen only if the Assembly takes it up,” said R Subramanyam, Rural Development principal secretary.
The Andhra Pradesh government is of the opinion that Malegam recommendations are short of putting in a place an effective protection mechanism for the borrowers.
From The Hindu Business Line
The Reserve Bank of India has no plans to outsource its existing regulatory and supervisory framework for microfinance institutions (MFIs).
This was stated by the RBI Deputy Governor, Dr K.C. Chakrabarty, at a FICCI seminar on “Financial Inclusion: Partnership between Banks, MFIs and Communities” held on Friday.
“We cannot outsource the supervision for effective monitoring of MFIs in India as we want to keep that area under the RBI’s jurisdiction. However, we are not opposed to decentralising their monitoring but it has to be done through opening of RBI’s own branches in remote locations where MFIs are operating,” he added.
The proposed MFI Bill envisages a greater role for RBI in regulating the MFI sector. It is meant to enable the orderly growth of microfinance institutions, provide universal access to such finance by the poor and disadvantaged classes, and regulate the sector.
The Nation Online
THE Central Bank of Nigeria (CBN) has approved the revised microfinance policy supervisory and regulatory framework for Nigeria, an official of the bank has said.
The Director, Other Financial Institutions Supervision Department, Mr Olufemi Fabamwo,said this on Saturday in Abuja at the First Annual General Meeting of the National Association of Microfinance Banks, (NAMBs) According to him, the policy provides for three categories of microfinance banks (MFBs).
Speaking with the News Agency of Nigeria (NAN), Fabamwo said the first category comprised those authorised to operate in one location with a minimum paid capital of N20 million.
Such MFBs were prohibited from having branches within the same state, he said.
The second category of banks were only authorised to operate within one state or Federal Capital Territory (FCT), with a minimum paid up-capital of N100 million and they can open branches or cash centres within the same state.
He stated that for the third category, the paid-up capital was N2 billion, and that they were allowed to open branches in any part of the country.
He warned that all the implementations were subjected to the CBN certified decision and ratification for meeting the required standard.
By Hope Moses-Ashike, Businessday Online
Following the tsunami which engulfed the microfinance banks in the country late last year, confidence restoration has become a major challenge in the sub-sector. The micro finance industry witnessed the initial revocation of operating licenses of 224 microfinance banks by the Central Bank of Nigeria (CBN).
121 microfinance banks out of the 224 were granted provisional approval for new licence while 103 were liquidated by the Nigeria Deposit Insurance Scheme. During this period, there was panic withdrawal by customers of these banks to the point that the banks that were not affected in the revocation exercise were had hit.
Although confidence is beginning to return after the sanitisation exercise, analysts have opined that it will take a longer time for this to be achieved. However, they believe that the revised policy guideline for microfinance banks released by the CBN recently is a step toward confidence restoration.
Speaking on confidence restoration in an interview with BusinessDay, Olufemi Babajide, chairman, National Association of Microfinance Banks (NAMB) Lagos chapter, said it is an ongoing thing. “It is going to take time but the new policy has ensued stability in the sub-sector. With that one, it will be a plus to confidence restoration.”
He advised each local government unit to embark on road shows, visitation to opinion leaders, traditional rulers, politicians for confidence restoration. “At the state level, we have our plans that we will unveil in respect of confidence restoration,” he said.
According to the CBN, the Microfinance Policy, Supervisory and Regulatory Framework for Nigeria was first launched in December 2005. Five years after the launch, some issues emerged in the course of its implementation necessitating a review of the policy framework.
The review of the policy is in exercise of the powers conferred on the CBN by the provisions of Section 33 (1) (b) of the CBN Act No. 7 of 2007 and Sections 56-60 (a) of the Banks and Other Financial Institutions Act (BOFIA) NO 25 of 1991 (as amended).
In carrying out the review, the bank sent request for inputs to about 900 key stakeholders in the microfinance sub-sector. The stakeholders comprised: Microfinance Banks (MFBs), Deposit Money Banks (DMBs), others, including: Federal, states and local government agencies, development partners and non-governmental agencies among others.
The guideline states, “An assessment of the microfinance sub-sector, following the launching of the policy, however, revealed some improvements. These include heightened awareness among stakeholders such as government, regulatory authorities, investors, development partners, financial institutions and technical assistance providers on microfinance.
Specifically, a total of 866 microfinance banks have been licensed, Microfinance Certification Programme (MCP) for operators of Microfinance Policy Framework for Nigeria Page seven microfinance banks put in place and the promotional machinery beefed up. Accordingly, entrepreneurs are taking advantage of the opportunities offered by increasingly demanding for financial services such as credit, savings, financial advice and payment services.”
However, the GTI Microfinance Bank Limited has commended the Central Bank of Nigeria (CBN) for categorising microfinance banks into unit, state and national in its recently released revised guideline.
The micro finance bank reiterated its full support on the revised guideline of the CBN, saying that it is positioned to take the microfinance banking in the country to the next level.
In a statement by Abimbola Adewale, managing director/CEO of the bank, the approval of the N100 million capital base to run a state microfinance bank is highly commendable as it will enable operators to spread their operations across their states of registration thereby impacting positively on a larger percentage of the populace.
By M S Sriram, Business Standard
RBI?s role in giving MFIs policy support was remarkable, but an appropriate regulatory framework for the sector is long overdue
As the debate on the future of microfinance continues, it is worth examining the Reserve Bank of India’s (RBI’s) own discourse from 1998 onwards. This is particularly relevant after the Economic Survey tabled on February 26 and the Budget speech both make positive references to microfinance as being an important part of the inclusion agenda.
Contrary to what we are led to believe – that microcredit grew on its own and RBI stepped in at this stage to take note of the current practices – RBI played a crucial and catalytic role in the development of microcredit by encouraging and prodding banks to lend to micro-finance institutions (MFIs).
In 1998, MFIs had made early forays and the practitioners had asked for a policy framework. In response, the National Bank for Agriculture and Rural Development (Nabard) set up a task force on Supportive Policy and Regulatory Framework for Microfinance in the late 1998. This task force found microfinance an emerging activity to be nurtured. It was ahead of its times in calling for registration, and regulation through a self-regulatory organisation (SRO). Pending an SRO, the task force recommended that RBI should put an interim regulatory framework. At the same time, Sa-Dhan, the association representing diverse non-governmental and private sector players in microfinance, was established. Sa-Dhan was expected to evolve as the voice of the industry and an SRO.
This task force had a profound and simultaneous impact on policy making. In April 1999, the word microcredit was used for the first time in the credit policy, months after the task force was set up, but ahead of its report (October 1999). The statement said, “Micro-credit Institutions … are important vehicles for delivery of credit to self-employed persons, particularly women in rural and semi-urban areas.”And further: “A special cell … is being set up in RBI in order to liaise with Nabard and microcredit institutions for augmenting the flow of credit to this sector. The time frame for the cell … will be one year and its proposals will be given the highest attention.”
The credit policy (and a notification in April 1999) drew a distinction between small loans given by banks (with a ceiling on interest rates) and the loans given to MFIs for on-lending (without a ceiling). This notification created a two-way incentive for the commercial banks:
- to abdicate (to the extent possible) their own work of reaching out to the poor;
- to advance bulk loans to MFIs with no ceilings.
The banks did not have a level playing field, but were possibly happy to outsource small credit to MFIs. This opened bank finance to the MFIs, who were largely dependent on donor money.
The task force submitted its report in time for the mid-term review of the credit policy. RBI showed remarkable alacrity in acknowledging the recommendations. The review said, “The recommendations made by the Task Force are being ‘processed’ by Nabard in consultation with RBI and Government as appropriate.” The recommendations of the task force were already creeping into the policy much before “processing”, which was unlike the usual policy-making protocol of putting the report in the public domain, encouraging deliberations and incorporating feedback to convert recommendations into actions.
The mid-term review reiterated the importance of MFIs and asked banks to include microcredit in their corporate strategy to be reviewed on a quarterly basis. A detailed notification of February 2000 made six significant points:
- No interest cap on loans to MFIs and their loans to clients.
- Freedom to banks to formulate their own model/conduit/intermediary for extending microcredit.
- No criteria for selecting MFIs.
- Banks to formulate their own lending norms.
- Banks to formulate a simple system, minimum procedures and documentation for augmenting flow of credit by removing all operational irritants.
- Banks to include microcredit at the branch, block, district and state credit plans with quarterly progress to be reported to RBI.
The fact is that RBI gave policy support without an appropriate regulatory framework. The notification defining microcredit is stark: “The provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit institutions are those which provide these facilities.”
We do not know if it was a deliberate attempt to keep this vague by leaving out amounts or incomes. However, the regulatory discourse was just about opening up another channel of financial services.
Even as the somewhat regressive Malegam committee report is being discussed, RBI, on February 14, released a master circular on microcredit which refers to its historical circulars, with little addition: “A joint fact-finding mission looked at the issues plaguing the microcredit sector and ends with saying that findings were brought to the notice of the banks to enable them to take necessary corrective action where required.”
In the current circumstances, the finance minister has made a bold and affirmative statement in the recent Budget. He has also thrown in some money for an India Microfinance Equity Fund. This augurs well for the MFI sector — showing policy continuity rather than policy turnaround based on Malegam’s recommendations. Otherwise we would only be able to say microcredit had a bright future behind it, not ahead of it.
Raja Aqeel & Abdul Rasheed Azad, Business Recorder -
ISLAMABAD (November 12, 2010) : Consolidated strategy along with proper regulatory framework is needed in the aftermath of devastating floods to make microfinance a viable instrument for the welfare of the downtrodden and poor segment of society.
This was the consensus of different private and public sector micro-finance institutional heads at the ‘Fourth Pakistan Microfinance Country Forum 2010′ organised by Shamrock International to reshape the regulatory framework in the aftermath of devastating floods here on Thursday.
The main speakers were convinced that microfinance could not reduce poverty in countries like Pakistan alone where it was increasing with each passing day. The panel was unanimous on improving the state of governance, as it was one of the major tools in implementing rules and regulations needed for poverty alleviation.
“We are lagging behind as time is rife for the next generation reforms within the financial services industry ie, technology advance to make it possible for the ordinary rural masses to access financial services at their doorstep without any hassle, said Ghalib Nishtar, President & CEO, Khushhali Bank Limited in the opening session.
“Some of the major changes in technology, the microfinance sector witnessed is easy access to Internet and mobile phone. The expansion and growth of mobile phone industry has given tremendous boost to mobile banking making these services more affordable and accessible to millions of people in even the remote areas of the country”.
Saqib Mohiudin of Business Support Fund, shared an example that an organisation established a peach farm where 12 thousand peach growers were given training in enterprise development, market practices and better market access and within four to five months they earned handsome amount. It is one of the success stories of microfinance but gives a very comprehensive message that with sound planning one could achieve everything.
He said that State Bank of Pakistan (SBP) has planned that graduated micro-group lending be introduced through commercial banks so that the small farmers have access to easy credit for developing their business ventures.
Cluster financing has also been offered by SBP to the First Women Bank, which is also an effective tool, adding that cost effective financing be provided to micro/small enterprises to expand their businesses, he added. He said lack of regulatory framework on the part of the government was necessary to recover the loans advanced by the commercial banks; these measures would definitely help in mitigating the lot of poor.
Farhat Abbas Shah, CEO Farz Foundation, the first Islamic microfinance institute of Pakistan based in Lahore has introduced an Islamic tool of microfinance “Musharka”. Under the programme the foundation would bear 90 percent of the credit cost whereas the lender would contribute one percent in the initial phase of business. After establishing the business the entrepreneur would have to increase its share to 20 percent in next year, while the remaining 80 percent would be paid by the foundation.
Every year his/her contribution would increase by 10 percent, while the remaining funds would be provided by the organisation. After a ten-year period, the foundation would be able to recover the principle amount and the lender would be free to carry on its business independently. In some of the cases, a small business was established by a poor person has achieved tremendous success and they were independently running their businesses and feeding their families.
Similar views were expressed by Nadeem Hussain, President and CEO of Tameer Microfinance Bank Limited as he highlighted how a range of services through branch-less banking have successfully changed the lives of millions of people. Replying to a query with regards to financial literacy, he said, “It is not an issue as far as the future of providing access to microfinance through technology is concerned; the masses are already using cell phones for communication without any difficulty, this tool must be extended to the far flung areas to educate poor masses and offer them new range of financial services as most of the people in rural areas are unaware of such institutions.”
In his opening remarks, Menin Rodrigues, President and CEO, SHAMROCK Communications and convenor of the conference said, “Pakistan’s economy has recently encountered plethora of turbulent setbacks and they have to make herculean efforts to meet enormous challenges, which are threatening sustainability in several sectors. To steer the country out of the quagmire they would have to completely change economic dynamics and economic managers have to revisit the laid down priorities.
Such adverse conditions could only be tackled through a well thought-out microfinance system, keeping in view our geo-cultural set up and gender disparity. A well-co-ordinated microfinance sector could only be in a position to offer a robust long-term solution to this national crisis and ultimately its repercussions.
A well thought-out policy based on the felt needs of the target groups of the society calls for triggering fresh ventures in the shape of small industries and commercial enterprises across the country depending on the availability of the raw material at the nearest possible sites along with unhindered market access to the products carved through the untiring labour of the poor as well as low middle class as need for microfinance arose mostly in under developed and developing countries to give the much needed impetus to their economic growth trajectory.”
Dr Shabbir Hussain, Managing Director, HHRD Pakistan, said, “It is high time that the outreach of microfinance be enhanced both vertically and horizontally to expand its area, which will ultimately help in group lending promotion making it affordable to the target beneficiaries being cost-effective. Islamic mode of microfinance has greater potential for an effective outreach particularly in the rural areas of Pakistan.” Shafqat Sultana, President & CEO, First Women Bank Limited, one of the pioneering institutions engaged in offering microfinance, stressed the need for entrepreneurial skill development and training to the borrowers before disbursement of loans and laid emphasis on effective regulatory monitoring framework for recovery of the disbursed loan.
Most of the people commit crime due to poverty, she said adding that crimes grow gradually through poor policies of the economic managers. The reality is that poverty claims more lives than wars every year. Lasting peace cannot be achieved unless this large population finds ways to break the shackles of poverty,” she concluded.
By Gbenga Ogunbufunmi ,Asst. Business Editor, Daily Independent Online –
•Sanusi •Muhammed Yunus
Microfinance banking (MfB) started as a concept to provide financial services to the world poor, those who by circumstances of not being rich are excluded from access to the conventional commercial banks and other financial institutions due to lack of collateral.
The concept presents series of exciting possibilities and opportunities for improved markets, reducing poverty and fostering social development among citizens.
The concept of microfinance originated in the mid-1970s in Bangladesh, an Asian country, through the pioneering experiment by Dr. Muhammad Yunus, then a professor of Economics in one of the country’s tertiary institutions, Chittagong University.
Yunus’ objective was to offer the poor in that country financial services, entrepreneurship opportunities and an end to mistreatment by money-lenders, a system where they could produce, manage and maintain their own finances.
Yunus’ experiment in microfinance was in the granting of microcredit; that is, extending small loans to entrepreneurs who are too poor to qualify for conventional bank loans.
The advantages of microfinance are numerous. First, it is sustainable and creates independence from aid. Yunus believed that by giving small loan to an individual or group of people who cannot access credits from the conventional banks would give them the ability to work their own way out of poverty.
Secondly, it means that the money goes directly to the people who need it – bypassing the bureaucracy and corruption that can compromise traditional methods of charity.
Moreover, Microloans are never lent to individuals without first providing them with the expertise and training to build business plan that is likely to succeed, and such projects are even monitored.
Yunus’ interest in the scheme was aroused by the conditions of the poor in his country who, despite their entrepreneurial instinct, lacked the means of translating their desires into reality.
Thus, in 1974, Yunus led his students on a field trip to a poor village. They interviewed a woman who made bamboo stools, and learnt that she had to borrow the equivalent of 15 pence to buy raw bamboo for each stool made. After repaying the middleman, sometimes at rates as high as 10 per cent a week, she was left with a penny profit margin. Had she been able to borrow at more advantageous rates, she would have been able to amass an economic cushion and raise herself above subsistence level, Yunus thought.
Realising that there must be something terribly wrong with the economics he was teaching, Yunus took matters into his own hands, and from his own pocket lent $27 to 42 basket-weavers in nearby town of Jobra. He found that it was possible with this tiny amount not only to help them survive, but also to create the spark of personal initiative and enterprise necessary to pull themselves out of poverty.
Against the advice of banks and government, Yunus carried on giving out ‘microloans’, and in 1983 formed the Grameen Bank, meaning ‘village bank’ founded on principles of trust and solidarity.
In Bangladesh today, Grameen has 1,084 branches, with 12,500 staff serving 2.1 million borrowers in 37,000 villages.
On any working day, Grameen collects an average of $1.5 million in weekly instalments. Of the borrowers, 94 per cent are women, and over 98 percent of the loans are paid back, a recovery rate higher than any other banking system.
Grameen methods are applied in projects in 58 countries, including the United States (U.S.), Canada, France, The Netherlands and Norway.
Today, Yunus runs Bangladesh’s Grameen Bank, a leading advocate for the world’s poor that has lent more than $5.1 billion to 5.3 million people. The bank is built on Yunus’ conviction that poor people can be both reliable borrowers and avid entrepreneurs. It even includes a project called Struggling Members Programme that serves 55,000 beggars. Under Yunus, Grameen has spread the idea of microcredit throughout Bangladesh, southern Asia, and the rest of the developing world.
People see microfinance as a viable commercial activity that can increase access to investment capital for the working poor.
With Yunus’ experiment, millions of people around the world today have been liberated from economic slavery. Jobs have been created, families uplifted and standard of living improved remarkably.
According to Yunus, “At first, I didn’t think that what I did had any significance in a broader context.”
However, the scheme keeps expanding in scale, and Yunus has grown intimately familiar with the unbearable dimensions of global poverty. As many as 1.2 billion people around the planet lack access to basic necessities, he explains, and microfinance could be their pathway out of despair. In 1997, only about 7.6 million families had been served by microcredit worldwide, according to the 2005 State of the Microcredit Summit Campaign Report.
As of December 31, 2004, some 3,200 microcredit institutions reported reaching more than 92 million clients, according to the report. Almost 73 per cent of them were living in dire poverty at the time of their first loan.
“Yunus and Grameen have taken a first step, which has inspired others to take a look at microfinance as a business,” says John Tucker, deputy director of the microfinance unit at the United Nations Capital Development Fund.
Origin Of MFBs In Nigeria
According to the Central Bank of Nigeria (CBN) in the preambles to its ‘Microfinance Policy, Regulatory And Supervisory Framework for Nigeria’, the practice of microfinance in Nigeria is culturally rooted and dates back to several centuries.
The traditional microfinance institutions provide access to credit for the rural and urban low-income earners.
However, they are mainly of the informal self-help group or rotating savings and credit association types.
Other providers of microfinance services include savings collectors and co-operative societies. The informal financial institutions generally limited outreach due to paucity of loanable funds.
To bridge the gap, successive Nigerian governments in the past had initiated series of publicly-financed micro-rural credit scheme and policies targeted at the poor. But all these have remained unsustainable as they always die with each successive government.
However, real attempts at introducing officially administered microfinance bank (MfB) scheme started when the then military president, General Ibrahim Badamosi Babangida, introduced the defunct Peoples Bank that later metamorphosed into Community Bank and later to Microfinance Bank.
One astonishing thing about the introduction of the concept into Nigeria is that while micro-credit or microfinance has been able to uplift the too poor in other developing countries in Africa, Asia and some parts of Europe and America, the introduction of MfB in Nigeria has made the poor to be poorer and further lead them to grinding poverty.
Wrong Models, Low Capacity
As more microfinance banks in Nigeria are finding it difficult to meet their obligations to depositors in the wake of the paucity of capital in the financial system, analysts insisted that the bane of the financial sub-sector is a combination of wrong model and low capacity of the banks among others.
As the financial regulatory authorities continue to expand energy sorting out the mess uncovered by the famous bank audit of August 2009, concerns are being raised over the seeming replication of the crisis in the microfinance banking sector as the number of distressed institutions are swelling by the day.
Investigations showed that the number of frustrated MfB depositors is growing as more banks continue to shut their doors because of their failure to meet depositors’ demands.
There seems to be unanimity of opinion among analysts who blamed the unfavourable development on a combination of low capacity of the banks and wrong model adopted by a number of MfBs.
The exasperation of investors in MFBs is said to have been compounded by the resolve of the apex bank not to bail out any of the distressed firms.
At a meeting with chief executives of MfBs, Other Financial Institutions Director (OFID) of the CBN, Femi Fabanwo, said although the regulators were worried by the increasingly widespread incidence of illiquidity in the microfinance banking sub-sector, there would be no bailout for any of them having liquidity problem.
However, further investigations have shown that apart from those suffering from acute illiquidity, a number of the ailing MfBs are at the verge of a change of ownership, a development said to have informed special audit of their accounts.
A CBN source explained that the recent audit of money deposit banks could be blamed for some of the problems presently affecting MfBs
It was gathered that a combination of factors including the bank audit, the clampdown on bank debtors and the refusal of banks to lend are the factors frustrating attempts to inject fresh funds into the banks.
But operators and financial experts said beyond the issue of injection of additional capital, the foundations for some of the MfBs were too weak for efficient operation in a complex economic climate like Nigeria.
Wrong Business Models
Biodun Adedipe, senior Partner, Biodun Adedipe and Co, a firm of financial analysts, said many of the promoters of MfBs got it wrong from the start.
He noted that some of the owners of MFBs have decided to compete with money deposit banks which have better structure, a development he attributed to the inability of the MFBs to meet their obligations to their depositors.
“Most of them have wrong business models because they came and tried to operate like money deposit banks.
“Microfinance banks are expected to engage in neigbourhood banking. All their customers are supposed to be those who operate within their localities. They are supposed to know them and have the capacity to monitor their progress,” he said.
Adedipe said the loss of focus is responsible for the myriad of problems confronting microfinance institutions.
However, chief executive of Financial Derivatives Nigeria Limited, Bismark Rewane, said the trouble with microfinance institutions is not peculiar to Nigeria.
According to him, bank failure is a consequence of economic problems besetting the global community, as over 155 banks have failed in the U.S. alone.
However, Rewane said apart from the global economic crisis, other impediments to a regime of smooth operation of MfBs are the Nigerian economic crisis and lack of capacity of the affected banks.
He said the low capacity of the MfBs was responsible for the systemic failure of these banks.
He would not indict the system or regulators as the current challenges, according to him, can be described as the consequence of the general downturn in the economy.
Rewane, who noted that MfBs are lending at the retail level, said most of those who took facilities in the MFBs are facing problems that make it difficult to service their loans.
“Lending to someone who has lost his job can be challenging. How do you expect a man that has just been sacked to repay his facilities? The process is therefore fallout of the general recession in the country,” Rewane said.
But managing director, Gold Microfinance Bank Limited, Lagos, Lanre Abiola, admits that these banks were faced with liquidity challenges and consequently closed shops. But he adds that they have plans to reopen for business this year.
But a former director of the Nigeria Deposit Insurance Corporation (NDIC), Joel Ahimie, attributed the liquidity crisis in the MFBs to haste for profit and wrong lending practices as well as inadequate supervision by the regulatory authorities.
He said: “Our people were just too much in a hurry. Most of the operators see microfinance bank as a mini bank, and that is wrong. Some see it as a profit-making business, forgetting that the profit will come but not now. The money-lenders are making money and they charge 100 per cent interest, but MFBs charge over 30 per cent, which is a lot of money.
Executive director of Lift Above Poverty Organisation (LAPO), Godwin Ehigiamusoe, said there is the need for a review of the minimum capital for the sector.
“Internationally, it is agreed that N1 billion for a microfinance institution is rather high, so there may be need for a downward review in that aspect,” he said, admitting that N20 million was not sufficient to run a microfinance institution at the state level.
Chief executive officer, ACCION Microfinance Bank, Bunmi Lawson, said “the principle behind MFBs is that you give a lot of small loans and you should ensure that you have a steady capital base that would enable you meet any liquidity problems at any point in time. Most MfBs operators are regrettably not too conscious about their lending processes. They give loans to too many people without proper monitoring and at the end of the day, what you would hear are issues of bad loans. MfB operators lend to Small and Medium Enterprises (SMEs) and instead of giving to say 10 people, they actually loan to over 10,000 clients and before you know it, there would be cash problem. As you know, MfBs are still very new and people are not yet putting many deposits into them. So, they do not have huge credit to give out to the active poor and they do not have enough funds from the commercial banks. All of that just made it a bit difficult for them.”
The CBN recently said that in addition to monetary penalties, it would remove the managing director of any MfB that fails to render monthly returns promptly or makes false or late renditions two consecutive times.
Repeated failure to render the returns for a period of six months by any MfB, according to the CBN, will amount to the revocation of the bank’s operating licence.
Even with the licensing of over 910 MfBs in Nigeria by the CBN, the operations of most of them left much to be desired, as most of them have even derailed from the main objectives setting them up.
For instance, instead of catering for the rural population and those living in hinterlands as well as make credits available to artisans and MSMEs, the MfB operators are preoccupied with competing with the large commercial banks.
Some analysts argued that the problem of the MfBs in Nigeria is compounded by the fact that the sponsors of most were ex-staffs of distressed and liquidated banks, hence their operational methodologies are mainly carry-over from the distressed banks.
They argued that such managers still see MfBs as another avenue for self-enrichment. Therefore, the recent proposed certification of the chief executives /managing directors of the MfBs by the CBN to ensure that they are run professionally in line with international best practices anchored on transparency and risk-based corporate management come as a welcome development.
Head of corporate affairs of the CBN, Mohammed Abdullahi, said the apex bank is doing everything possible to ensure that microfinance banks play their roles effectively in the Nigerian economy.
“There is a committee of which some members just returned recently from a trip abroad and we are considering all options. We are considering ideas from all over the world, so that microfinance banks can play their roles effectively in the economy,” he said.
But for how long will depositors of these troubled MfBs wait?
The Nigerian Experience
The MfBs in Nigeria were soon after their establishment caught in the web of corruption and inefficient Nigerian economic system. The concept was hijacked by moneybags, infected with bureaucracy of the Nigerian politics and economics.
Due to poor policy formulation, high cost of doing business in the country. The microfinance concept has been misapplied with dire consequences for the poor in Nigeria.
According to analysts, the CBN policy that mandated MfBs to have a minimum reserve of not less than N20 million with the apex bank, while at the same time directed that the NDIC insures each depositor for a maximum N100,000 regardless of the amount of money invested, has taken the MfBs out of the reach of the poor it was intended to serve. The policy, according to analysts, also discourages prospective investors because their funds are not sufficiently secured.
Also, high cost of incorporating business ventures, taxes, approvals, rents and salaries have eaten deep into the banks’ vault thereby making access to cheap fund impossible.
Another area the MfBs in Nigeria have faltered is in the area of corporate governance. Most of the MfBs operating in the country today have abandoned their primary area of responsibility. Rather than focusing on small businesses and entrepreneurs, they have shifted their focus into big businesses in competition with conventional commercial banks. The implication of this is that when the big businesses default, the banks go down with them, as they do not have the required capital base to absorb such shock. This is apart from the fact that they lacked the required expertise for such ventures.
Other issues that bordered on corporate governance among microfinance institutions in the country is the unusual overhead cost imposed on themselves by these banks. Many of them, even before commencing operations, rented buildings that compete in standard with that of a commercial or an investment bank. Some, apart from the lavish furnishing of the rented premises and fleets of expensive cars, will also deploy bulletproof doors that run into millions of naira. The implication of these is that these banks, even before commencing operations, are already in debt on frivolities, hoping to cover it up with depositors’ money when operation commences.
All these lapses led to the collapse of microfinance institutions in the country, coupled with poor regulatory framework and lack of punishment for those that run them aground.
Looking at the situation in Nigeria, who then are at the receiving end?
It is often the too poor who the scheme was meant to salvage from the claws of poverty. The poor who deposited their little earnings in these institutions with the sole aim of getting small credit, loses all with the collapse of the institutions. No CBN or NDIC to come to their aid while the young man who mismanaged their small savings continue to live “big” in the city.
As of today, 80 per cent of poor Nigerians who participated in the country’s microfinance scheme from Peoples Bank to Community Bank and now Microfinance Bank ended up regretting their actions.
Then what are the solutions?
Analysts have suggested that a typical micro-credit or MfB, in cutting its coats according to its cloth, should not have more than a small three-room office, no air-conditioners, no suits required for staff as they are expected to be on the field most of the time monitoring clients’ deployment of monies loaned to them for the implementation of their business, while staff salaries ought not be more than N20,000 per month. No cars; if they must, they should go for a bus. There is need to start small, gain experience then win customer confidence. By so doing, the business will grow to accommodate expansion.
By Hope Moses-Ashike, Businessday –
Microfinance banks (MFBs) operators are eagerly expecting a major reform in the sub-sector after the liquidity crisis that practically brought the sector to its knee through the unprofessional attitude of most directors who ran the affairs of the banks.
Mathias Omeh, president, National Association of Microfinance Banks, pointed out that the general reform carried out by the Central Bank of Nigeria (CBN) on Deposit Money Banks (DMB) was also needed in the microfinance industry, but on a low key, considering that the sub-sector was a small entity.
Sanusi Lamido Sanusi, CBN governor, early this year revealed details of reforms intended within the banking system, saying while the US had set up a committee to undertake a study of what went wrong over there, after achieving some stability, “in our own case, we commissioned a detailed study with the involvement of the CBN and external resources to diagnose the problems and come out with solutions.” And this had culminated into the formulation of the blueprint or roadmap for the reforms.
According to Sanusi, the blueprint for reforming the Nigerian financial system in the next 10 years is built around four pillars of enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution, and ensuring that financial sector contributes to the real economy.
Omeh admitted that the ongoing review of the microfinance policy guideline by the apex bank forms part of the total banking reform, noting that the regulatory authorities which include the CBN and Nigeria Deposit Insurance Commission (NDIC) were currently embarking on target examination of MFBs and that each bank examined was being instructed on what to do.
The CBN is currently undergoing a review of the microfinance policy guideline, and the result is expected to be released this month.
It would be recalled that the CBN last month held stakeholders’ meeting on the review of the microfinance policy, regulatory and supervisory framework, and the regulatory and supervisory guidelines for microfinance banks. BusinessDay, however, gathered that the regulatory authority was making moves to increase the share capital of MFBs to cut across the states, as MFBs in the urban areas might be expected to increase their share capital to N100 million, while those in the rural areas to N20 million.
Responding to this, Omeh said the CBN had not come out with a specified increase but that it was still consulting with stakeholders, and might come up with a new policy guideline at the end of this quarter. At a recent meeting with managers of the National Poverty Alleviation Programme, Joe Alegienu, the CBN’s director of development banking disclosed that the apex bank was developing a framework to regulate microfinance banking in the country.
Alegienu stated that the decision to create a new framework was because microfinance banking had failed in the fight against poverty, as a result of the proliferation of commercial bank operatives masquerading as microfinance operators.
The new microfinance banking policy framework is expected to become operational this month. To him, “we do not want a situation where the microfinance banks that were established to support the fight against poverty among rural people are allowed to turn into a monster that would consume the people. We will soon publish an operational template that would serve as a guide on how microfinance banks are going to do business. It is time to tell those not qualified to do the business to stay away”.
by Babatunde Oke, Nigerian Compass –
Despite the euphoria that greeted the establishment and operations of micro finance banks, their candle light is no longer glowing as most of them have closed shops. BABATUNDE OKE writes on the current state of micro finance banks in the country.
MIcrofinance banks are not as visible in the country as they used to be few years back, no thanks to the global economic crisis that threw world economy off balance and caused downturn in developed economies such as United Kingdom (UK), United States of America (USA) and other European countries. The effects of this downturn caused recession in the developing economies in Asia and the under-developing economies of Africa.
Nigeria tasted the bitter pills, with the effect first being the capital market with stock prices going down the rock bottom line.
The effects was still on when incumbent governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, assumed office and introduced a reform that started with the conduct of stress test on all the banks to determine their level of liquidity by examining the level of their exposure to non performing loans.
At the end of the test, 10 banks were found to be unsound, with eight of them in serious situation to the level that they were bailed out with N620 billion. The apex bank took immediate measures to save the troubled banks by first removing their management teams and appointing new ones. It also mandated all banks in the country to make provisions for their non performing loans, ensure strict compliance with risk management policy and adoption of the Common Financial Year End of December 31, beginning from December 31, 2009.
Before the global economic crisis set in and the introduction of the reforms by CBN, Micro finance banks were established after the inauguration of the National Micro Finance Policy and Regulatory Framework by the CBN in October 2005. The policy, according to the apex bank, would help 60 per cent of the economically active population in the informal sector to access funds and lift the small and medium enterprises, which are expected to grow the economy and reduce unemployment.
This led to the emergence of over 900 micro finance banks in the country. Some commercial banks also established micro finance banks to take their share from the micro credit market, while other commercial banks that did not have full fledged subsidiary put in place new products tailored to capture part of the market.
The twin events, the global economic crisis and the ongoing reforms by the CBN also caused crisis in the micro finance industry with many of them closing shops, while the few that remained are struggling to survive.
According to some of them, the business was bad due to the reforms that had made their deposits in some of the affected commercial banks to be trapped, while others adduced the failure to the refusal of some of their debtors to repay loans that were granted them.
Financial analysts opined that most of the micro finance banks failed because they did not really focused on the purpose for which they were set up but were busy competing with commercial banks in terms of their products and operations, especially lending.
They also argued that the lifestyle of the chief executives and some officers of the micro finance banks, such as riding expensive cars and enjoying luxury at the expense of the banks were the major cause of their failure and collapse.
A recent publication by the United Bank for Africa (UBA) that it would migrate its micro finance customers into its bank’s mainstream has sent fear waves down the spine of many people in the country. Many banks with full fledged micro finance subsidiaries have tactically migrated their customers to their banks’ mainstream, without the customers knowing.
Investigations by the Nigerian Compass revealed that what the banks did was to introduce conventional banking operations into these subsidiaries, thereby making the customers believe that they are still under micro finance operations.
The former Chief Executive of Nigerian Deposit Insurance Corporation (NDIC), Alhaji Ganiyu Ogunleye, once attributed the failure of the micro finance banks to lack of adequate regulations for the sub sector.
According to him, “We have problems in the micro finance sector and this is making regulation difficult. From our records, less than 50 per cent of the operators of the MFB are actually complying with statutory regulations, such as filing of returns and giving reports of their activities on a timely basis. Letters sent to these micro finance institutions to determine their status were always sent back, meaning that a number of them have actually stopped operating.”
He noted that before he exited NDIC, a move was put in place aimed at addressing the numerous irregularities in the system and also to protect depositors of the various micro finance banks from losing their deposits.
“Arrangements are on now to identify operators that truly exist and those who only exist on paper, and we hope to take actions on it. There is an exercise to compile the names and details of existing micro finance institutions, so that actions would be taken that will alleviate the suffering of depositors,” he added.
A financial analyst, Mr. John Idehen, said that application of traditional banking system used by micro finance banks not only make access to fund cumbersome to borrowers but also expose operators to unmitigated risks.
This, according to him, makes it difficult to have sustainable growth in this sub-sector of the financial system, adding that the activities of the operators give room for continuous thriving of the traditional systems of esusu and ajoo.
“Micro finance as it is presently operated in the country leaves much to be desired. If the system is working, esusu and ajoo would have paled into insignificance. But these traditional modes of funds mobilization and savings are still thriving because they still, to a large extent, cater for the financial needs of a considerable percentage of people in the informal sector,” he said.
He said that most micro finance bank lack the technology, experience and capacity to capture and manage the huge potentials of the market; and thereby misuse the opportunity they had in their hands.
Another analyst, Mr. Siju Adeyeju, said that most micro finance banks were not doing what they were supposed to be doing, adding that the chief executives of the banks were too aggressive and were running the banks like the normal commercial banks and wanted to venture into businesses that were not meant for them
He said, “They thereby pushed their staff so hard to get deposits and forget about their primary purpose of giving micro loans. The beneficiaries, who were poor people were actually not paying back, and the fact remains that the greed of the chief executives of these banks led to the demise of the banks.
“This laudable concept has been hijacked by money bags; it has been caught by bureaucracy of the Nigerian politics and economics. No thanks to ill-formulated policies. The micro finance concept is presently being misapplied.”
Mayor Edmund, a capital market analyst said, “Having failed to capture its target market, micro finance banks in the country are now trying to compete with full fledged banks but are grossly lacking in the most important aspect of its operations; that is raising funds from depositors and getting prospective clients to shed their phobia for bank loans for fear of exorbitant interest rates charged and hidden bank charges.”
Managing Director of Moorgate MFB, Mr. Gbolahan Bello, once attributed the poor asset quality of MFB to the perception and misconception that people have about the industry. “Because the industry is still new, all that some people are interested in is to borrow money because they feel we are government owned and have limitless funds to throw around, making them want to borrow without wanting to pay back.
“We are low-leveled banks that are established to help the active poor and small traders, but poor asset quality of MFB has been a problem from the beginning because some people have not had good intentions.”
In his opinion, the Managing Director of Imperial MFB, Mr. Ejike Azubuike, said, “Most of the loans that are created are not paid up before the due dates and by the time it is one day past, it is classified as poor asset quality because they are not meeting the payment schedule,” he said.
But while many micro finance banks have been drowned by the CBN reforms and the global economic crisis, some of them are still floating. For instance, Blue Intercontinental Micro finance Bank, a full fledged subsidiary of Intercontinental Bank Plc, is still in operations partially because it has a different capital base form its parent bank and due to its international connection.
by Amaka Agwuegbo
The Managing Director of Good Neighbours Microfinance Bank, Mr. Ikechukwu Awa, has asked state and local governments to comply with the one per cent budgetary provision for microfinance and on-lend to microfinance banks, MFBs.
Urging state and local governments to remit the funds, as enshrined in the MFB operating policy, Awa said such allotted funds, if remitted, would increase the deposit base of MFBs, thereby boosting the quality of financial services rendered.
There have been cases where some state and local governments tried to give out the funds by themselves but they never recovered the money because the average beneficiary thinks it’s his own way of partaking of the national cake.
“But if this fund is channeled through MFBs, the borrowing public would know it’s not business as usual because we have the capacity to monitor the loans and make sure that they are repaid. So, I’m encouraging the state and local governments to give us this allocation.
Pointing out that the essence of microfinancing is to make financial services available to the ‘active poor’ and low income group of the society, Awa said this important aim would continue to elude Nigerians if the one per cent of state and local government budget for on-lending is not remitted to MFBs.
According to the Microfinance Policy, Regulation and Supervisory Framework for Nigeria, states and local government are to set aside an amount of not less than 1% per cent of their annual budgets for on-lending activities of microfinance banks in favour of their residents.
This is to ensure stable macro-economic environ-ment, and the provision of basic infrastructures, political and social stability.
States and local government are to foster adequate land titling and other property rights sufficient to serve the collateral needs of borrowers and financial institutions, while instituting and enforcing donor and foreign aid guidelines on micro-finance to streamline their activities in line with this policy.