news - Will new capital base restore confidence in microfinance banks?

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Will new capital base restore confidence in microfinance banks?
July 12, 2010

Abuja, July 12, 2010 (Microfinance Africa) - LIKE the commercial banks, which came under the hammer of the Central Bank of Nigeria (CBN) last August, following the Nigeria Deposit Insurance Corporation (NDIC) audit report which nailed some bank chiefs, most of who were accused of insider dealing among other offences, microfiance banks are set to have a foretaste of that bitterpill as the apex bank has set machinery in motion to sanitise the sector.
Hints that things may no longer be business as usual for operators of microfinance institutions came to the fore when Mallam Sanusi Lamido, CBN governor observed at a public function recently that microfinance banks in the country had performed at less than optimal and that CBN was carrying out a systematic review of the current microfinance policy with a view to making it add more value to the economy.
Beside, he said chief executive officers of microfinance banks in the country would be made to undergo examination in order to determine their level of professional competence, adding that those found wanting would be relieved of the positions.
As would be expected, Lamido may have began the sanitaisation of the sector, with the new policy regime pegging new capital base for operators in the sector. Among other things, the CBN said it had concluded plans to increase the minimum paid-up capital of Unit Micro-Finance Banks (MFBs) by 500 per cent to N100 million. It also increased that of State MFBs by 100 per cent to N2 billion.
According to the policy, Unit MFBs ( licensed to operate as Unit banks) shall be community-based banks. Such banks can operate branches and/or cash centres subject to meeting the prescribed prudential requirements and availability of free funds for opening branches/cash centres.
On the other hand, a State MFB (licensed to operate in a state) shall be authorised to operate in all parts of the state (or the Federal Capital Territory) in which they are registered, subject to meeting the prescribed prudential requirements and availability of free funds for opening branches.
Presently, the minimum paid-up capital for state MFBs is N1 billion, while for Unit MFBs, it is N20 million. Consequently, the new minimum paid-up capital represents 100 per cent increase for State MFBs and 500 per cent for Unit MFBs.
The CBN has also set the deadline for meeting the new minimum paid-up capital at December 31, 2011. The increase in minimum paid-up capital is one of the highlights of the reform package for the MFBs sub-sector announced by the CBN.
According to CBN the new dispensation, N20 million minimum paid-up capital would be retained for Unit MFBs in the rural areas.
The new N100 million minimum capital base would, however, apply to all Unit MFBs in urban centres, including all state capitals. The implication is that Unit MFBs located in Lagos State, Abuja, Kano, Port Harcourt and other major cities would have N100 million minimum paid-up capital.
Expectedly, this new policy regime is already sending jitters down the spine of some of the operators, who feel the move by the CBN is aimed at stifling the activities of operators in the microfinance sub-sector of the economy.
Some operators in Lagos, who would not be named the new policy regime announced by the CBN has not gone down well with stakeholders in the sector, as majority of the operators feel that jacking up share capital for urban MFBs to the tune of N100 million, is too high.
They have also argued that the CBN ought to have released the new policy guideline, which they reckoned would be in aid of the transformation process envisaged by the apex bank.
Failure of the CBN to keep to its promise of evolving a new policy guideline for microfinance banks (MFBs) by the middle of this year, which just ended, could be attributed to its inability to reach a compromise with MFB operators over new increase in capital base.
Investigation revealed that the apex bank met with selected chief executives of MFBs few weeks ago to intimate them of the coming reforms. It was gathered that the apex bank asked them to go and study the document and send their comments and observations back to it soonest.
However, the chief executives are divided over the appropriateness of the new minimum paid-up capital. While some believe it was necessary, others believe that the level of increase was too much and suggested graduated increase.
However, Olutayo Adenekan, chairman, National Association of Microfinance Banks (NAMB), Lagos State chapter, said the delay in the release of the new policy guideline has no impact on the sub-sector because it is better to come up with a holistic and good policy framework than to release a hastily formulated policy that can bring confusion into the industry.
Adenekan believes that there is no delay in the release of policy guideline because the CBN is taking time to consult with stakeholders on the policy framework, noting that “the CBN wants to make sure the policy guideline is okay and stakeholders are involved.”
It could be recalled that at a recent meeting with managers of the National Poverty Alleviation Programme (NAPEP), Joe Alegienu, the CBN’s director of development banking, disclosed that the apex bank was developing a framework to regulate microfinance banking in the country.
Alegienu said the decision to create a new framework was because microfinance banking had failed in the fight against poverty as a result of the proliferation of commercial bank operators masquerading as microfinance operators.
The new microfinance banking policy framework was expected to become operational by June this year. However, the CBN will soon publish an operational template that would serve as a guide on how MFBs are going to do business.
According to him, “we do not want a situation where the microfinance banks that were established to support the fight against poverty among rural people are allowed to turn into a monster that would consume the people. We will soon publish an operational template that would serve as a guide on how microfinance banks are going to do business. It is time to tell those not qualified to do the business to stay away.”
When micro finance banks made their debut in 2005, managers in the institutions went into churches, mosques and other worship centres, canvassing for customers. In the process, Nigerians were ensnared by promises of quick loans, high interest payment and winning exorbitant prizes in promos among others.
Five years down the line, about 85 per cent of the banks have not only gone under, but lack the capability to fulfill these promises. They have closed down their branches, sacked their workers and are unable to pay depositors.
Following the conclusion of audit of microfinance banks (MFBs) by the Nigeria Deposit Insurance corporation (NDIC), a list of failed MFBs will now be published, the corporation has assured.
Although industry watchers are worried that the exposure may bring about loss of confidence in the industry and even cause chaos in the sub-sector, but an operator of one of the MFBs, Godwin Ehigiamusoe, who is an executive director, Lift Above Poverty Organization (LAPO), believes the NDIC, as well as the Central Bank of Nigeria (CBN) – the regulatory bodies of MFBs will not take any action that will lead to lack of confidence in the industry. Ehigiamusoe says the regulatory authorities have done a lot to restore the confidence of depositors in MFBs and would not want to destroy it.
Investigation by The Nation has however revealed that the apex bank has come under a lot of flak over the new policy regime, with those averse to it saying it is ostensibly designed to whip operators of microfinance institutions on line.
A staff of the CBN, who would not be named said the regulatory authority is however unfazed by the barrage of criticisms that has attended the announcement of the new policy regime, saying it is in the best interest of the economy.

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