The microfinance industry in Nigeria is evolving significantly and rapidly too. As of the moment, over 1,000 entities have been licensed and are operating at different levels of efficiency in the industry. Although there have been some fatalities along the way, it is appropriate to say that the industry is growing. Operators are making their mistakes and learning from them.
Organisationally, the industry is doing well under a well-established operators’ umbrella organisation – the Association of Microfinance Banks (MFBs) – with presence in all the geopolitical zones. There is also evident interaction between operators and the regulators – Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC). Essentially, one could say that the microfinance industry in Nigeria is in expansion mode, which is one of the recognised early stages in the development of the industry.
However, it has struggled and is still struggling with some challenges relating to capacity – financial and technical – as well as leadership and governance. These problems are not unique to the industry but tend to get amplified because of the object of their trade – money and credit issues.
It is however important for operators to appreciate the full circumstances surrounding their industry. If they do not do so, it will be difficult to get their cooperation. Worse still, their investments will be placed at greater risk. First, they have to understand the risk posed by poor leadership and governance, both to the industry and its players. Much of the recent failure experienced in the deposit money banking sector have been traced to poor corporate governance.
Needless to say, that those who devote their hard-earned resources to float an enterprise may as well say goodbye to such resources if they are unwilling to allow management best practices to reign supreme.
Needless to say, that those who devote their hard-earned resources to float an enterprise may as well say goodbye to such resources if they are unwilling to allow management best practices to reign supreme.
Operators in the microfinance sector have been told this in so many words and in fairness, they are doing their best to comply or adapt, in a harsh economic environment. The regulators have not only spoken of the importance of effective board and management, but they have also gone ahead to mount training sessions for directors of MFBs. That is a right foot put forward by the regulators that require complementary actions by operators. It is now up to the operators to give ascendancy to the idea of good corporate governance and effective leadership.
Secondly, the issue of weak capital bases has been with the industry for too long. It is also important for operators, who are in the business for the long haul, to appreciate the need for proper capitalisation. Even among the deposit money banks, it is a truism that shallow pockets shut operators out of good business opportunities.
A strong capital base speaks to a number of issues. It shores up the business when some lending decisions turn out to be wrong or developments in the market damage good credit outings. Without the financial strength provided by strong capital and shareholders’ funds, a lender is exposed to the harsh weather of business, especially in the lending areas.
This is more so in a country hurrying to bring more people into the financing loop. Financial inclusion presupposes that those being brought into the financial system will have their needs met by financial institutions. Only strong financial institutions can be there for such people.
The government of Nigeria has realised that it is going to be difficult to reach the citizens with any welfare programme, if they are financially excluded.
There is now no controversy about the advantages of economic democracy epitomised by financial inclusion. The government has set a date for itself; some serious deadlines have been outlined to achieve certain welfare-oriented landmarks in the economy, including raising the number of those included in the financial system by next year to about 80 percent. It hopes to achieve this high target of financial inclusion of its population by 2020 through operators in the financial sector. These include deposit money banks, microfinance banks, agent banks, and other nonbank financial institutions.
Every link in the chain must be strong for us to have a successful implementation of the programme. The financial inclusion strategy currently under execution was first adopted in 2012. Its main aim is to reduce the proportion of adult Nigerians that are financially excluded from 46.3 percent in 2010 to 20 percent in 2020.
This target will not be achieved if microfinance banks do not live up to the expectation of being strong and able to service the poor. The CBN realises this strategic position of microfinance banks and has decided to help them through regulations to build capacity, to meet their objectives. One of the core objectives is the canalisation of financial resources to micro, small and medium enterprises (MSME).
Nigeria microfinance banks are currently engrossed in the business of recapitalisation, an overdue step that is necessary to restore the past glory of the sector. The CBN which has responsibility for licensing and regulating the subsector had on October 22, 2018, issued a circular pursuant to its Microfinance Policy, Regulatory and Supervisory Framework of April 2011. The circular announced the reviewed minimum capital requirement of MFBs, operating in the country.
This regulation, reinforced in 2019, reviewed upwards the capital requirements of each category of MFBs. It also broke the unit banks into two ties, ostensibly to reflect the argument that those operating in the rural areas as unit banks (Tier II) do not need as much capital as those doing the same business in the urban centers.
There is however a body of opinion that even the N50 million required by the circular for tier II MFBs may be inadequate for their operations. That leaves room for improvement anyway. The attached table gives the new capital requirements at a glance. It is hoped that operators will do their best, even as things get tougher in the country, to meet the set capital requirements because at the end of the day they will be the better for it.
