News that almost half of the loans given out by Nigeria’s licensed microfinance banks are non-performing is ominous. It demonstrates that risk management at that level of financial intermediation is very poor and raises fresh fears of possible systemic distress. For a financial system that has witnessed cyclical distress and an economy with a depressed small and medium scale enterprises sector, the spectre of trouble in the MFBs calls for fresh thinking to rejuvenate micro lending in the system.
The Central Bank of Nigeria and its new Governor, Godwin Emefiele, will need to take microfinance more seriously and resolve to make it an important accelerator of industrialisation and job creation. So far, the omens are not so good. According to the Nigeria Deposit Insurance Corporation, Non-Performing Loans held by the MFBs in 2013 were 45.7 per cent of the total loan portfolio. This figure emerged from the on-site examination of 797 of the 821 registered MFBs in the country conducted by the CBN and highlighted in its Financial Stability Report.
Set side-by-side with the prescribed Portfolio-at-Risk maximum of five per cent, the non-performing ratio becomes worrisome. It also raises apprehension of systemic distress, a phenomenon that the economy has suffered several times with severe consequences for savers and for our tepid saving culture. The dread is not allayed by the fact that the 45.7 per cent is actually a decline from the 61.9 per cent NPLs position of the MFBs as of December 2012 following pressure on the microfinance institutions by the apex bank to tighten their credit processes.
Besides, only 526, or 66 per cent of the MFBs examined by the CBN, met the statutory capital adequacy ratio (the ratio of capital to credit) of 10 per cent. And just 568, or 71.2 per cent, satisfied the minimum liquidity ratio (the ratio of deposits to credit) requirement of 20 per cent. This is not good enough, especially when remembered that depositors in MFBs are typically the lower income earning segment of the populace who have been squeezed out of the mainstream financial system. That some 271 MFBs have issues with capital adequacy ratios and with 229 meeting regulatory liquidity requirements call for some concern.
Although most financial analysts, including the CBN’s Other Financial Institutions Supervision Department, believe there is no cause for alarm, the assertion by its Director, Olufemi Fabamwo, that it would not shut down over 600 MFBs that failed to meet the December 2013 deadline on new statutory minimum capital thresholds suggests that the regulator is being lenient with operators, perhaps for the very reason of avoiding distress and panic withdrawals.
In an economy where over 40 per cent of the population, by some estimates, are excluded from the formal financial services market and lending rates for small borrowers range between 30 and 40 per cent, micro credit must be developed to enable the mass of the people to escape poverty and joblessness.
Microfinance targets the low income segment of the population and small and medium scale businesses. Microfinance is a very old concept, but has received fresh impetus from governments globally since the 1970s with the aim of channelling credit to the lower rungs of the society. A summit of the G-8, the grouping of the world’s eight most industrialised economies, in 2004 called for robust aid and human capital support to boost microfinance institutions, especially in developing economies.
Malaysia has since 1988, through its AIM and YUM credit schemes and The Economic Fund for National Entrepreneurs Group, developed a functional microfinance system that also draws in commercial and development banks. The Grameen Bank micro credit scheme that services over seven million poor Bangladeshi women and won its founder, Muhammed Yunus, a Nobel prize, has been difficult to replicate elsewhere. In the United States and Canada, MFIs target marginalised populations that lack access to mainstream banks.
We need to harness successful models and mould them into local conditions for success. The National Association of Microfinance Banks acknowledges that lack of managerial skills; low financial capacity and unfavourable macroeconomic environment hamper MFBs in Nigeria. In making them crucial to the economy, there should be a purposeful implementation of the National Microfinance Policy inaugurated since 2006. The CBN should strictly enforce its regulatory framework on liquidity, capital adequacy and risk management. It should quickly implement its plan to create a collateral registry for movable assets to eliminate the practice of multiple borrowing from several MFBs by dubious customers and reduce NPLs.
The government’s N220bn MSME development fund now being implemented may go the way of previous intervention funds unless the government takes another look at the ownership of MFBs. Grameen, a runaway success, is a non-governmental organisation; most of the MFIs in the US and Canada are NGOs. CBN should make regulations to exclude the corruption-prone state and local governments from owning majority stakes in MFBs and leave MFIs in the hands of private entrepreneurs.
Most importantly, CBN should strengthen its supervisory capacity and enhance its ability to enforce its writ and keep distress out of the system.