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Which way forward for microfinance banks?
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The setting up of the microfinance scheme in the country has raised hope of survival for the nation's active poor.
The policy, launched in 2005, enables the setting up of private sector driven microfinance banks to provide financial services for the active poor and low income households.
One key objective of the microfinance policy is to contribute to rural transformation and make financial services accessible to a large segment of the potentially productive Nigerian population which otherwise would have little or no access to financial services.
However, the current skewed distribution of the network of MFBs in the country constitutes a major challenge to the success of the policy.
Current data indicates that more than 77.8 percent of the total licensed 716 MFBs are located in the southern part of the country while the northern part accounts for the remaining 22.2 percent.
The south accounts for 557 out of a total of 716 MFBs in the country, the north accounts for only 157 MFBs. This low representation of MFBs in the country is likely to hamper outreach in these areas.
Joe Alegieuno, deputy director, development finance department, Central Bank of Nigeria (CBN) believes the way forward lies with the transformation of existing non-governmental organisations microfinance institutions to MFBs. According to him, a CBN survey showed that though many of the NGO-MFIs have the requisite capital for MFB licensing, they have not applied for licensing because of ignorance on the procedures and incentives derivable from such licensing.
Another issue capable of truncating the success of the microfinance policy, experts believe, is the flamboyant nature of some of them.
A micro finance bank is designed to have simple operating structures in terms of office infrastructure, manpower and other facilities in order to contain high operational costs, and more importantly, appeal to the unsophisticated poor, which they are set up to service. However, recent development in the country indicate that most MFBs, particularly those in the urban areas are setting up structures with imposing buildings and office infrastructures and flashy cars like commercial banks.
Experts however describe this approach as wrong since their capital base cannot sustain such high level operations.
Bertram Egwuatu, former assistant resident representative, UNDP, Nigeria said, "My mind tells me that the objective of those setting up microfinance banks is wrong.
The microfinance banks I think should have a good board but what I see is that their infrastructure is heavy, which also raises their overhead. Again, you don't bring in people with say, PHD to run microfinance banks. ASA for instance uses OND holders as their credit officers and then make sure they grow with them but what I find now in microfinance banks is that they employ people with chains of degrees in finance and banking. I bet they are going to fail because microfinance banks are not substitutes for commercial banking operation.
It is not all about raising the capital base to N20 million or N1 billion but sustaining it to grow. You cannot grow such money when you are capital intensive because such things as salaries and allowances are overhead."
Egwuatu noted that the commercial banks could not succeed with microfinance banking because small loans were very expensive to administer. "We need to understand that microfinance banks still remain micro, which means to serve the poor out there, again, because the customers are supposed to grow with the business you don't allow them source huge loans like N500,000 that is not microfinance, rather such people should to the commercial banks to borrow money. In microfinance banks we expect people that would be given like N10,000 and prepared to grow it such that when it gets to N100,000 it should transfer to the commercial banks. The reason is that at this level the capacity has been built on how to manage funds. But to start with the level that you begin to release huge loans of N100,000 or more that is wrong."
Godwin Ehigiamusoe, executive director, Lift Above Poverty Organisation (LAPO), agreed no less. To him, the image that the microfinance operators are displaying for the practice is superficial and capable of scaring away those they are meant to provide services for.
"A poor person is not interested and in fact intimidated by all the highly sophisticated furnished offices. Also, the cost profile is an issue because it means that what we have as returns for small loans as compared to the cost is really not much. Ordinarily, I don't think the revenue of the real microfinance banks can support a high expense profile.
My recommendation is that as much as possible, microfinance banks should present themselves or project an image that would reasonably be acceptable to the poor people, which they can also be comfortable with, an image that would also express high profit margin."
Other challenges of the microfinance in the country include the dearth of skilled personnel; comprehensive data base on the activities of micro finance institutions; lack of functional support institutions among others.
Experts believe there is need for sustained enlightenment campaigns on the provisions of the microfinance policy to educate promoters and clients on these provisions and encourage their participation across the country for the interest of the sector.
Ehigiamusoe, said it is important for operators to strengthen their operational management capability and develop their products with features and characteristics that blend with the poor.
Also, the regulators need to upgrade their supervisory capacity to handle the high number of MFBs in the country.
"There is no doubt that the number of licensed microfinance banks is much compared to the capacity of even the relevant department of the CBN to effectively police and supervise the institution. However, we actually have to realize that there is nothing the CBN could do to put down the number because the way they were inherited for the community banks. What I therefore think the CBN should do is to upgrade its own in-house capacity to be able to provide effective supervision and monitoring for these microfinance banks.
The policy, launched in 2005, enables the setting up of private sector driven microfinance banks to provide financial services for the active poor and low income households.
One key objective of the microfinance policy is to contribute to rural transformation and make financial services accessible to a large segment of the potentially productive Nigerian population which otherwise would have little or no access to financial services.
However, the current skewed distribution of the network of MFBs in the country constitutes a major challenge to the success of the policy.
Current data indicates that more than 77.8 percent of the total licensed 716 MFBs are located in the southern part of the country while the northern part accounts for the remaining 22.2 percent.
The south accounts for 557 out of a total of 716 MFBs in the country, the north accounts for only 157 MFBs. This low representation of MFBs in the country is likely to hamper outreach in these areas.
Joe Alegieuno, deputy director, development finance department, Central Bank of Nigeria (CBN) believes the way forward lies with the transformation of existing non-governmental organisations microfinance institutions to MFBs. According to him, a CBN survey showed that though many of the NGO-MFIs have the requisite capital for MFB licensing, they have not applied for licensing because of ignorance on the procedures and incentives derivable from such licensing.
Another issue capable of truncating the success of the microfinance policy, experts believe, is the flamboyant nature of some of them.
A micro finance bank is designed to have simple operating structures in terms of office infrastructure, manpower and other facilities in order to contain high operational costs, and more importantly, appeal to the unsophisticated poor, which they are set up to service. However, recent development in the country indicate that most MFBs, particularly those in the urban areas are setting up structures with imposing buildings and office infrastructures and flashy cars like commercial banks.
Experts however describe this approach as wrong since their capital base cannot sustain such high level operations.
Bertram Egwuatu, former assistant resident representative, UNDP, Nigeria said, "My mind tells me that the objective of those setting up microfinance banks is wrong.
The microfinance banks I think should have a good board but what I see is that their infrastructure is heavy, which also raises their overhead. Again, you don't bring in people with say, PHD to run microfinance banks. ASA for instance uses OND holders as their credit officers and then make sure they grow with them but what I find now in microfinance banks is that they employ people with chains of degrees in finance and banking. I bet they are going to fail because microfinance banks are not substitutes for commercial banking operation.
It is not all about raising the capital base to N20 million or N1 billion but sustaining it to grow. You cannot grow such money when you are capital intensive because such things as salaries and allowances are overhead."
Egwuatu noted that the commercial banks could not succeed with microfinance banking because small loans were very expensive to administer. "We need to understand that microfinance banks still remain micro, which means to serve the poor out there, again, because the customers are supposed to grow with the business you don't allow them source huge loans like N500,000 that is not microfinance, rather such people should to the commercial banks to borrow money. In microfinance banks we expect people that would be given like N10,000 and prepared to grow it such that when it gets to N100,000 it should transfer to the commercial banks. The reason is that at this level the capacity has been built on how to manage funds. But to start with the level that you begin to release huge loans of N100,000 or more that is wrong."
Godwin Ehigiamusoe, executive director, Lift Above Poverty Organisation (LAPO), agreed no less. To him, the image that the microfinance operators are displaying for the practice is superficial and capable of scaring away those they are meant to provide services for.
"A poor person is not interested and in fact intimidated by all the highly sophisticated furnished offices. Also, the cost profile is an issue because it means that what we have as returns for small loans as compared to the cost is really not much. Ordinarily, I don't think the revenue of the real microfinance banks can support a high expense profile.
My recommendation is that as much as possible, microfinance banks should present themselves or project an image that would reasonably be acceptable to the poor people, which they can also be comfortable with, an image that would also express high profit margin."
Other challenges of the microfinance in the country include the dearth of skilled personnel; comprehensive data base on the activities of micro finance institutions; lack of functional support institutions among others.
Experts believe there is need for sustained enlightenment campaigns on the provisions of the microfinance policy to educate promoters and clients on these provisions and encourage their participation across the country for the interest of the sector.
Ehigiamusoe, said it is important for operators to strengthen their operational management capability and develop their products with features and characteristics that blend with the poor.
Also, the regulators need to upgrade their supervisory capacity to handle the high number of MFBs in the country.
"There is no doubt that the number of licensed microfinance banks is much compared to the capacity of even the relevant department of the CBN to effectively police and supervise the institution. However, we actually have to realize that there is nothing the CBN could do to put down the number because the way they were inherited for the community banks. What I therefore think the CBN should do is to upgrade its own in-house capacity to be able to provide effective supervision and monitoring for these microfinance banks.
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