Ogun State, Nigeria, November, 22 2010 -
Barely one month after provisional licences were granted new investors in micro financing business, none of the licensees has actually commenced operations, as the challenges of the business environment and the experiences of the existing micro finance banks (MFBs) continue to haunt them.
Investigations by the Nigerian Compass in Lagos and Abuja where over 50 per cent of the newly licenced 121 MFBs are based, showed that many of them may not take off early as crisis of waning public confidence in the sub-sector and regulatory requirements appear to be their major hurdles.
Sources confirmed that a few of the investors were looking at the first quarter of 2011 as take off date even as they continued discussions with old players whose licences were revoked on the possibility of using their existing infrastructure as operational offices to cut take off costs.
One of the owners of a newly licensed banks confirmed on the condition of anonymity that there was no way his company could take off soon, as funding challenge remained a major issue yet to be addressed by investors in the micro finance institution, adding that the option being explored was to convert a facility belonging to an old MFB to its headquarters .
“Let me say that we are not finding the environment conducive to take off of our operations. We did not just apply for the licence and so when the approval came, it was a surprise as we were not thinking of securing approval as fast as it came. As it is now, we are just discussing at the board with a view to determining when and how we can take off without failing. It is a big issue because public confidence in the sector has waned substantially based on our interaction with potential clients.
“But then, we are putting all resources at our disposal to ensure that we take off in a little way within the next few months. We are looking at first quarter of next year to commence business. We would have been properly positioned to take off before the end of this year but for the breakdown in our discussions with one of the banks that was to offer us some funding support.
“They reneged on their promise due to what they attributed to operational problems, especially non-performing loans portfolio in their balance sheets. Despite all this, we are going to come out and operate within the available resources at our disposal and ensure that we survive and grow into profitability within the next two years of the commencement of business.”
An industry analyst and chartered accountant, Mr. Adeyinka Adesanya, believed that the success of the MFBs would depend on the extent to which the CBN was ready to enforce its monitoring and supervisory roles within the sub-sector, noting that mere issuance of new licences will not solve the problems that led to the collapse of the previous ones.
He pointed out the problems of MFBs could be linked to the Nigerian mentality both on the part of the owners and the petty traders, whom the programme was designed to serve. He blamed some of the owners for their insincerity as well as the credit takers because they “want quick returns while the traders are becoming insincere with their repayment plan.”
According to him, rather than leaving the CBN to contend with the enormous challenges facing the sub-sector, “the supervision of MFBs should be taken over by an independent body, to monitor them. The recent experiences had showed that the apex bank lacked the capacity to effectively supervise the micro finance institutions.
On the challenges of MFBs within the operating environment, an investment analyst and chartered tax practitioner, Mr. Benson Ekeleme, argued that the recent shock occasioned by the CBN’s clamp down on the sub-sector that led to the revocation of 224 licences, had impacted negatively on public perception about their financial intermediation roles in the economy as most people seemed to have lost confidence in them.
On how to strengthen the sub-sector, the finance expert explained that by virtue of their enabling law, MFBs were meant to enhance government’s effort towards poverty reduction.
“However there is little or no support from the government for operators ,especially in the area of funding. These MFBs obtain funds at very high rates and cannot afford to disburse credits at lower rates while banking culture among the customers of MFBs is still poor and in most cases there are bad debts while collection is pretty difficult,” he said.
“Enlightenment of the public as it relates to MFB operations is very low. They are left to suffer the burden of enlightenment and the cost of reaching these levels of customers is tough and challenging due to poor knowledge and education.”
He said that “there is a growing need for government’s support for the sub-sector by improving public awareness about their roles in the economy and exposing them to channels of cheaper funds needed to fulfill their obligations more efficiently to micro credit takers like artisans, traders and others in the informal sector.”
Following public outcry that trailed its revocation of 224 MFB licences last September, especially agitations by members of the National Association of Microfinance Banks (NAMB), the CBN on October 20 this year reviewed its previous decision on the 224 MFBs and came up with a palliative measure of granting provisional approval for new licences to 121 subject to the fulfillment of some specific requirements within three (3) months out of the 224 MFBs.
According to the apex bank, those granted provisional approvals were those that had made fresh injection of capital and made significant loan recovery, as confirmed by its capital verification exercise.
“The requirements for the grant of new operating licence to the 121 MFBs include the capitalization of prior deposits for shares and the new capital injection to bring the shareholders’ fund unimpaired by losses to the prescribed minimum of N20 million, good corporate governance, sound risk management system and strong internal controls to forestall avoidable losses, closure of unapproved branches, cash centers and customer meeting points, adoption of a true microfinance model, among others. At the expiry of the three months deadline, a comprehensive pre-licensing examination and capital verification will again be conducted before the new licence will be granted to those found eligible.
”The CBN is also putting in place other measures to ensure that the MFBs live up to the overriding objectives of fostering financial inclusion, fighting poverty and empowering low-income and vulnerable groups. These include the review of the Microfinance Policy Framework, introduction of a new operational template to benchmark microfinance banking, capacity building to develop a critical mass of knowledge and skill, human resources as well as examining the possibility of introducing a Micro, Small and Medium Enterprise (MSME) Fund to catalyze a sustainable development of the microfinance space.”, the statement added
Giving a background to the events that culminated to the revocation of the licences, the Deputy Governor, Financial System Stability of the apex bank, Dr. Kingsley Moghalu explained that “the microfinance industry in Nigeria had been confronted with numerous challenges since the launch of the Microfinance Policy Framework in December, 2005. A significant number of the microfinance banks (MFBs), were deficient in their understanding of the microfinance concept and the methodology for delivery of microfinance services to the target groups.
“Many of them lost focus and began to compete with deposit money banks for customers and deposits, leaving their target market unattended, in spite of efforts of the regulatory authorities to put them back on track. Unfortunately, the impact of the global financial crisis on MFBs had been more severe than anticipated. Credit lines dried up, competition became more intense and credit risk increased, as many customers of MFBs were unable to pay back their credit facilities owing to the hostile economic environment. The combination of these factors had significantly weakened the microfinance sub-sector and its ability to achieve the policy objective of economic empowerment at the lower end of the market”, Moghalu lamented.
The CBN identified high level of non-performing loans, resulting in high portfolio at risk (PAR), which had impaired their capital; gross undercapitalization in relation to the level of operations; poor corporate governance and incompetent boards; high level of non-performing insider-related credits, and other forms of insider abuse; heavy investments in the capital market, with the resultant diminution in the value of the investment after the meltdown and poor asset-liability management owing to portfolio mismatch.
Other contributory factors to the crisis in the sub-sector as listed by the regulatory authorities are heavy investments in fixed assets beyond the maximum limit prescribed; operating losses sustained as a result of high expenditure on staff and other overheads; weak management evidenced by poor asset quality, poor credit administration, inadequate controls, high rate of fraud and labour turnover and failure to meet matured obligations to customers.
The question most industry observers are asking is: Has the operating climate changed from what it used to be about two years ago such that the new licensees can operate with prospects for growth and profitability in the years ahead? The answer may not be in the affirmative as micro and macro indices still reflect minimal changes despite CBN’s macro prudential policy frameworks to restructure the MFB sub-segment of the financial services industry.
For instance, the apex bank had observed earlier that over the years the microfinance industry in Nigeria had been confronted with numerous challenges as a significant number of them were deficient in their understanding of the microfinance concept and the methodology for delivery of microfinance services to the target groups, adding that “many of them lost focus and began to compete with deposit money banks for customers and deposits, leaving their target market unattended, in spite of efforts of the regulatory authorities to put them back on track.
Similarly, CBN also observed that the impact of the global financial crisis on MFBs had been more severe than anticipated as their credit lines dried up and competition became more intense and credit risk increased, as many customers of MFBs were unable to pay back their credit facilities owing to the hostile economic environment. These and other factors, according to the CBN, significantly “weakened the microfinance sub-sector and its ability to achieve the policy objective of economic empowerment at the lower end of the market”.
Many analysts seem to agree that in its present state, the regulatory bank still lacks the capacity to effectively supervise the financial system in such a way that insider-abuses, poor credit administration and inadequate controls and many other problems that led to the collapse of old MFBs are effectively addressed.
An expert, who retired recently from the CBN and was involved in supervising the MFBs, told our correspondent on the condition of anonymity that “the CBN cannot achieve the objectives of its on-going reforms in the MFBs sector by just issuing guidelines. Many of these had been issued in the past with little or nothing to show for them in terms of good result. What should be done is enforcement which CBN lacks the capacity for now. There is need to increase the monitoring and inspection division in the CBN so that regional offices could be created and make the MFBs closer for assessment and compliance monitoring.“With my experience in the past, the operators lacked the technical and managerial skills to manage the MFBs. So, training is also important. I know the CBN has done fairly well in this area but much still needed to be done in capacity building of the MFBs through training and corporate governance re-orientation. If we are able to do this, we will achieve the efficiency and the desired stability in the sub-sector”, he added.