Saving the micro-finance banking sector
The recent approval of the liquidation of 83 micro-finance banks (MFBs) by the Central Bank of Nigeria (CBN) is bad news from the banking sector. It is worrisome that as many as 83 of these institutions are going under, barely four years after 224 of them were declared insolvent in 2010, with attendant negative implications for depositors’ funds.
Although the CBN has promised that depositors’ funds will not be lost in the imminent liquidation exercise, the failure of these institutions is a regrettable development that will involve loss of capital and sources of business financing for micro enterprises. The failure of the banks is more lamentable when it is considered that the bulk of their customers are of low socio-economic status. It is this vulnerable class of Nigerians, and the small-scale businesses which patronise them, that are imperiled when these institutions can no longer meet their obligations, and are liquidated.
One critical matter that the failure of such a large number of these financial institutions has thrown up is the laxity of regulation that allowed the weak governance structure that informed their demise. It is important that we interrogate the circumstances that led to the sorry fate of these banks because the failure of any banking institution is sure to increase general public distrust of banking, especially micro-finance banking.
In that regard, it is not only the 83 banks that will bear the brunt of their collapse, as even the well run ones may suffer from loss of faith in micro-finance institutions, by a more wary public. But, then Nigeria, like any other developing country, needs a genuine and effective micro-finance system to boost the micro-business sector, create jobs and reduce poverty.
The Managing Director of the Nigeria Deposit Insurance Corporation (NDIC), Umaru Ibrahim, who disclosed the decision of the Central Bank of Nigeria (CBN) to revoke the operating licences of these banks, said many of the institutions “existed only on paper, while some are simply used to defraud Nigerians.” Many of them could also not meet up with their capitalization requirements.
This state of affairs could only have been inimical to the noble objectives for which the institutions were set up. Even among the remaining micro-finance institutions that still have their licences intact, not all are meeting up with the expectations for licensing them. The likelihood is that many of them may still go under, as about 600 out of over 800 of them have been reported to be unlikely to meet up with their recapitalization specifications.
Yet, Nigeria sorely needs efficient micro-finance institutions. We are among the most under-banked nations of the world, with over 79 per cent of the nation’s population said to be without bank accounts by a not-for-profit institution, Enhancing Financial Innovation and Access, in 2008. The figures are even much worse in the rural areas. There is very poor access to finance for micro-business operators, with attendant negative implications for job creation.
The time has come to strengthen the regulatory framework for these institutions and ensure that it is closely administered. We must do all that is necessary to prevent a recurrence of this kind of situation in which a large number of small entrepreneurs would risk losing a good amount of their savings, as well as the badly needed financial support for their businesses. The CBN must ensure closer supervision of this segment of the banking industry. It must also endeavour to make them comply with the necessary reporting requirements. In this regard, we welcome the recent report that the MFBs will, henceforth, undergo quarterly inspection by the apex bank to check their stress levels to forestall unwholesome practices that could lead to their failure. As things stand, the CBN has said that the December 31, 2013 deadline for the recapitalization of these institutions is still in force, and will not be extended. The banks will, therefore, do well to seek professional advice to be able to meet up with the recapitalization requirements set up for their different categories under the Revised Microfinance Policy Framework. They also need to embrace risk management and good governance principles. The MFBs must aslo be content to keep within the limits set for them. They need to see that micro-financing can be very profitable if they operate the way they are designed to, and stop competing with the large commercial banks.
The owners and boards of the surviving MFBs need to ensure that the institutions remain engines of growth, which the micro-finance sector should rightly be. They should be made contribute their quota to Nigeria’s socio-economic development. We cannot afford a failure of any segment of the banking sector in our already under-banked economy.