Reforming microfinance to alleviate poverty, foster national development

A development economist and professor of public policy, Jonathan Morduch, once said: “Microfinance stands as one of the most promising and cost effective tools in the fight against global poverty.”That statement is true, judging by what some developing economies have done so far. The story of microfinance in other jurisdictions, like in Bangladesh, India and even Rwanda, is that of a success and millions of people being lifted out of poverty.But the hard reality is that each success was dependent on regulatory dynamism and stakeholders’ commitment to play by the rules. Of course, there must be evolving framework and the institutions would be focused and be available where they are needed.

Microfinance policy was initiated in Nigeria in December 2005 as a response to observed challenges of financing the real sector, mostly dominated by the Micro, Small and Medium Enterprises (MSME) and boosting rural finance.The policy’s objective, which led to the establishment of microfinance banks in Nigeria, was to provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner.

It was to serve as a guide for the activities of informal unregulated institutions, as well as new entrants in the sub-sector and aimed at ensuring that operators within the sub-sector are guided by a set of rules, principles, and a robust legal framework.

On the other hand, Nigeria, as Africa’s largest economy, with a Gross Domestic Product (GDP) now estimated at over $400 billion, has a huge market for microfinance estimated to be about 100 million people. But over 60 per cent of the estimated 200 million people live below the poverty line, putting the country at a very vulnerable position.

About 90 per cent of Nigeria’s businesses are considered microenterprises. Despite this huge number, easy access to funds has remained a challenge for most Small and Medium Enterprises, in spite of several government funding initiatives.

Unfortunately, 14 years after their establishment, rather than mobilise funds and ease access to credit for micro businesses and rural communities, a lot of MFBs have been operating like mini commercial banks, with a large concentration in urban areas.

Currently there are more than 900 microfinance banks, operating in different categories – national, state and unit. But they all have similar characterises – low capital base and weak deposit mobilisation, translating into bizarre interest rate charges on loans.

The inadequate spread in the location of the MFBs in relation to their target beneficiaries, demand for immoveable collaterals for loans, high interest rate, and absence of a credit reporting system are still prevalent.“We are committed and working assiduously to addressing these limitations with the ongoing reforms,” the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, said.

The Director of Other Financial Institutions Supervision Department (OFISD), CBN, Mrs. Tokunbo Martins, said the microfinance policy was scripted to provide financial services to the poor who are traditionally not served by the conventional banks.These financial services, she said, include credit, savings, micro-leasing, and money transfer and payment services.

“It is unfortunate that some or many MFBs are not achieving what they should achieve. Deposit mobilisation by many of the MFBs is not enough, otherwise why do we have so much currency outside the banking system? Our statistics show that the currency outside banks is still huge.

“Cash should either be in vaults of banks or in vaults of CBN and we know how much we have issued. So when we minus the one in our vaults and the one in the banks, where is the rest? These are the monies MFBs should pursue, dissuade people from keeping them under their pillows or wherever else.

“Microfinance banks would be pivotal to economic growth if only they can enhance their reach and give out loans to MSMEs to further develop their businesses. This is a major part of the ongoing reforms.So far, data from the licensed credit bureaus indicate that the operations of microfinance banks, despite challenges, have helped to improve financial inclusion among smallholder peasant farmers, artisans and other small business operators.

“As at December 2018, aggregate loans granted by MFBs was N482.9 billion. Of this amount, loan sizes below N1.4 million accounted for 72 per cent. Equally observed was that small businesses have been more successful in securing credit from the microfinance institutions rather than conventional deposit money banks,” she said.

According to her, despite the observed failure, the importance of microfinance banks in poverty alleviation, providing access to finance, as well as in banking the unbanked and under-banked population in the country still remains strategic in development strides.

Microfinance framework
Microfinance is the provision of financial services to the poor, who are traditionally not served by the conventional banks, offering financial services like credit, savings, micro-leasing, money transfer and payment services.The beginning of microfinance banks in Nigeria was informal and small-scale, mainly traditional thrift saving system and activities of the traditional group networks served as proprietors of financial exchange, such as esusu, ajo, adashi.

The earlier efforts of government to meet the socio-economic needs of the rural communities and reach rural areas, resulted in the establishment of community banks, now microfinance banks.Community banks emerged to meet the needs of the poor in order to increase their access to finance and improve their income generating activities, but the failure of these institutions resulted in the establishment of microfinance banks in Nigeria.Even the principal laws governing micro finance in Nigeria have evolved over the years in accordance with growth and emerging trends in the sub sector.

The evolving phase of the country’s microfinance industry got its fourth major reforms in October 2018, when CBN ordered a new capital base structure across all the categories of operations, with effective date of April 2020 for existing ones and immediate effect for new ones.

This was in exercise of the powers conferred on CBN by the Banks and Other Financial Institutions Act and in furtherance of its mandate to promote sound financial system in Nigeria.While some have described the new capital base as a huge hike, the apex bank has admitted that the new structure would take no fewer than 200 microfinance banks out of the system. But the central message is that post-reforms will see strong, focused and well capitalised institutions ready to do the work.

By the new capital requirements, microfinance banks under the state category will shore up their capital base to N1billion, against N100 million currently. The unit category now has N200 million capital formation, from N20 million, while those of the national category will move from N2billion to N5billion.But like a slight reversal, six months after, the regulators introduced a tier-based structure for the unit category and the overall timeframe for all categories.

Specifically, the subsisting rule provided that under the unit category, there would be Tier I, with a capital base requirement of N200 million, while Tier II, will have N50 million.Tier I unit microfinance bank which shall operate in the urban and high-density banked areas of the society and Tier II unit microfinance banks, shall operate only in the rural, unbanked or under-banked areas.

“Even with this requirement, about 200 microfinance banks may be affected, but if we must get it right, we must do it the right way. The review of the categories of microfinance banks is with a view to ensuring continued operations of microfinance banks in the rural, unbanked and under-banked areas of the economy,” Martins said.For the timeline, Tier I unit microfinance banks now have N100 million capital consolidation by April 2020 and a completion of N200 million by April 2021.

On the other hand, the Tier II unit microfinance banks must meet a N35 million capital requirement by April 2020, with a completion of the N50 million by April 2021.The state microfinance banks, by the same token, must shore up their capital base to N500 million on or before April 2020, while N1billion mark must be reached by April 2021.By the same rule, a microfinance bank under the national category, now has 11 months to show a capital base of N3.5 billion on April 2020 and N5billion by April 2021.

The Deputy Governor, Cooperative Services, CBN, Edward Lamite Adamu, has said the bank remains committed to economic empowerment of the disadvantaged groups, including women, men in the rural communities and will seek to achieve this through the instrumentality of microfinance, among other initiatives.“Only recently, CBN took some actions, including a thorough review of the subsector, increased surveillance and revocation, where necessary, to revitalise the sector, ensure the institutions remain mission-focused and to grow public confidence,” he said.

Delivering a keynote address at the 27th seminar for finance correspondents and business editors in Gombe State recently, Emefiele, who was represented by Adamu, noted that in a developing economy like Nigeria, the link between microfinance and the real sector is quite strong.

“Microfinance banks are conceived to serve as critical financial lubricants for the real sector, which is the pillar of sustained economic growth. At the moment, economic policy in Nigeria faces a major challenge of reviving growth, which is the only sure path to ending pervasive poverty. Microfinance has worked in this regard in many climes and promises to work in Nigeria, if we get it right.

“By increasing access to credit and related services to the economically active segment of the low income population, microfinance directly contributes to expanding the production base and it is therefore, a credible strategy for increasing financial inclusion and reducing unemployment,” he said.

Rural mass strategy
Going by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the Lagos Business School survey, there are 37 million SMEs, out of which 36 million are micro, but only one million are able to get access to loans. There is indeed, the need for loans and the means is what the reforms are all about.CBN-backed NIRSAL Micro Finance Bank (NMFB) has been described as a development that embodies obvious positive goals. It will serve as a special purpose vehicle in the renewed microfinance banking reforms and be an outlet for expanded use of Secured Transactions in Movable Assets Act, through a functional National Collateral Registry.

The N5billion capitalised microfinance bank is also a credit to the Bankers’ Committee, Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), and the Nigerian Postal Service (NIPOST).The bank’s shareholding structure gives Bankers’ Committee 50 per cent stake, having provided the set-up capital, while NIRSAL and NIPOST own 40 per cent and 10 per cent respectively.

The Managing Director and Chief Executive Officer of the Nigeria Incentive-Based Risk Sharing for Agricultural Lending (NIRSAL), Aliyu Abdulhameed, said farmers stand to benefit from the take-off of NIRSAL Microfinance Bank sooner.He said the institution would strengthen the nation’s financial inclusion, create jobs at the rural areas, fill the gaps of closed microfinance banks and give loans to small enterprises across the country, expressing the hopes that once the rural farmers and small scale businesses are empowered, insecurity across the nation will abate.

By June, 109 locations cross the states’ capital would have started operations. “NIPOST has about locations across the country and we would deploy the negative assets. There is really need to address the problem of microfinance to stimulate SMEs to contribute adequately to growth because access to finance and inclusion is still a challenge. The goal is to serve the 774 local governments,” he said.

The Registrar, National Collateral Registry, Mohammed Mainasara, explained how the credit bureaux can facilitate credit to the real sector under the initiative.“It is a data bank whereby you can also access information about movable assets. That is, if I decide to use my wristwatch to take credit, and this wristwatch has a landmark that it can be identified by, you can endeavour to use that identification to access the level of the progress of that asset under the registry.“It allows the borrowers to prove their creditworthiness. The system has a lot of gold ornaments that are being kept at home.

“Gold is a very expensive ornament, and if they are to carry all the golden cheques to the bank or sell them in the market, they attract a lot of money; which means they are creditworthy, but they cannot use those assets to transact business in the financial space,” he said.

Also, the National Coordinating Consultant, FCT Project, Monitoring, Reporting and Remediation Office, Dr. Steve Ogidan, agreed that a number of microfinance banks are not present in grassroots or rural areas, where most of the adult population of Nigeria- 18 years and above, numbering 63.1 million, out of about 99.6 million live. In these rural areas, 49.1 million are women and about 56.7 million are 35 years and above.

“The majority of people microfinance banks are to serve live in the rural areas. The majority of them are women and the majority of them are young and microfinance bank as it is presently configured till today is not reaching the people and the Central Bank now has various interventions.“The economy has exited economic recession, but is still recovering very slowly and the latest survey by National Bureau of Statistics is saying that as the Gross Domestic Product (GDP) is growing, domestic value is coming down; and oil revenue is increasing, other revenue sources are coming down.

“Micro finance banks are giving credit at 30 per cent and above. It is extremely difficult to take credit at that rate and get a return. That is why the operators of NIRSAL micro finance bank, the regulators, the Bankers’ Committee and NIRSAL came together to see what can we do differently.”For the Lead Director, Centre for Social Justice (CSJ), Eze Onyekpere, the five per cent interest rate, with a two-year moratorium and five years repayment plans are welcome development, but however said for the expected benefits to materialise, the initiative needs to be expanded.

Besides, he called for enlightenment on SMEs; ensuring that persons of competence and integrity are brought for oversight functions; and increasing the capital base to a minimum of N100 billion.“The downside of this intervention is that the conventional microfinance banks will stand no chance of competing with this special initiative. If it is taken to scale, it will crowd out their operations, and they will be forced to wind up. But the positive benefits crowd out this downside.

“This will tackle the challenge of access to credit for SMEs. The implication is that the loans will be available at rates below the inflation rate and monetary policy rate. This, to a great extent, implies that the beneficiaries will be enjoying a subsidy.“Access to credit has remained a huge challenge for Small and Medium Enterprises (SMEs), and monetary policy and money deposit banks over the years have shown no inclination at easing this challenge, not even the regular microfinance banks.

“The recognition of securities, which the conventional money deposit banks have rejected as collateral is a welcome development, a step in the right direction. This should be deepened to support entrepreneurship and the blossoming of creative ideas.

“The initiative will therefore increase value addition, create new jobs as the SMEs will have access to credit to expand and deepen production. It will also create the opportunity of increased profitability, more taxable income to individuals and SMEs and reduce the unemployment figures,” he said.The importance of borrowing cannot be over-emphasised because when a business is profitable, it can be enhanced by borrowing, at least, to expand, as long as the cost of borrowing is less than the returns the business can generate. So, the process of credit should be seamless.

The microfinance banks are supposed to be more nimble, serve and exist in the rural areas, because that is where the majority of the people are. Repositioning the sub-sector for better service delivery, especially in the wake of the digital age is crucial.

The CBN, by the reforms, is envisioning a viable and sustainable microfinance sub-sector that will be market-oriented, where the private sector plays the major role and the government provides enabling environment through appropriate strategies and institutional policy framework.It can only take collective support, playing by the rules and regulatory dynamism to realise the goals, as obtainable in other climes.