The important role of the Microfinance banking sub-sector in Nigerian economy as well as other developing economies cannot be overemphasised. Since it was introduced in Bangladesh in the mid-1970s, several countries have copied the model of financing, Nigeria inclusive. The sub-sector has made landmark contributions to developing economies, especially its impact on the Micro, Small and Medium Scale Enterprises (MSMEs).
The MSMEs in Nigeria remain a critical aspect of economic growth that cannot be neglected. Nigeria has over 37.07 million MSMEs accounting for more than 84 per cent jobs in Nigeria. In spite of the critical nature of this sub-sector of the economy, funding for micro-businesses still remain a challenge as less than one per cent of credit in the banking industry is channeled into MSMEs which constitute up to 90 per cent of businesses in Nigeria.
Players in the sector said that for the MSMEs, the provision of funds through microfinance banking is considered the best option available. Microfinance banking is the provision of a broad range of financial services such as deposits, loans, money transfers and insurance to the poor and low income household and their micro enterprises at affordable cost. It is a system of financial intermediation that addresses the multi-faceted challenges of the rural dwellers and low-income households and is arguably adapted to their situation and needs.
The World Bank categorised microfinance institutions as those institutions which “consists of agents and organisations engaged in relatively small financial transactions using specialised, character-based methodologies to serve low income households, micro enterprises, small farmers and others who lack access to the formal financial system”.
In global economies, the focus and key objective of microfinance is poverty alleviation or reduction. Microfinance banking has been serving as a driver or an essential instrument of financial inclusion in many countries. In Nigeria, government’s initiative to meet the socio-economic complexities and needs of the rural communities and reach rural areas resulted in the establishment of community banks. Community banks emerged to meet the needs of the poor in order to increase their access to finance and improve their income generating activities.
However, the failure of the community banks resulted in the establishment of microfinance banks in Nigeria. The objective behind the establishment of microfinance banks in Nigeria was to provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner. The policy was meant to serve as a guide for the activities of informal unregulated institutions and new entrants in the sub-sector, as well as ensuring that operators within the sub-sector are guided by a set of rules, principles and a robust legal framework.
However, as part of efforts to ensure that right things are done, the Central Bank of Nigeria (CBN) decided last year to revoke the licences of some microfinance banks. According to the apex bank, 62 of the microfinance banks had already closed shops; 74 became insolvent; 12 were terminally distressed; while six voluntarily liquidated. A report published recently on the CBN website showed that the number of licensed microfinance banks in the country dropped from 1,028 in May 2018, to 898 as at February this year. This means that the number of licensed microfinance banks across the 36 states of the country and Federal Capital Territory (FCT) has dropped by 12.7 per cent in almost one year. According to the apex bank, this is to ensure that only microfinance banks with sound financial base are the ones allowed to operate in Nigeria.
Meanwhile, depositors have been enjoined to protect themselves from losing their hard earned money by patronising only financial institutions that are licensed by the CBN and which display the NDIC sticker: ‘‘Insured by NDIC” in their banking halls and entrances, so as to avoid patronising dubious fund managers, otherwise, known as ‘Wonder Banks’. Recently, many Nigerians have lost billions of naira to various Ponzi schemes and wonder banks. The apex bank and NDIC have continuously been creating awareness on the emerging trend of investing in suspicious schemes that are not being regulated by the apex bank. For instance, Nigerians have also been warned about putting their money in digital currencies, popularly known as Bitcoins, which the regulators said has serous dangerous consequences, like the ‘Wonder Banks’ because the digital currencies are not licensed by the CBN and therefore not insured by NDIC’.
Despite challenges confronting the sector, many that have secured loans from MFBs in recent times said they are now more effective in their operations. For instance, an entrepreneur, who preferred anonymity said before now, to get a loan from a microfinance bank, one was required to be able to prepare a Harvard University-like business proposal which required presentation of certified audited accounts, opening an account and running it for a period of not less than six months. ‘‘Microfinance banks have eased access to finance and demystified loan origination transaction burden for their clients. The loan appraisal methodologies employed are largely based on character and peer review that reduce the transaction and psychological costs for a microfinance borrower. In addition, there is minimum documentation used by prospective clients to access the loans. Instead of asking for high value collateral, microfinance institutions use peer pressure or guarantors as alternative. Things are easier now,’’ the entrepreneur said.
MFBs have been enjoying full supports of the CBN and the Nigeria Deposit Insurance Corporation (NDIC) since their inception. The regulators said they have been overseeing activities of the MFBs in order to ensure that the pronounced policy objectives of the scheme are achieved and that the MFBs are sustainable and profitable for inclusive growth and development of our economy for the benefit of all.
For instance, the NDIC conducts routine examination on the MFBs to ensure their soundness and safety, provide deposit guarantee, financial and technical assistance, financial literacy and depositor-friendly failure resolution mechanisms.
Similarly, the CBN has over the years continued to design policies to ensure that the sub-sector effectively plays its role in the financial system. Just last month, the apex bank introduced a special intervention fund for microfinance banks (MFBs) in the country, even as it assured that it will soon issue a new MFB policy.
According to the apex bank, it aims to increase the share of micro credit as percentage of total credit to at least 20 percent by 2020 from the current ratio of five per cent. CBN Governor, Mr. Godwin Emefiele, said that while the apex bank recognises the challenges of the MFBs, it is also aware of their contributions to extending credit to the economically active poor. He said: “Data from the licensed credit bureaus indicate that the operations of microfinance banks have helped to improve financial inclusion amongst smallholder peasant farmers, artisans and other small business operators. As at December 2018, aggregate loans granted by MFBs was N482.896 billion. Of this amount loan sizes below N 1.4 million accounted for 72 per cent. We equally observed that small businesses have been more successful in securing credit from the microfinance institutions rather than conventional deposit money banks (DMBs).
“There are challenges, nevertheless. They include; inadequate spread in the location of the MFBs in relation to their target beneficiaries, demand for immoveable collaterals for loans, high interest rate, and absence of a credit reporting system. We are committed and working assiduously to address these limitations”.
Also, it said that one of the ways it is looking at increasing the spread of micro credit is through the National Microfinance Bank (NMFB) which is billed to spread its tentacles majorly to the rural areas using the legacy assets of the Nigerian Postal Service (NIPOST). CBN director, Corporate Communications, Isaac Okoroafor, said NMFB was aimed among others at bringing microfinance institutions and activities into greater focus in order to deepen financial inclusion and alleviate the financing needs of MSMEs.
MFBs operate at the micro credit level and are closer to the low income earners and the poor. This is where beneficiaries of the various interventions of the CBN such as the Anchor Borrowers Programme,Agricultural Credit Guarantee Fund Scheme (ACGFS), among others, have at different times received such credits through the microfinance banks because the MFBs play key role as an alternative vehicle for dispensing such intervention programmes.
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