Except the Central Bank of Nigeria (CBN) changes its policy, no fewer than 612 microfinance banks (MFBs) across the country may close shop at the end of this month over failure to meet the deadline for compliance with the new minimum capital requirement set by the apex bank. Established primarily to meet the financial needs of the low-income earners in the country, a recent internal survey conducted by the National Association of Microfinance Banks in the country, showed that of the 874 licensed microfinance banks in the country, only 30 per cent may meet the new capital base requirement, thereby putting the fate of about 612 of them in the balance.
The CBN had last year revised its deadline for compliance with the new capital requirement for the microfinance banks by one year, that is, 2022. The impact of the COVID-19 pandemic on economic activities is said to have adversely affected their operations, making about 70 per cent of them unable to meet the new capital threshold. Considering the fact that Nigeria is not yet out of the pandemic, and has just exited a recession, it makes a lot of economic sense for the CBN to further extend the deadline, at least to 2025; to enable them put their books in order. Investigation by the umbrella body for microfinance banks in the country has also shown that mostly affected by the pandemic are those operating in the rural unbanked and under-banked areas, categorised as Tier 2 microfinance banks.
Under the new recapitalisation order, they are expected to meet N35 million capital thresholds by end of this month, and N50 million by April 2022. The CBN had in October 2018 reviewed the minimum capital requirement as follows: Unit MFHs from N20million to N200, state MFHs from N100million to N1billion, and National MFHs, from N2billion to N5billion. Also, on March 18, 2019, the CBN again reviewed upward the minimum capital requirement and allowed installment payment as part of effort for them to meet the new capital base.
Details of the new minimum requirements for the different types of microfinance banks show that many of them will not survive if the CBN fails to reduce the minimum threshold and extend the deadline. This will defeat the lofty objectives for the establishment of microfinance banks as providers of financial services to the poor, savings and micro-credit, money transfer and payment services. Under the new recapitalisation guidelines, those operating in urban and high density banked areas otherwise known as Tier 1 are expected to have N100 million capital thresholds by end of this month, and N200 million by April 2022. State licensed MFBs are required to increase their capital base to N500 million by April 2021, and N1billion by April 2022, while National MFBs are expected to meet a minimum capital requirement of N3.5billion by end of this month and N65 billion by April 2022.
We believe that failure to meet the new capital base will have far-reaching consequences on commercial banks. The multiplier effect will likely distort the financial system already in dire straits. While we believe that mergers and acquisitions, downsizing, or going to the capital market to raise funds to meet the new capital base are options available in the present circumstances, we urge the CBN to ensure that the MFHs remain afloat and continue to fulfill their mandate. Although we support the idea of microfinance banks having a strong capital base, there is also need to address other challenges facing them. These include near absence of basic infrastructure such as power supply that constitutes a major operational costs and regular changes in government policies, human capital inadequacy and sociocultural misconceptions.
Over all, the CBN should not allow its good intentions in setting up MFBs to be vitiated. It should pursue the new minimum capital base with caution, while at the same time look into reports of alleged mismanagement of funds in the banks. Therefore, there is need for stringent monitoring of the banks. Background checks on prospective borrowers’ ability to pay back their loans is necessary to avoid rising over-indebtedness.
Failure to do this will compound the operational difficulties of these banks. In order to serve the people well, microfinance banks need strict regulation.