De-risking MFB lending: A superior option to a national MFB

There are over one thousand microfinance banks (MFBs), currently operating in Nigeria. There are also three categories of operators in that segment of the finance industry – the Unit MFBs have authority to run only one branch in the state where they are located, while the State operators are allowed to open as many branches as the CBN may allow in the state in which they are licensed to operate. The third category is the National MFBs, which are the big ones allowed to operate in every state and may locate in any state of their choice in the country.

These institutions had carried on business with authorized capital funds of N20million, N100million and N1billion, respectively for unit, state and national microfinance banks. However, that era came to an end on October 22, 2018, when a new regulation on capitalization was released. Going forward, anyone wishing to operate in the subsector would have to provide a capital fund of N200million, N1billion and N5billion respectively for unit, state and national MFBs. This is a clear call for consolidation, which was however, not unexpected, given recent developments in the subsector.

The industry has grown very rapidly but the things that go with maturity have begun to rare their heads, both ugly and pretty. There have been rising concerns over the health of many operators in recent times. Only last September, the industry witnesses a lot of fatalities as the CBN revoked the licenses of 154 microfinance banks across the country on grounds of sundry infractions and distress. According to the CBN, 62 of the failed operators had already closed shop while 74 of them had become insolvent. It added that 12 were terminally distressed; while six had been voluntarily liquidated. Over the years, the Nigerian Deposit Insurance Corporation has had to part with substantial parts of its deposit insurance fund in order to meet liabilities arising from failure of some operators. Evidently, the time has come for sweeping changes, if the industry is to meet the objectives of its designers. With the new capital requirement, the changes have begun to come, with a sign that more are in the offing.

That brings us to the issue of a national microfinance bank said to be planned by the CBN in collaboration with some stakeholders. According to reports, the CBN will, as early as January 2019, float a nationwide microfinance banking programme that will cover the 774 local governments of the country. The new institution, according to the reports will make use of existing facilities of the Nigerian Postal Service (NIPOST) in all the local government areas for its offices. This initiative is said to be part of efforts to facilitate the speedy disbursement of the many intervention funds provided by government, and in particular, the Agribusiness/Small and Medium Enterprises Investment Scheme (AGSMEIS). The CBN Governor was quoted as saying that “in order to collectively address the challenges militating against the achievements of the objective of the AGSMEIS initiative, the CBN is considering the proposal for the establishment of the national microfinance bank, which would leverage on the Nigerian Postal Service presence in 774 local government areas across the country”. The Governor was further reported to have said that the bank would enable the CBN to create jobs and enhance skill acquisition in the rural communities. The partners of the CBN in this proposed bank would be the Bankers’ Committee and the Nigerian Postal Service (NIPOST).

Undoubtedly, the idea of a strong microfinance industry is unassailable. We cannot continue to promote very weak institutions that increase the already high systemic risk in the subsector. In particular, the poor capital base of the existing operators, especially the unit banks makes them unviable. However, I think that completing the consolidation process already underway, before proceeding to launch a new government MFB, is a better option. The new publicly-owned MFB will surely divide the market into two – a political and a commercial microfinance market. This will undoubtedly impact the enthusiasm with which investors embrace the recapitalization plan.

Besides, a national microfinance bank sounds like another Peoples Bank of Nigeria – a good idea that was crucified on the altar of public ownership. I was privileged to be a special adviser to the Minister of Finance at the time the Peoples Bank was created. It was part of government’s plan to canalize financial resources to the informal sector, in an organized and responsible manner as opposed to haphazardly dispensed hand-outs that existed. The bank came out of the many financial sector reforms of the 1990s, aimed to create new institutions and instruments to enhance the robustness of the financial system. It came with the formal licensing of finance companies and primary mortgage institutions, which would combine with new financial instruments also introduced at the time, to canalize financial resources to the “dry grounds”.

The concept of the Peoples Bank under Mrs Sokenu and her team was good but it had problems. Largely because of its ownership fundamentals, it became politicised, disoriented and had to go. I have no doubt those problems are natural to public-owned enterprises. We therefore need to assure ourselves that we understand what happened at the Peoples Bank, and that we have learned the necessary lessons, which every business failure offers, as to benefit from that experience, before trading a path that looks similar to the one that ended in failure.

More important, I think that some of the recent policies implemented are yielding good fruits, and need to be given a chance to nurture. The Secured Transactions in Movable Assets Act, which my readers know am a leading promoter, is a case in point. In my trips around the country interpreting the Act to operators in seminars and lectures, I found that, as expected, that Act is beginning to positively impact both microfinance banks and their clients. Reports have it that by April 2018, total credit to that sector was about N400billion but by November, it had jumped to about N1.1 trillion. As at October 8, 2018, 560 financial institutions had responded to our campaign, registered and are now leveraging the infrastructure of the National Collateral Registry to advance credits to clients. Over 35,000 Financing Statements have been registered worth several billions of Naira. Surely, there is virtue in de-risking lending to risker borrowers. Among the 560 institutions registered to use the Collateral Registry, MFBs are 483. It means that an increasing component of the loans booked by the participating microfinance banks will be secured with movable assets. That tells us something about the future on non-performing loans and the operators in the industry. The former is dim while the latter is bright.

It is not too late for CBN to review its plans and invite the industry champions to help tweak the N5billion utilization. The industry champions are MFBs that have distinguished themselves and can be trusted with government funds. Some of them are already accessing huge funds from even more discerning investors from abroad. We could use them to disburse the AGSMEIS funds more productively, rather than the Deposit Money Banks, that are content with oil and gas revenues and who failed to disburse the funds. CBN can introduce new monitoring indices as they did in Kenya, where economic and social indicators have been introduced, including employment generated and contribution to literacy, in evaluating MFB performance. There is a business case for using the big MFBs rather than forming a new institution that has failure in its DNA and potential to expand the frontiers of toxic assets.

India’s growth was reviewed down from 7 per cent to 6.7 per cent, over which its Central Bank Governor resigned. That will impact oil sales to India and impact our economy negatively. Government should get smaller instead.

Emeka Osuji