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Microfinance bank as an upgrade of the SMEEIS initiative
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The official launch of the 600 microfinance banks by President Yar Adua has been viewed by many as a gradual wind up of the Small and Medium Enterprises Equity Investment Scheme, (SMEEIS).
It was launched primarily to act as a catalyst for rapid economic development, poverty alleviation and employment generation through the provision of financial, advisory, technical and managerial support to small and medium enterprises. Under this agreement, banks resolve to set aside a voluntary contribution of 10 percent of their profit after tax for the scheme.
The implementation of the scheme which was in the form of equity investment, required that the enterprise owners enter into a form of partnership agreement with the banks and the banks would have equity interest of up to 40 percent in the enterprise.
The scheme was conceived and approved at the 246th bankers committee meeting (21 December 1999). In order to ensure its successful implementation and accessibility by those who needed it, a maximum asset base of N500-million (excluding land and working capital) was set for any enterprise interested in the scheme.
Over N37-billion had been contributed by all the banks at since 2002 commencement of the scheme in 2002. However, as of December 2007, only N21-billon of their total funds had been utilised.
The real investment of the scheme grew at a much slower rate, from N 2.2- billion in 2002 to N12.1-billion in 2005. This represented only 29.1 percent of the total amount of the fund set aside. The lapses of the scheme became obvious. When an economic survey was carried out by the CBN on Small and Medium Industries (SMIs) in 2004, facts emerged that the 6,498 industries covered by the survey could only employ a little over a million people. This put a serious doubt on the ability of the scheme to succeed in achieving one of its primary objectives, reducing unemployment. Analysts began to raise concerns about some of its rigidities, stating that its equity investment clause did not encourage entrepreneurs to take advantage of it. They argued that Nigerians were not predisposed to the idea of having an equity investment agreement with banks, while the banks were interested in acquiring controlling shares in these enterprises.
Also, the limitation of the scheme on the range of possible entrepreneurial activities covered restricted the number of possible beneficiaries. Economic analysts also began to notice a trend among banks as they cultivated a laid-back approach to it.
The introduction of the microfinance bank is not the first of such community-based, self help programmes to be launched in Nigeria. Over the years, the Nigerian government has implemented various publicly financed micro/rural credit programmes and policies, of which the most recent was the creation of the Nigerian Agricultural Cooperative and Rural Development Bank Limited (NACRDB) in 2000.
However, analysts view the adoption of the microfinance bank initiative in Nigeria as a positive development due to the fact that it has been successfully implemented in countries like India, Pakistan, Indonesia, Philippines and Uganda.
With the approval of over 600 microfinance banks in Nigeria, CBN has ensured the accessibility of the scheme to the poorest of the poor. The expectation is that microfinance banks, MBFs, will be able to accomplish what the SMEEIS could not; hence the excess fund from the programme being channelled into MFBs.
The fund, totalling over N37-billion, will become the life line of a comprehensive micro-credit policy that will involve both state governments and all other private sector operators. The programme would make financial services available to a larger portion of the potentially productive Nigerian population, who otherwise would have little or no access to financial services. It would further promote the gradual merging and reformation of the informal sub-sector into the legal financial system.
Also, the programme will enhance service delivery by microfinance institutions to small and medium entrepreneurs, contribute to rural transformation and finally, it will promote linkage between universal/development banks, specialised institutions and microfinance.
In order to achieve these, two categories of microfinance banks have been licensed. First, unit bank MFBs, licensed to operate as community based banks and having a minimum paid up capital of N 20 million. Second, state operated MFBs, having a minimum paid up capital of N1-billion and the ability to function in all parts of the state and the federal capital territory. CBN set a maximum principal amount of N500, 000 as loan obtainable through MFBs.
There are also distinguishing features of the MFBs initiative that have engendered its popularity. They include the relatively small size of loans obtainable, as compared to that obtainable from traditional financial institutions .Also, the elimination of asset-based collateral as a condition for loan, and finally the simplicity of the working of these institutions, easily comprehensible by the artisan public.
The microfinance policy recognises the power of effective and efficient distribution of micro-credit to the low-income people, increasing their ability to be self employed and helping them break the cycle of poverty. The CBN has promised to work closely with these microfinance institutions, helping them to grow by providing them with insurance, saving plans and other services to ensure their stability in the larger market place. These measures will help create a safety net for them in case of unforeseen circumstances that may threaten their survival.
Although some analysts have viewed the gradual winding up of SMEEIS as a step in the right direction, others have expressed concerns over some obvious shortcomings present in the microfinance policy which may hinder it from improving upon the drawbacks of the SMEEIS initiative. These shortcomings as seen by analysts border on issues such as, the dependence of these microfinance institutions on the commercial banks for funding and clearing of cheques.
In trying to meet up with the minimum paid up capital set by CBN for the establishment of these banks, most communities that want to set up microfinance unit banks have to get the funding from the commercial banks. Accessing these funds from the commercial banks may not be easy and this sometimes affects their autonomy.
Also, in terms of clearing of cheques, there may be delays in the process which affect the smooth operation of the MFBs. Another issue raised is the cap placed by CBN on the maximum amount of loan accessible by beneficiaries of the scheme. This ceiling, placed by the CBN, may limit the MFBs investment in viable business ventures that require much capital.
In another vein, SMEEIS has since its inception imputed over N21-billion into different sectors of the economy ranging from agriculture to information technology and the service sector as reported by the CBN. Business analysts, express fears as to the ability of the MFBs to contribute such sum to the different sectors of the Nigerian economy since its conception is primarily targeted at the poor who cannot access huge loans from the big commercial banks.
The final point raised is the huge interest rates being charged by the microfinance institutions. The interest rate on loans accessible under this scheme has been criticised by experts as being much higher than what is obtainable in the commercial banks. Interests of up to 72 percent per annum have been reported as being charged in some microfinance banks.
From the foregoing, the microfinance institutions can be used to effectively achieve key economic goals; reduced unemployment, eradicate poverty and encourage micro-saving etc. However, these institutions should be closely monitored to correct the inherent shortcomings highlighted above that may render the objectives of the microfinance banks unrealisable.
The implementation of the scheme which was in the form of equity investment, required that the enterprise owners enter into a form of partnership agreement with the banks and the banks would have equity interest of up to 40 percent in the enterprise.
The scheme was conceived and approved at the 246th bankers committee meeting (21 December 1999). In order to ensure its successful implementation and accessibility by those who needed it, a maximum asset base of N500-million (excluding land and working capital) was set for any enterprise interested in the scheme.
Over N37-billion had been contributed by all the banks at since 2002 commencement of the scheme in 2002. However, as of December 2007, only N21-billon of their total funds had been utilised.
The real investment of the scheme grew at a much slower rate, from N 2.2- billion in 2002 to N12.1-billion in 2005. This represented only 29.1 percent of the total amount of the fund set aside. The lapses of the scheme became obvious. When an economic survey was carried out by the CBN on Small and Medium Industries (SMIs) in 2004, facts emerged that the 6,498 industries covered by the survey could only employ a little over a million people. This put a serious doubt on the ability of the scheme to succeed in achieving one of its primary objectives, reducing unemployment. Analysts began to raise concerns about some of its rigidities, stating that its equity investment clause did not encourage entrepreneurs to take advantage of it. They argued that Nigerians were not predisposed to the idea of having an equity investment agreement with banks, while the banks were interested in acquiring controlling shares in these enterprises.
Also, the limitation of the scheme on the range of possible entrepreneurial activities covered restricted the number of possible beneficiaries. Economic analysts also began to notice a trend among banks as they cultivated a laid-back approach to it.
The introduction of the microfinance bank is not the first of such community-based, self help programmes to be launched in Nigeria. Over the years, the Nigerian government has implemented various publicly financed micro/rural credit programmes and policies, of which the most recent was the creation of the Nigerian Agricultural Cooperative and Rural Development Bank Limited (NACRDB) in 2000.
However, analysts view the adoption of the microfinance bank initiative in Nigeria as a positive development due to the fact that it has been successfully implemented in countries like India, Pakistan, Indonesia, Philippines and Uganda.
With the approval of over 600 microfinance banks in Nigeria, CBN has ensured the accessibility of the scheme to the poorest of the poor. The expectation is that microfinance banks, MBFs, will be able to accomplish what the SMEEIS could not; hence the excess fund from the programme being channelled into MFBs.
The fund, totalling over N37-billion, will become the life line of a comprehensive micro-credit policy that will involve both state governments and all other private sector operators. The programme would make financial services available to a larger portion of the potentially productive Nigerian population, who otherwise would have little or no access to financial services. It would further promote the gradual merging and reformation of the informal sub-sector into the legal financial system.
Also, the programme will enhance service delivery by microfinance institutions to small and medium entrepreneurs, contribute to rural transformation and finally, it will promote linkage between universal/development banks, specialised institutions and microfinance.
In order to achieve these, two categories of microfinance banks have been licensed. First, unit bank MFBs, licensed to operate as community based banks and having a minimum paid up capital of N 20 million. Second, state operated MFBs, having a minimum paid up capital of N1-billion and the ability to function in all parts of the state and the federal capital territory. CBN set a maximum principal amount of N500, 000 as loan obtainable through MFBs.
There are also distinguishing features of the MFBs initiative that have engendered its popularity. They include the relatively small size of loans obtainable, as compared to that obtainable from traditional financial institutions .Also, the elimination of asset-based collateral as a condition for loan, and finally the simplicity of the working of these institutions, easily comprehensible by the artisan public.
The microfinance policy recognises the power of effective and efficient distribution of micro-credit to the low-income people, increasing their ability to be self employed and helping them break the cycle of poverty. The CBN has promised to work closely with these microfinance institutions, helping them to grow by providing them with insurance, saving plans and other services to ensure their stability in the larger market place. These measures will help create a safety net for them in case of unforeseen circumstances that may threaten their survival.
Although some analysts have viewed the gradual winding up of SMEEIS as a step in the right direction, others have expressed concerns over some obvious shortcomings present in the microfinance policy which may hinder it from improving upon the drawbacks of the SMEEIS initiative. These shortcomings as seen by analysts border on issues such as, the dependence of these microfinance institutions on the commercial banks for funding and clearing of cheques.
In trying to meet up with the minimum paid up capital set by CBN for the establishment of these banks, most communities that want to set up microfinance unit banks have to get the funding from the commercial banks. Accessing these funds from the commercial banks may not be easy and this sometimes affects their autonomy.
Also, in terms of clearing of cheques, there may be delays in the process which affect the smooth operation of the MFBs. Another issue raised is the cap placed by CBN on the maximum amount of loan accessible by beneficiaries of the scheme. This ceiling, placed by the CBN, may limit the MFBs investment in viable business ventures that require much capital.
In another vein, SMEEIS has since its inception imputed over N21-billion into different sectors of the economy ranging from agriculture to information technology and the service sector as reported by the CBN. Business analysts, express fears as to the ability of the MFBs to contribute such sum to the different sectors of the Nigerian economy since its conception is primarily targeted at the poor who cannot access huge loans from the big commercial banks.
The final point raised is the huge interest rates being charged by the microfinance institutions. The interest rate on loans accessible under this scheme has been criticised by experts as being much higher than what is obtainable in the commercial banks. Interests of up to 72 percent per annum have been reported as being charged in some microfinance banks.
From the foregoing, the microfinance institutions can be used to effectively achieve key economic goals; reduced unemployment, eradicate poverty and encourage micro-saving etc. However, these institutions should be closely monitored to correct the inherent shortcomings highlighted above that may render the objectives of the microfinance banks unrealisable.
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