With the huge shortage of funds in the banking industry, failure of the established community banks and other government programs in financing microenterprises in Nigeria, gave rise to the idea of transforming existing microfinance NGOs into microfinance banks. In the past years, microfinance institutions were informal in nature. They were characterized by different mechanism such as ability of the members of these microfinance institutions to have credit support from other members which could be used in expanding their businesses mainly in the agricultural sector.
For almost three decades it has been a challenge for governments to provide micro-credit to the poor people who are operating micro and medium enterprises. It is known that in every country around the world, over 90% of the businesses are micro and small businesses (Jenkins, 2009).
In Nigeria, there used to be people who go round taking money from other people in their job places. These kinds of people serve like village banks, where they accept the money as deposit and save it for the people. This kind of agreement between the inhabitants of the respected area and the people going round to collect their money establishes a trust between them. Although it differs between community to community, the whole idea is the same which is deposit taking and saving, but what remains interesting here is that in some cases, these people that agree to save, form group amongst themselves, and one or two people among them borrow the money after it has been accumulated. They usually gather the money for six to twelve months. The members who collect the money usually use it to invest in their businesses but they also know that they are required to return the money back to the depositors. This way other members will also have a chance to borrow. This is one of the interesting cases as it gives us an insight on how the financial sector operates in Nigerian villages and towns.
This process of formation of own borrowing groups was not only common in Nigeria, but it was experienced around the world. An empirical evidence in Ghana (Owusu and Tetteh, 1982), Zimbabwe (Bratton, 1986) and Dominican Republic (Desai, 1983) shows that local conditions have influenced the ideal size of membership and that below or above the ideal size of membership correlates negatively with cohesiveness and joint accountability.
Anyanwu (2004) conducted a study on micro-finance institutions in Nigeria, their policy practice and potential. In this study, he analyzed at that time, the ten major micro-finance institutions in Nigeria with respect to their location. These micro-finance institutions were Farmers’ Development Union (FADU), in Ibadan; Community Women and Development (COWAD), in Ibadan; Country Women Association of Nigeria (COWAN), in Akure; Lift Above Poverty (LPO), in Benin; Justice Development and Peace Commission (JDPC), in Ijebu-Ode; Women Development Initiative (WDI), in Kano; Development Education Centre (DEC ENUGU), in Enugu; Development Exchange Centre (DEC BAUCHI), in Bauchi; Outreach Foundation (OF), in Lagos; and Nsukka Area Leaders of Thought United Self-Help Organization (NLTNUSHO), in Nsukka.
The result of the analysis carried out by Anyanwu in 2004 showed that most of the beneficiaries of the services provided by the micro-finance institutions in Nigeria were women. “About 97.4 per cent of the clients in the sample were women. Four of the institutions exclusively provide services to women, while five had over 90 per cent of their clients as females” (Anyanwu, 2004 pp.5). This shows clearly how women have been the most important target for the micro-finance institutions which is viewed as normal because of the fact that women in Nigeria are always believed to be marginalized in terms of socio-economic matters. The study was one of the triggering factors that led to the public sector seeing the fact that almost 60 percent of the Nigerian populations which reside in the rural or remote areas do not have access to micro-credit. This gave the public sector a thinking of coming out with alternative solution to this problem. The following tables 1 to 4 summarize the ten major micro-finance institutions in Nigeria and their activities before 2005.
As the analysis in Table 1 to 4 shows, in average all these microfinance institutions source their funds from either government grants or grants from other individual or international donors. This kind of source tells us that the microfinance institutions in Nigeria were dependent on these grants which constitute 51.2 percent of their whole source of funds. This is a very big number in respect of sustainability of the entire microfinance sector that they serve to the poor. Microfinance institutions in Nigeria should be able to have continual supply of micro-credit to the Nigerian poor and abandoned population on their own without receiving any exogenous grants or donations. Having that huge amount of external support as 51.2 percent grants or donations, gives us a hint that a more adequate and self-sustainable institution is needed in order to serve the poor on sustainable basis. So overall, self-sustainable institutions are needed to be able to tackle the poverty alleviation question addressed by the government through the micro-finance sector in Nigeria.
With these downturns and global concern about poverty, micro-finance became a very important discussion and top priority of even international development institutions. Huge funds were set aside by these institutions to combat poverty. These institutions are membered by the world countries which made it powerful enough to deal with questions of poverty and promote consensus solution amongst themselves. With the clear international concern about the effect of poverty which the world income distribution with a Gini coefficient of around 0.85 makes it an excellent indicator of unsuccessful nature of the aggregate world economy these days. This result shows an unjust income distribution, which roughly 15 percent of world’s population receive 80 percent of the aggregate income generated, whereas almost half of the world’s population to fall under massive conditions of poverty (Birtek, 2009).
Microcredit is a critical anti-poverty tool and a wise investment in human capital. Now that the nations of the world have committed themselves to reduce the number of people living on less than $1 a day by half by the year 2015, we must look even more seriously at the pivotal role that sustainable microfinance can play and is playing in reaching this Millennium Development Goal (Annan, 2006).
Year 2005 was recognized by the United Nations as “Year of Microfinance” (Jenkins, 2009). United Nations is one of the sole organizations which foster the continual existence of micro financing in both the developed and developing countries. The millennium development goals addressed the issue of alleviating poverty not only by giving foreign aid to the less developed and under-developed countries, but also by supporting the poor to stand on their own.
With all these developments that took place since early 1990s, like the other governments, the Nigerian government also reacted. The Central Bank of Nigeria (CBN) responded in 2005 by establishing laws which will promote the establishments of better financial institutions to serve the Nigerian poor population. The microfinance policy, regulatory and supervisory framework for Nigeria entered into force in 2005. This law obligates microfinance institutions to be regulated in Nigeria. With this policy, regulatory and supervisory framework, the government addressed different issues needed to strengthen microfinance institutions in Nigeria. This law required the private sector to acquire license from the Central Bank of Nigeria. The license was open to start-up a micro-finance banks or an already established microfinance institutions that wanted to convert into a micro-finance bank. The policy aimed at having adequate regulation and supervision over the microfinance sector in Nigeria.
According to Jenkins (2009), one of the ways of incorporating microfinance into the financial system can be achieved through the change of microfinance NGO’s into a formal regulated financial institutions. With this, adequate credit allocations to the poor could be achieved. As (white and Campion, 2002) termed it to be “up scaling of microfinance institutions”. Furthermore, Jenkins (2009) stated that since 1990s a large number of microfinance institutions have transformed into a regulated microfinance bank such as BancoSol, K-Rep and ACLE-DA Bank. These microfinance NGOs were all unregulated, but they later transformed into a fully regulated institution under their respective country laws.
3.2 Regulation of Micro Finance Banks in Nigeria
The microfinance policy, regulatory and supervisory framework in 2005 was the first formal policy established for microfinance institutions that are becoming microfinance banks in Nigeria. Some months later, another formal text was released on regulatory and supervisory frameworks for micro-finance banks (MFBs) in Nigeria. These provisions were established in line with the Millennium Development Goals (MDGs) as every member of the United Nations should respect. Analysis would be made on the policies establishing the micro-finance banks in Nigeria. This policy was the proceeding of the National Conference on Microfinance organized between the Ministry of Finance (MoF) and Central Bank of Nigeria (CBN) in 2000. As a result, in 2001, the Central Bank of Nigeria conducted a baseline study of the microfinance institutions in Nigeria. Some of the objectives of the study among others as indicated by Okojie, Monye-Emina, Eghafona, Osaghae & Ehiakhanem (2009, pp22-23) were:
Identifying the role of MFIs in financial intermediation in Nigeria,
Determining the level of financial intermediation of MFIs with a view to developing a regulatory and supervisory framework to guide and enhance its operations in Nigeria, and
Recommending policies that would facilitate the linkage of informal, semi-formal, and formal financial services providers to micro- and small-scale rural entrepreneurs.
Also the study shows that as of third quarter of 2001, about 60 percents of commercial banks had aggregate savings of about N99.4 million about 662,666 USD and outstanding credit of N649.6 million about 4,330,666 USD, indicating huge business transactions in the sector. This clearly indicates the large size of their equity base. (Okojie, Monye-Emina, Eghafona, Osaghae and Ehiakhanem, 2009).
With the above indications addressed by the study which explained the need for a proper regulatory framework, the Central Bank of Nigeria (CBN) responded as indicated by (Anyanwu, 2004) as follows:
Development of a regulatory and supervisory framework for the operations of MFIs in Nigeria
Establishment of an apex regulatory institution charged with the responsibility of building capacity through the training of directors and managers of MFIs to enable them to develop an efficient information system for identifying and managing risks, and satisfying relevant data and information requirements of regulators and stakeholders,
Improvement of infrastructural facilities so as to reduce the transactional costs associated with the administration of microcredit in the country.
These areas above indicated by the Central Bank of Nigeria (CBN) brought about the entire regulatory and supervisory framework for microfinance banks (MFBs) in Nigeria. Below will be analysis on the kinds of regulatory and supervisory issues are addressed.
3.2.1 What determines the Central Bank of Nigeria (CBN)’s Power?
The regulatory and supervisory guidelines and rules are issued by the CBN in the exercise of powers given by the provisions of section 28 subsection (1) (b) of the CBN Act 24 of 1991 (as amended) and in pursuance of the provisions of section 56-60A of the Banks and Other Financial Institution Act (BOFIA) 25 of 1991 (as amended). These guidelines were to organize and establish micro-finance banks (MFB’s) that will be able to utilize deposit acceptance and savings from the public and engage in microfinance activities with their clients (CBN, 2005). This power made CBN above any other government department or parastatal in decidng regulatory and supervisory rules for these microfinance banks in Nigeria.
3.2.2 What Defines a Micro Finance Bank by law?
As indicated by the policy law, a microfinance bank unless otherwise stated shall be taken to mean any kind of company licensed to carry out the business of providing microfinance services which includes such things as savings, loans, domestic funds transfer and other financial services that economically active poor, micro enterprises and small and medium enterprises need to carry out and boost their businesses as indicated by these rules and guidelines (CBN, 2005).
3.2.3 Who should be the micro-finance clients ?
It is clealy indicated in the policy establishing the microfinance banks in Nigeria that who their clients should be. The policy clealy states that the main purpose is to serve the economically active poor which will be a way of empoering them to have more choices. The policy indicated that for a person to benefit from the microfinance banks, certain characteristics should be met (CBN, 2005), which includes :
Having a monthly income of not more than twice the monthly per capital income of Nigeria or minimum wage, whichever is higher
Having a total productive assets [inclusive of those arising from loans but excluding the cost of land] of not more than five hundred thousand Naira [N500, 000.00] only, about 3,333.33 USD.
Is not a regular employee of any organization
Age between 18 and 60 years.
Unless if someone fall in that category, or else microfinance loan would not be granted.
3.2.4 What defines a Poor Person?
A poor person as explained by the policy is one who has meager means sustenance or livelihood, and who earns a total income in a year that is less than the minimum taxable income set by the Nigerian government (CBN, 2005).
3.2.5 Which businesses are termed as micro-enterprises?
It is indicated in the policy that micro enterprises are those firms that require micro credit or loans to operate and boost their businesses. These kinds of businesses are characterized of mainly sole proprietorships and are family basic in nature. Employments are provided to few which are mostly immediate family members. These micro entrepreneurs work informally and usually are engaged in activities which are primary in nature like local craft and subsistence agriculture.
3.2.6 What defines Collateral and what is the Loan Duration?
Unlike the commercial bank lending where collateral is a requirement, micro loans are given to the micro entrepreneurs such as peasants, farmers, artisans, fishermen, women, senior citizens and non-salaried workers in the formal and informal sector based on their character and the cash flow of the businesses and their household (CBN, 2005).
Collateral is not needed to secure any micro-credit loan due to the fact that the idea is to help the poor, low income earners and micro entrepreneurs boost their businesses as indicated by the policy (CBN, 2005).
The micro-loan duration should not exceed 180 days (6 months), but in some exceptional cases where a loan is giving to micro-enterprises engaged in agricultural activities with longer gestation period, maximum of 12 months (one year) would be granted. The loan may be repaid daily, weekly, monthly or bi-monthly basis depending on the amortization schedule in the contract (CBN, 2005).
3.2.7 Ownership and License of Microfinance Banks (MFB’s) In Nigeria
The policy framework explained that micro-finance banks can be established by a single person, group of individuals, community development associations, and domestic private and foreign investors. The policy further explained that significant diversification in ownership would continue to be encouraged in order to enhance good corporate governance of licensed MFB’s. Also those universal banks that intend to create any category of MFB as their subsidiaries shall be required to satisfy all the requirements set by the law.
Talking about granting license, it requires that any investor that’s willing to operate a MFB in Nigeria shall put it in writing to the governor of Central Bank of Nigeria (CBN).
It indicated that there shall be two categories of licenses. These categories as indicated by the Micro-Finance policy were:
Those Micro Finance Banks (MFB’s) licensed to operate as a unit bank otherwise known as Community banks shall operate and open branches within a specified local government area [LGA]. N20 million [twenty million naira] roughly 133,333.333 USD or such amount shall be the minimum capital requirement as may be prescribed by the CBN from time to time.
And Those Micro Finance Banks (MFB’s) licensed to operate in a State and open branches within a specified state or Federal capital territory. N1.0 billion (one billion naira) only roughly 6,666,666.667 USD or such an amount shall be the minimum capital requirement as may be prescribed by the CBN from time to time (CBN 2005, p10).
With these features mentioned above, one can see the differences between a universal bank and a micro-finance bank regulation in Nigeria. A clear demarcation can be seen in the amount of capital requirement. For a universal bank, its 25 Billion Naira about 166,666,666.7 USD, which is 25 times the minimum capital requirement for a microfinance bank licensed to operate in a state. This is a huge gap because microfinance banks in Nigeria are only restricted to given credits to the class of people that are either low income earners, aged or senior citizens. These only are allowed to receive a micro-credit loan.
3.3 Permissible acts for Microfinance Banks in Nigeria
There are number of permissible acts indicated by the policy establishing microfinance banks in Nigeria. As indicated by the framework policy, a microfinance bank shall only be allowed to provide the following services to its clients (CBN, 2005 pp8-9):
Acceptance of various types of deposits including savings, time, target and demand from individuals, groups and associations; except public sector deposits [government],
provision of credit to its customers, including formal and informal self-help groups, individuals and associations;
promotion and monitoring of loan usage among its customers by providing ancillary capacity building in areas such as record keeping and small business management;
issuance of redeemable debentures to interested parties to raise funds from members of the public with approval of the CBN;
collection of money or proceeds of banking instruments on behalf of its customers through correspondent banks;
provision of payment services such as salary, gratuity, pension for the various tiers of government;
provision of loan disbursement services for the delivery of credit programme of government, agencies, groups and individual for poverty alleviation on non-recourse basis;
provision of ancillary banking services to their customers such as domestic remittance of funds and safe custody;
maintenance and operation of various types of account with other banks in Nigeria;
investment of surplus funds of the MFB in suitable instruments including placing such funds with correspondent banks and in Treasury Bills;
pay and receive interests as may be agreed upon between them and their clients in accordance with existing guidelines;
operation of micro leasing facilities, micro finance related hire purchase and arrangement of consortium lending and supervise credit schemes to ensure access of micro finance customers to inputs for their economic activities;
receiving of refinancing or other funds from CBN and other sources, private or public, on terms mutually acceptable to both the provider of the funds and the recipient MFBs;
provision of micro finance related guarantees for their customers to enable them have greater access to credit and other resources;
buying, selling and supplying industrial and agricultural inputs, livestock , machinery and industrial raw materials to poor persons on credit and to act as agent for any association for the sale of such goods or livestock;
investment in shares or equity of any body-corporate, the objective of which is to provide microfinance services to poor persons;
encouragement of investment in cottage industries and income generating projects for poor persons as may be prescribed by the CBN
provision of services and facilities to customers to hedge various risks relating to microfinance activities;
provision of professional advice to poor persons regarding investments in small businesses; rendering managerial, marketing, technical and administrative advice to customers and assisting them in obtaining services in such fields;
mobilize and provide financial and technical assistance and training to micro- enterprises
provision of loans to microfinance clients for home improvement and consumer credits; and
performance of non-banking functions that relate to micro finance related business development services such as co-operatives and group formation activities, rural industrialization and other support services needed by micro enterprises.
Unless otherwise stated by the CBN, no microfinance bank is allowed to spill over these permissible acts, in other words only these services can be performed and provided by microfinance banks in Nigeria. These permissible acts are subject to review by the CBN from time to time.
3.4 Prohibitive acts for Microfinance Banks in Nigeria
As indicated by the policy, microfinance banks are not allowed to carry activities (CBN, 2005 pp9-10) such as :
acceptance of public sector [government] deposit except for the permissible activities like provision of payment services such as salary, gratuity, pension for the various tiers of government and provision of loan disbursement services for the delivery of credit programme of government, agencies, groups and individual for poverty alleviation on non-recourse basis
foreign exchange transactions,
international commercial papers,
international corporate finance,
international electronic funds transfer,
cheque clearing activities,
dealing in Land for speculative purposes,
real estate except for its use as office accommodation,
allow any facility for speculative purposes; and
enter into leasing, renting, and sale/purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries own five percent [5%] or more of the equity of the MFB, without the prior approval in writing of the Central Bank of Nigeria