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Microfinance banks: Swimming against the tide

CBN
On the back of the  revocation of 83 microfinance banks’ licences by the former CBN Governor, Sanusi Lamido Sanusi, Bukola Afolabi takes a look at the state of microfinance banks.
Before he left the saddle of the Central Bank o0f Nigeria (CBN), the immediate former governor of the bank, Mallam Sanusi Lamido Sanusi, approved the liquidation of 83 licensed microfinance banks in the country.
This followed the non performance of these banks. According to Alhaji Umaru Ibrahim, some of the banks “only existed on paper while some are used to defraud Nigerians.”

This is not the first time performances of microfinance banks would be put into question. It would be recalled that during military regime of General Ibrahim Babangida, he established what was then known as the Community Bank with the aim of helping to finance small scale businesses.
However, many Nigerians had their money trapped in these banks when they folded up as they were used by the operators to defraud Nigerians of their hard-earned money. With the establishment of microfinance banks, it was expected that the failure of the community banks would be corrected.
It sad to say such has not been the case with the liquidation of 83 of these banks. Before their liquidation, Nigeria could boast of 900 microfinance banks operating in the country, a number that has now been reduced.
While explaining how Nigerians’ money in these banks would be refunded, Ibrahim said plans have been made on how to determine the number of depositors and how to refund their money.
“Some assets of the banks will also be sold. There is no doubt that the operations of some of the microfinance banks have become epileptic,” he said.
Apart from the 83 liquidated banks, the CBN also mandated another 600 microfinance banks to merge within the next few months, failure of which would also result in their operations being closed down.
With this latest development, concerns have been raised about the survival of the remaining microfinance scheme, whether it would go the way of the failed People’s Bank. Financial experts are also worried on the habitual collapse of microfinance houses in the Nigeria economy.
In one of her past comments on the issue, the Managing Director of the First Bank Micro Finance Bank (FBNMFB), which is a subsidiary of the First Bank Plc, Pauline Nsa, had attributed the failure of these banks to lack of development and professionalism. She was of the opinion that many are run like personal businesses by the operators, with no feelings of responsibility to the customers. “When the microfinance policy guideline was launched in 2005, the CBN directed the defunct community banks to convert to microfinance banks. At the time this policy came out, many of the community banks were already on the verge of collapse because they were not doing too well. What many of them simply did was to raise fresh capital to convert to MFB. Before they changed, what needed to be put in place in terms of development of the industry and building capacities were not done. All they did was to raise capital to embark on the newly introduced MFB. Issues like training and how to run the operations of the new MFBs were not done,” she had said.
She added, “What then happened was that the fresh funds, which the operators of community banks raised to embrace MFBs, also went the same way their funds in community banks did. A lot of them had their capital funds eroded by bad loans. They operated along the same old line they did when they were community banks. They ran their activities like commercial banks instead of facing those individual customers in the small businesses. However, though many of them failed, some also survived and those that did are still offering services to their clients even till now. Also, a set of new ones has come on board.  Also the CBN, in an attempt to boost the growth of the SMEs and microfinance banks, has taken giant strides by initiating some schemes and programmes including the N200 billion funds. We believe that these new ones will learn from the mistakes of those that failed and then do better businesses to ensure survival.”
She had also lamented failure of the operators of the bank to adhere strictly to the guidelines regulating the operations of microfinance houses.
“Basically, the reason the Central Bank of Nigeria (CBN) introduced MFBs was to create opportunity for micro entrepreneur, especially the small business operators, to have access to loans. In the time past, this set of people never had opportunity of getting finance from commercial banks. So, the MFBs were created to help them deposit their money and grow their businesses gradually.  Remember, the micro business owners also need finance like their big business owner counterparts. The only difference is size. So what we are looking at here is financial services that are smaller in sizes compared to those ones that can be accessed through the commercial banks. The CBN launched the micro finance policy guidelines to address those finance gaps that were created in the micro businesses sector, which could not be filled by the commercial banks. These comprise unstructured businesses that are not well organised like the corporate ones. In addition, the microfinance system was also designed to attract funds outside the banking system into the sector,” she said.
She is not alone in raising concern about the survival of the scheme.  An entrepreneur, Mr. Oluranti Adebisi, whose money was trapped in the failed community bank of Ibrahim Babangida’s regime, expressed fears that with the collapse of some MFBs, Nigerians have lost confidence in the scheme.
“I do not believe in these banks because of past experiences I have had with them. I lost quite a huge sum of money in the old community banks, and that is why I don’t have deposit in any if these MFBs. You will find out that many of them are just there to collect money from people and before you know it, the bank would run into trouble and your money is gone. For instance, take the case of Integrated Microfinance Bank. The bank came with lots of promises, at a point in time, it was said that it was the best microfinance banks, but where is the bank today? It is no more and depositors’ money is gone. That is why many Nigerians are afraid to transact business with them,” he said.
Adebisi welcomed the proposed merger of the banks, saying that it would help in strengthening their financial status but advised government to effectively monitor their operation as it is done with the commercial banks.
“I would advise that for people to gain confidence in these banks, government needs to do more in monitoring their operations. Fewer licences should be given out because it has become a business of every Dick and Harry. Even a one-room apartment is used as microfinance bank in some places, but if fewer licences are given to those who have the financial capacity to run them, it would help in bringing back the confidence of the people.”
In spite of the lapses in their operation, Pauline, however, was of the view that the MFBs have not done really bad and expressed hope that their operations would improve.
“It is wrong to say that the microfinance sector has not had the desired impact. Well, we can say we have not had the type of impact that one would expect. But again, we believe that over time, that impact would be felt.  This is because the formal micro finance sector is relatively new compared to the informal microfinance, which has always been there since time immemorial. For instance, the alajo and esusu types of finance have always been there. The formal microfinance that was introduced in 2005 has not had the impact that is as high as one would expect. Like any new thing, there have been challenges and we believe that with time, give it another 15 years, the impact would become obvious. This is because both the operators and the CBN are trying to make the new system work. I also know that the federal government may have assisted the Small and Medium Enterprises (SMEs) to make unprecedented savings of billion in two years with its N200 billion special intervention fund for small businesses. I believe with time the system will be in good shape and operators will benefit more.”
Not everyone shared Pauline optimism. Mrs. Remi Alonge, the Managing Director of Rockfield Enterprises, a plastic manufacturing company, said, “I don’t believe in the MFBs. Ninety percent of them are fraudulent. They have not lived up to their purpose and that is why we are still talking of poverty in the land. Microfinance banks are supposed to assist smaller businesses but the reverse is the case. You talk of the charges on interest and they even ask you for collaterals for you to secure loans.  You pay money into them and before you know it, your money is gone. I would prefer government strengthening the existing conventional banks than having numerous MFBs that are of no benefit to the masses.”
On the issue of high interest rate, Pauline had also explained that ‘worldwide, microfinance interest rates are not determined by regulators like CBN or constituted authority. The reason is that microfinance business is expensive. It is expensive because if a commercial bank has N5 million, it can lend such fund to one customer. But if a microfinance bank has the same amount it can lend it to more than 100 clients. After giving the loans to such large number of customers, it will need to administer it, and to do so, it needs to engage many staff. Beyond that, the microfinance bank also needs infrastructure too like accommodation, light, water, transport and computers. If the loans are given out at four per cent per month, how much do you think that will amount to in a month that the microfinance bank will realise enough profit to meet all the various expenses associated with the loans? That is one reason the interest rate charged by MFBs is high.”
She had also said that “most MFBs had issue of capital. With N20 million capital base of a one unit MFB, how long will that sustain a business in Nigeria where a concern has to provide its own generator, water and security? In such a tough operating environment, capital employed in the business will be used up within a short time. This made most MFBs – in order to remain in business – to go out to source money at very costly rates. That translates into the interest rate that they charge because they need to charge high to be able to pay back the loans and make small profit to remain in business. But when you look at the target clients of the MFBs, the high interest rate is not really an issue. The issue is whether they will have access to finance because their transactions are short term.”
Adebisi, however, urged government to do more for small businesses through accessible loans and low interest rates.

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