DEVELOPING MICROFINANCE BANKING IN NIGERIA

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Author: Onafowokan Oluyombo. B.Sc, MBA, FCA, AMNIM. Department of Financial Studies, Redeemer's University.

INTRODUCTION

The Nigeria banking system is characterized by changes and reform on regular basis. The banking system which is part of the Nigerian financial sector composed of variety of banks working as Commercial, Merchant, Mortgage, Investment, Development, Community and Profit and Loss Sharing Banks. The recent reformation in Nigeria financial sector brought about the full deregulation of the banking sector in January 2001 with the adoption of universal banking system in Nigeria via the Central Bank of Nigeria (CBN) circular reference BSD/DO/Cir/Vol.1/10/2000 as seen in Ogunleye (2002). This concept led to the increase in banks capital in year 2003. The reformation has swept commercial and merchant banks away from the banking sector as at 31st December, 2005 as a result of the deadline set by Central Bank of Nigeria (CBN) towards the achievement of the new N25 billion minimum capital base for banks operating in Nigeria (See Soludo 2004). This reformation agenda also led to the commencement of a new type of banking in Nigeria to be called "Microfinance Bank". Microfinance bank is also known as Sustainable Finance, Microfinance Institutions and Micro-enterprise finance. The backbone for this type of banking in Nigeria is contained in the Microfinance policy released by the CBN (2005) in exercise of the powers conferred on her by the provision of section 28, sub-section (1) (b) of the CBN Act 24 of 1991 (as amended) and in pursuance of the provisions of sections 56-60(a) of the Banks and other Financial Institutions Act (BOFIA) 25 of 1991 (as amended).

OVERVIEW OF MICROFINANCE BANKING

In reviewing the concept of Microfinance banking, the following terms: Microfinance, Sustainable finance, Micro-enterprises finance and Microcredit are used inter-changeably throughout this paper to mean the same thing. Otero and Rhyne (1994) defines a microfinance as a revolution that involves the large scale provision of small loans and deposit services to low-income people by secure, conveniently located and competing commercial financial institutions thereby generating the process needed to democratize capital. This definition means that the numbers of microfinance institutions should be enough to meet the needs of low income earners in the nation through the provision of loan facilities and to give room for healthy competition among them. According to Asian Development Bank (2000), microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their microenterprises. Microfinance services are provided by three types of sources: formal institutions, such as rural banks and cooperatives; semiformal institutions, such as nongovernmental organizations; and informal sources such as money lenders and shopkeepers. Institutional microfinance is defined to include microfinance services provided by both formal and semi-formal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services. Microfinance has been described as an economic development approach intended to benefit low-income women and men. Ledgerwood (2000). It means that the purpose of microfinance is to reach the low income earners either in the urban or rural areas with financial services that will enable them create wealth without any discrepancy as to the sex of such person. Robinson (2001) examines microfinance "as small-scale financial services-primarily credit and savings-provided to people who farm or fish or herd; who operate small enterprises or micro enterprises where goods are produced, recycled, repaired or sold; who provide services; who work for wages or commissions; who gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and groups at the local levels of developing countries both rural and urban". This definition is encompassing as it tries to state those who may benefit from microfinance institutions and also inform that developing countries need microfinance institutions more than developed countries and especially, that microfinance is meant for those operating small and micro enterprises. In examining microfinance, Ndiaye (2005) opined that access to improved financial services - access to more and better ways of turning savings into lump sums - helps poor people from sliding deeper into poverty and helps them lay foundations for their ambitions to better themselves and their families. This is all about microfinance strategy to poverty alleviation. Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance from other formal financial products. These are: (i) the smallness of loans advanced and or savings collected (ii) the absence of asset-based collateral, and (iii) simplicity of operations. Central Bank of Nigeria (2005). This give a clue that the CBN is aware that there are people, that are not served by the conventional banks because the loans requires by them is very small compare to the activities and loan portfolio of these banks. Oluyombo and Ogundimu (2006) noted that microfinance institution is now a growing phenomenon all over the world. It is emerging as a rapidly growing financial services industry worldwide as a solution to the crippling effects of the conventional banks interest on the poor and those operating micro and small scale enterprises (MSSE). Basically, microfinance is an economic approach to take financial services to those that are hitherto un-reached at a reasonable fee that is affordable and economic to the users of such services, and also, using funds from the providers of financial services to generate adequate returns for the users, thereby building up their enterprises and creating employment opportunities which will reduce the poverty level in the economy. Microfinance is a holistic approach that has been used in different countries to alleviate the plight of micro and small scale enterprises (MSSE) both in the rural and urban areas in accessing fund as at when needed which was not possible from the conventional banks. It is certain that Microfinance service providers would soon become a force to be reckoned with in the global financial markets.

FEATURES OF MICROFINANCE BANK

The distinguishing features of sustainable finance as totally different from other banking institutions as identified by ADB (2000), CBN (2005) and CBN (2006) are listed below to include the following: i. The smallness of loans advanced to their customer ii. Savings from the customers are very small iii. The absence of asset-based collateral iv. Simplicity of operation v. The extension of banking services beyond economic to social and cultural upliftment of the people. vi. Development of good inter-personal relationship between the bank and her customers which lead to high degree of trust and openness on both parties. vii. Their products and services are targeted towards micro and small scale enterprises (MSSE) in their locality.

Distinguishing features between a Microfinance Bank and a Universal Bank Criteria Microfinance Bank Licensed to Operate as a unit bank (a.k.a. Community Bank) Microfinance Bank Licensed to Operate in a State Universal Bank

A

Minimum paid-up capital/shareholders' fund N20.0 million (increased from N5.0 million) N1.0 billion N25.0 billion

B

Scope of activities covered by Licence To operate within a Local Government Area. Not to engage in sophisticated banking services, such as forex business. To operate within a State. Not to engage in sophisticated banking services, such as forex business but can receive tenured loans and equity from abroad To operate nationally and in international markets. To operate forex transactions and domiciliary accounts for customers.

C

Limitation on credit to an individual or company Credit subject to a single obligor limits of 1% for an individual/corporate entity and 5% for a group Credit subject to single obligor limit of 1% for an individual/corporate entity and 5% for a group Single obligor limit applies

D

Limitations on deposits from an individual or a company No Limit No Limit No Limit

E

Access to public sector deposits Permitted for only micro-credit programmes on a non-recourse basis and for payment purposes Permitted for only micro-credit programmes on a non-recourse basis and for payment purposes Permitted

F

Cheque writing accounts Cheque issuing customized to the correspondent bank Cheque issuing customized to the correspondent bank Cheque issuing permitted

G

*Geographical coverage In rural and urban areas Must operate in both rural and urban areas within a State in a proportion prescribed by the CBN All parts of Nigeria and foreign branches and subsidiaries *The Central Bank of Nigeria (CBN) shall define the rural/urban areas for the purpose of this policy

Source: Central Bank of Nigeria (2005). "Microfinance Policy, Regulatory and Supervisory Framework for Nigeria". CBN, ABUJA. Page 33.

FINANCIAL METHODS OF MICROFINANCE BANK

The operation of microfinance world wide is unique, even though Microfinance organization work like banks, but their financing methods are deeply rooted in the philosophy of alleviating the plight of the poor and others that are deprived from accessing banking services as a result of their economic power, education, financial status and lack of adequate collateral for conventional bank loan. The financing instruments or products of Microfinance Banks (MFB) include:

i. Deposit: Is an aggressive savings mobilization from the grass root. It may be a target savings done on daily, weekly or monthly basis. Majority of traders and market women/men save on special market days when their sales are expected to be higher than the normal days.

ii. Credit: This is loan facility which is relatively small and typically used as working capital by micro and small scale enterprises (MSSE).

iii. Collateral Substitution: Unlike the conventional banks that seek collaterals inform of fixed and financial assets, microfinance banks collateral is substituted by group guarantees, inventory/commodity collateralization and compulsory savings.

iv. Transfer/Payment Service: This entails standing order payment and other regular payments like salaries, pension and gratuities.

MICROFINANCE BANKING IN NIGERIA

Microfinance banking is a new concept in Nigeria because the first banking legislation that was enacted in 1952 and refers to as 1952 Banking Ordinance, the Banking Act of 1969, Banks and other Financial Institutions Act 1991 and subsequent amendments do not recognize this type of banking in Nigeria. However, the legal background to the establishment of this banking system in Nigeria was derived according to CBN (2005) from section 28, sub-section (1)(b) of the CBN Act 24 of 1991 (as amended) and section 56-60(a) of the Banks and other Financial Institutions Act (BOFIA) 25 of 1991 (as amended). The CBN, being the apex regulatory and supervisory body in the banking sector has therefore justified the establishment of Microfinance banking system in Nigeria through her inherent authority from the relevant laws of the nation. In pursuance of this laudable objective of the establishment of Microfinance banks in Nigeria, the CBN issued a circular reference OFIC/DO/CIR/Vol.1/450 on February 3, 2006 (just barely two months to the first Microfinance policy earlier issued in December, 2005) addressed to all chairmen, directors and managers of community banks and the public on the requirements and procedures for the conversion of community banks to microfinance banks. The operation of Microfinance banks (MFB) in Nigeria has been grouped into two by the CBN. The first group will operate as Unit Microfinance Bank while second group will operate as a State-wide microfinance bank. The implication of this can be seen from the prescribed new capital requirements of N20 Million for Unit MFB and N1 billion for State wide MFB. Interested MFB investors are to send an official application to CBN with prescribe license fee of N170,000 and N400,000 for Unit MFB and State-wide MFB respectively. Furthermore, the MFB that will operate a unit bank shall be community based bank. i.e. the MFB will operate within a local government and can open branches and/or cash centers within the same local government after seeking approval from the CBN. Likewise, the State-wide MFB are allowed to open braches and/or cash centers within the State after seeking the CBN approval. It should be noted that the current directive by the CBN is just a way of bringing the informal financial sector under the control and influence of the CBN thereby promoting monetary stability and sound financial system in the country. Although, the CBN policy is the official commencement of Microfinance bank in Nigeria, however, as at 2004, Nigeria can boast of 8 leading Microfinance Institutions in existence with a total savings of N222.6 Million, Loan and advances of N2.624 Billion and average loan size of N8,206.90k. In other to get the MFB on stream, the CBN include that each State government shall dedicate an amount of not less than 10% of their annual budget for on lending activities of Microfinance banks in favour of their residents. This is a good arrangement, provided the State governments complies and also ensure that the money is released to the MFB as directed by CBN. Hence, the State government should be discouraged from floating, owing or managing any Microfinance bank to ensure orderliness, transparency and equitable disbursement of the State funding. It has been confirmed that rural financial institutions associated with government are target of Politicians. (See Yaron, etal 1997:102). Those expected to benefit from the services to be rendered by MFB in Nigeria include but not limited to micro and small scale entrepreneurs like traders, hairdresser, peasant farmers, street vendors, hawkers, shoe cobblers, artisans and goldsmiths.

CONCLUDING REMARKS

The transformation of community banks and interested non-governmental organizations to Microfinance Institutions under the supervision of the Central Bank of Nigeria is a laudable one. However, for smooth running of this type of banking in Nigeria, the following issues should be addressed by the regulatory authorities and the operators so that the purpose for the establishment of Microfinance banking concept in Nigeria will be fulfilled. The services and products of Microfinance Institutions should be tailored towards the poor masses in rural and urban areas as an economic tool. In this respect, loans to be provided should be moderately priced and within the reached of the poor. Corporate governance policy should be implemented for all the owners, directors and employee of Microfinance banks to avoid asset strapping, diversion of depositor's fund. To achieve this, all senior staff, directors and shareholders of the bank should be compel to swear to an affidavit stating all their assets before assuming such position in the bank. Moreover, due diligence and security report of this group of personnel should be carried out by the State Security Service under the instruction of the Central Bank so that those who plunder the banking sector do not transfer such illicit fund to Microfinance business in Nigeria. Microfinance bank should offer simple products that are easy to understand and also keep their fixed cost low while lending to credible customers of good reputation and character. The issue of internal control must not be over-looked by the Microfinance Banks. To curtail the anticipated rush for operating licence, the CBN should stream line with a limit the number of such bank in each State and Local government for now. This will also allow for even and easy distribution of this institution across the country thereby reaching the people on time and also reduce mass concentration of Microfinance bank in the cities alone.

Reference

 Asian Development Bank (2000). Finance for the Poor: Micro Finance Development Strategy. ADB, Manila. Central Bank of Nigeria (2005). "Microfinance Policy, Regulatory and Supervisory Framework for Nigeria". CBN, ABUJA. Central Bank of Nigeria (2006) Requirements and Procedures for the Conversion of Community Banks to Microfinance Banks. Abuja. February 3. OFID/DO/CIR/Vol.1/450 Federal Government of Nigeria (1991), Banks and other Financial Institutions Act (BOFIA) 1991. Lagos: Government Press Limited. Federal Government of Nigeria (1997), Banks and other Financial Institutions (Amendment) Act (BOFIA) 1997. Lagos: Government Press Limited. Ledgerwood, Joanna (2000) Microfinance handbook: An Institutional and Financial Perspective. USA: IBRD. Ndiaye, Fode (2005) Microfinance as a Strategy for Poverty Reduction in Africa. Paper delivered at Expert Group Meeting on Poverty Eradication. Bangkok, 6 - 7 July Ogunleye, G. A. (2002) "The Regulatory Importance Of Implementing The Universal Banking Concept In Nigeria: The Perspective Of The Nigerian Deposit Insurance Corporation". Journal of Banking and Finance. Vol. 5, No. 2 Oluyombo, Onafowokan and Ogundimu, Kayode (2006) "Microfinance as a Strategy for Poverty Alleviation in Nigeria" Journal of Business Management. Vol. 1, No. 1

Otero, M and Rhyne, E. (1994) The New World of Microenterprise Finance: Building Healthy financial Institutions for the Poor. West Hartford: Conn Kumarian Press. Robinson, Marguerite S. (2001) The Microfinance Revolution: Sustainable Finance for the Poor. USA: IBRD. Soludo, Charles (2004) "Consolidating Nigerian Banking Industry to Meet the Development Challenges of the 21st Century". A paper delivered to the special meeting of the Bankers' committee at Abuja. July 6. Yaron, Jacob, McDonald P. Benjamin, Jr., and Gerda L. Piprek (1997). Rural Finance: Issue, Design and Best Practices. Environmentally and Socially Sustainable Development Studies and Monographs Series 14. Washington, D.C. World Bank.