MFBs: Daring beyond their mandates

The Central Bank of Nigeria, last week, raised a red flag to microfinance banks indulging in functions clearly outside their jurisdictions, ABDULWAHAB ISA reports

The aims and objectives for its establishment are unambiguous. To provide finance to economically active poor excluded from financing by conventional banks. It’s designed to provide easily available micro credit to small and medium business in rural areas and in turn, provide employment, engender rural development and reduce poverty. The Central Bank of Nigeria (CBN), in 2005, and in line with global demand for financial inclusion service, granted licensees to microfinance banks with clear cut objectives paramount of which include making financial services accessible to a large segment of the potentially productive Nigerian population, which would otherwise have little or no access to financial services; provide synergy and mainstreaming of the informal sub-sector into the national financial system; enhance service delivery by microfinance institutions to micro, small and medium entrepreneurs (MSMEs). In addition, microfinance banks are to promote linkage programmes between microfinance institutions, deposit money banks, development finance institutions, and specialised funding institutions. CBN structured microfinance banks into three layers for easy operations. The unit microfinance bank with authorisation in one location. It is restricted from having any other branch. The minimum capital requirement for this category of MFB is N200 million. The second category is state microfinance banks. One permissible by law to have a single state authorisation or that of the Federal Capital Territory (FCT). The CBN allows for the opening of various branches within that particular state, or within the Federal Capital Territory (FCT). However, a state microfinance bank is not allowed to open more than two branches within the same local government area, unless it had established at least one branch or cash center in every LGA of the state. The minimum capital requirement for this category of MFB is N1 billion. The third category is national microfinance banks. This category is permissible of having more than one state authorisation inclusive of the Federal Capital Territory (FCT). The CBN restricts their operation to not more than (10) branches. The minimum capital requirement for this category of MFB is N5 billion.

Modest growth

The apex bank in its wisdom recently reviewed capitalisation of Tier 2 microfinance banks across the country to N50 million. In a circular to all microfinance banks by the Director, CBN Finance Policy and Regulations, Mr Kevin Amugo, the financial regulator said Tier 2 MfBs must meet a N35 million capital threshold by April 2020 and N50 million by April 2021. “The Central Bank of Nigeria has revised the categories of microfinance banks with a view to ensuring continued operations of microfinance banks in the rural, unbanked and underbanked areas of the economy,” CBN said in the circular. Continuing, it noted that “accordingly, the unit microfinance banks shall comprise two Tiers: Tier 1-unit microfinance bank which shall operate in the urban and highdensity banked areas of the society; and Tier 2-unit microfinance banks which shall operate only in the rural, unbanked or underbanked areas. “Tier 1-unit microfinance banks must meet a N100 million capital threshold by April 2020 and N200 million by April 2021.” The apex bank noted that the Tier 2-unit microfinance banks must meet a N35 million capital threshold by April 2020 and N50 million by April 2021. It directed that state microfinance banks shall increase their capital to N500 million by April 2020 and N1 billion by April 2021. “A national microfinance bank shall hold a capital of N3.5 billion by April 2020 and N5 billion by April 2021,” it added. Fifteen years down the line, microfinance banks have grown in leap and bound, registering its presence across rural areas and cities. It is fulfilling core objective of poverty reduction and financial inclusion mechanisms. They are providing credit services to businesses in the informal sector. There are over 900 microfinance banks in the country with state, regional, and national licenses giving credit facilities to targeted audiences. A recent report indicated that microfinance banks recorded an 82 per cent boom in lending in 2020. The figure, according to a report by the National Bureau of Statistics, indicates a rise from N300.2 billion in 2019 to N546.6 billion in 2020. Total assets of the microfinance banks rose by N251.02 billion from N758.98 billion as of the end of July 2020 to N1.01 trillion as of the end of December 2020. As of 2018, total microfinance loans to the private sector was just N250 billion. The figure was said to have doubled in two years due to improved technology, easier processing of loans, better loan recovery methods, increased competition, and a growing class of employees with an appetite for short-term credit. The performance of microfinance banks shows this segment of banking as the fastestgrowing credit segment in the financial lending space. Microfinance banks have led the charge on consumer loans in the last three years extending credit to the risky retail end of the market which has for years been ignored by commercial banks. In a bid to boost confidence in microfinance banks, Nigeria Deposit Insurance Corporation, NDIC, on January 1, 2008 extended deposit insurance cover to microfinance banks. The upward review of the deposit insurance limit from N100,000 as stipulated by the NDIC Act of 2006 to N200,000 in 2010 is another effort made by the NDIC to enhance the ability of these banks in savings mobilisation for investments, credit creation and economic development and to build public confidence in this segment of banks. The NDIC in collaboration with the CBN and Chartered Institute of Bankers of Nigeria (CIBN) in 2009 commenced the Microfinance Certification Programme (MCP) for the Board, Executive and operators of MFBs to upscale capacity building in the MFB subsector. This was another mechanism of ensuring mandatory continuing education scheme.

Straying into unfamiliar terrain

As a channel for poverty reduction and financial inclusion mechanism, microfinance banks have over the years lived by its prescribed doctrines and ethos. However, the bank was recently observed to be straying outside of its core areas. One of such areas include foreign exchange transactions and other impermissible functions not carved out for microfinance banks.

CBN’s warning

To rein in microfinance banks from straying into uncharted territory, apex bank in a statement last Friday cautioned microfinance banks in the country to stop engaging in foreign exchange transactions and other unauthorized dealings. The MfB operators were also strictly prohibited from engaging in foreign exchange transactions. The CBN further directed the MfBs to primarily focus on providing financial services to retail and/or micro clients, microcredit and retail transactions not exceeding N500,000 per transaction for Tier 2-unit MFBs and N1 million for other categories. Also, micro credit facilities shall constitute a minimum of 80 per cent of total loans portfolio for MFBs. The apex bank also warned MfBs to desist from offering non-permissible activities, especially foreign exchange and wholesale banking transactions. The regulator noted that it observed that some MFBs are engaging in non-permissible activities which pose risk to the financial system. The circular, which was signed by the Director of Financial Policy and Regulation Department, Ibrahim Tukur, stated: “The Central Bank of Nigeria (CBN) has observed the activities of some MFBs that have gone beyond the remit of their operating licenses by engaging in non-permissible activities, especially wholesale banking, foreign exchange transactions and others. “Given the comparatively low capitalisation of MFBs, dealing in wholesale and/or foreign exchange transactions are a significant risk with dire consequences for financial system stability thus, therefore, become imperative to remind all MFBs to strictly comply with the extant Revised Regulatory and Supervisory Guidelines for MFBs in Nigeria 2012 (the guidelines). The CBN promised it will continue to monitor developments in the MfB sector and apply severe regulatory sanctions for breaches of extant regulations, including revoking the licence of non-compliant MfBs.

Last line

Central bank’s warning to operators of microfinance banks to steer clear of functions not permissible to it is timely and essential. It’s a signal that conveys severe regulatory actions to offenders.