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DEVELOPMENTS IN THE MICROFINANCE SUB-SECTOR

REGULATORY PERSPECTIVE

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Introductory Comments

• Microfinance and MFIs, all over the world, have been recognized as veritable channels for achieving universal access to finance, or ‘financial inclusion’.

• This presentation highlights developments in the context of the basic objective of the Microfinance Policy Framework to widen and deepen access to financial services for the potentially productive segment.

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Distribution of MFBs

• 606 erstwhile CBs converted to MFBs

• New Investors also secured licenses to operate MFBs.

• Prior to 24 Sep. 2010, 969 MFBs were approved. This included 68 AIPs.

• As at 31 Dec. 2010, 866 approved MFBs, including 121 provisional approvals for new licences. 103 MFBs in liquidation.

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Distribution of MFBs

GEO-POLITICAL ZONES

PRIOR TO 24 SEP 2010

% OF TOTAL

AS AT 30 NOV 2010

% OFTOTAL

North-West 66 6.8 58 6.7

North-Central 156 16.1 149 17.2

North-East 34 3.6 31 3.6

South-West 389 40.1 345 39.8

South-South 136 14.0 115 13.3

South-East 188 19.4 168 19.4

TOTAL 969 100 866 100

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Distribution of MFBs

• Highly clustered in the SW; moderately in SE, NC and SS; but thinly spread in NW and NE.

• Highly diversified sector in terms of size of operations, capitalization, sophistication, clustering, etc.

• Highly urbanized; rural dwellers are still largely under-served.

• Target groups still under-served.

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Growth of MFBs

Indicators 31 Dec. 2007

31 Oct. 2010

% Change

Total Assets (N’million) 75,549.92 178,516.34 136.3

Aggregate Deposit (N’million) 41,217.71 83,072.97 101.6

Number of deposit accounts N/a 2,020,567 N/a

Average deposit size N/a 41,110 N/a

Aggregate Loans & Advances (N’m) 22,850.23 61,811.52 170.5

Number of loan accounts N/a 623,353 N/a

Average loan size N/a 104,750 N/a

Average Case load N/a 144 N/a

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Qualitative Issues

Selected Key Indicator Observation

Double bottom line Emphasis on the social mission is negligible; highly commercialized.

Net Interest Margin Higher rates are charged resulting in higher Net Interest Margin than mainstream banks.

Asset quality The quality of loan portfolio is a key driver of profitability. PAR 30 days, Bad debt ratio and write off ratio are very high.

Operating Cost Relatively smaller size and shorter maturity of loans drive transaction costs higher. Cost per borrower and operating expenses to Total Assets are high.

Longer-term funding Asset-liability mismatch; heavy investment in fixed assets, capital market and branch expansion.

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Challenges of MFBs

• Mission drift by the MFB Operators

• MFBs operating like ‘micro-commercial banks’ with flamboyance, fleet of branded cars and high expenditure profile

• Weak capacity and poor understanding of the microfinance concept and the methodology for delivering MF services

• Impact of the global financial turbulence of 2008/2009

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Challenges of MFBs …..

• Weak capitalization

• Poor corporate governance and susceptibility to insider abuse

• Incompetence and ineffective oversight of the board

• Poor risk management and weak internal controls

• Dearth of on-lending/external funding

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CBN 4-Pillar Reform

• Sanitization of the sector

• Capacity Building

• Restructuring

• Restoring Public Confidence

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Sanitization

• CBN/NDIC Joint Target Examination carried out on 820 MFBs in operation.

• Necessitated by reports of failure of MFBs to meet matured obligations, gross insider abuse and petitions;

• Focus was to determine capital adequacy, liquidity, level of non-performing loans and general financial health of MFBs;

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Sanitization

• Objective was to sanitize the sector, forestall contagion, remove bad apples and avoid total contamination of the industry.

• 224 ‘Terminally Distressed’ and ‘Technically Insolvent’ MFBs had their licenses revoked.

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Sanitization ……

• 121 MFBs that subsequently injected fresh capital, out of the 224 licences revoked, were granted provisional approvals for new licences, subject to meeting specified conditions within three months.

• The remaining103 MFBs are under liquidation.

• 866 MFBs (including 61 AIPs and 121 provisional approvals)

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Sanitization…..

• Liquidation of the 103 MFBs is ongoing

• Payment of the insured deposits by NDIC is on-going

• Intense surveillance of the sector will continue

• Cleansing of the sub-sector of unlicensed/ illegal operators intensified

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Sanitization…..

• The message is that Microfinance banking is a regulated activity and only well capitalized institution that are ready to comply with the rules and regulation will be allowed to operate in that space going forward.

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Capacity Building

• Establishment of Microfinance Certification Programme (MCP).

• 25 Microfinance Training Service Providers (MTSPs) accredited in 2009.

• 1,960 operators of MFBs were trained and sat CIBN Certification Examination (Level I) in 2010.

• Level II Training and Examinations in 2011.

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Restructuring

• Revision of Regulatory and Supervisory Framework and Guidelines

• New structure of tiered minimum capital requirement

• Internal restructuring of supervisory arrangement

• Adoption of Operational Template to benchmark MFBs

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Restructuring…..

• Nurturing NAMB as a self-regulatory organization to complement existing supervisory arrangement.

• MSME Fund in the pipeline.

• Shared services to provide a Data Centre and IT platform to link MFBs to other components of the financial/payment system are also in the pipeline.

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Restoring Public Confidence

• Sanitization exercise.

• Actualization of safety net through deposit insurance/protection scheme for MFBs’ depositors’ funds. 99% of depositors paid.

• Awareness campaign, sensitization, road shows.

• Ensuring market discipline.

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Opportunity

• Access to payment facilities is a major enabler for achieving universal access to finance. Branchless banking and mobile banking offer tremendous capability to pay and receive money easily, to expand financial possibilities and to reduce the cost of providing retail banking infrastructure by MFBs and need to be fully explored.

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Conclusion

• The microfinance sub-sector in Nigeria is fledgling, but it offers great potentials for financial inclusion and sustainable economic development, employment generation and poverty reduction, which are yet to be harnessed.

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