Babajide Komolafe and Amaka Agwuegbo
In recent times there has been widespread incidence of distress in the microfinance bank industry. A number of microfinance banks have closed shop due to the problem of illiquidity while the customers suffer the pain and agony of not being able to access their deposit. The severity of the distress in the sub-sector became manifest when the prime of the industry, Integrated Microfinance Bank sacked its chief executive and shut its doors to depositors who came for their money.
In this interview with Babajide Komolafe and Amaka Agwuegbo, former and first director, Special Insured Institution Department (SIID) of the Nigeria Deposit Corporation (NDIC), which is responsible for microfinance banks andÂ primary mortgage institutions,Â Mr. Joel Ahimie provides a thorough diagnosis of the cause of distress in the sub-sector. According to him, microfinance bank operators have derailed and the regulatory authorities do not have the capacity to supervise them effectively.
What is responsible for the incidence of distress in the microfinance banking industry
I’ve read in the papers that some of the MFBs are already distressed and are unable to meet their depositorsâ€™ demand for funds. I think what could be responsible for this situation is that the management of these MFBs have notÂ done their work the way it ought to be done. They were too much in a hurry and were mimicking the commercial banking operations. One and a half years in operation is still a period when they are supposed to put their structures in place. These include building up their deposit reserves, going out to seek for funds, and the likes but they have not been doing such.
As soon as they got their licenses, they rushed to the market for depositors, and as an incentive for people to come and bank with them, they started giving out loans without actually knowing these customers very well. The KYC (know your customer) principle in universal banking should apply to microfinance banking. Six months is too short for the MFBs to know the customers they are dealing with. In the universal banking system, within the six months period of consistent banking is when the operators get to know the kind of customers they are dealing with. But the MFB operators rushed into giving out loan facilities and I think that is one of the root causes of their problem.
Secondly, most of them relied on the facilities from commercial banks for funds for on-lending to customers. In the case of Integrated MFB, which is a very big bank with lots of promises, what happened is that they had a line of credit with a commercial bank which started having liquidity problems.
What I’m trying to point out is that MFBs ought not to rely on loanable funds for on-lending, but rely on savings and other kinds of deposits.
Don’t you think what is happening in the industry is due to the approach applied to microfinance banking
What you are saying about the approach is right. When you start as a microfinance institution, what you are supposed to do is to put the various structures in place, which has not been done. Because majority of our MFBs were community banks (CBs), what they ought to have done was employ and adequately train people since the practice is still new here. Also, they are supposed to have field officers who are to go out and identify various groups, and this takes time to organise.
MFBs are not supposed to make profit. In other countries, it takes microfinance banksÂ about 10 years to make profit. What our people did was to start giving out loans, while all they needed to do was to go out, organise the poor into groups, and offer them counselling services because you are dealing with the poor who are to be educated by the staff of these microfinance banks.
But what they do is to ignore the real poor whom they are supposed to serve and focus on the upper middle class and small scale entrepreneurs who are already customers to the commercial banks. And because this class of middle upper class and entrepreneurs are unable to assess facilities in the commercial banks, it becomes easy for them to approach MFBs because the demand for collateral is not so strong and they are taking advantage of the situation.
Majority of the loans that have been given out by microfinance banks are bad and it is this class of people that have actually defaulted in the loan they have taken from the microfinance banks.
To what extent can we attribute all these issues to supervision by the regulatory bodies
Supervision is a different ball game and it has to do with a bank’s ability to effectively manage its operations from the risks point of view. Maybe you wanted to ask shouldn’t there be an institution that will lay down the guidelines on how to run a microfinance institution in Nigeria. We don’t have that in place and every microfinance institution is looking up to the Central Bank of Nigeria that gave them life, and all the CBN can do is supervise and ensure that they comply to the rules and regulations of banking, which is different from an institution that should offer education to MFBs and tells them how to go about micro-lending.
For MFBs to make an impact in areas where they are located, you have to train your staff and identify the customers so as to be able to create wealth within the environment. Bur we have a situation whereby majority of the microfinance banks are concentrated in the urban centers, especially Lagos whereÂ we have over 200 microfinance banks.
It is a big market and that is why everybody is rushing into it because the motive is profit. This is one of the reasons why they are having problems because if they identify and concentrate on the poor and do the microfinance business the way it ought to be done, majority of them would not be having these problems they are having because the poor hardly owe and the recovery rate is high.
We have had some cases of MFBs who collected money from depositors, became distressed and ended up in the Police net only forÂ the CBN to announceÂ that those MFBs were not licensed by them. Who do we blame for such lapses?
The issue now is where do we apportion blame? The microfinance banksÂ are under the purview of the CBN but the ones we are referring to are fake institutions who were not licensed by the CBN. Don’t forget that we also had problems of wonder banks.
The reason why we are having that is because the number of microfinance institutions is increasing by the day. And thisÂ makesÂ it difficult for a person to come out and identify which microfinance bank is licensed or not because there is no register for the public to look at and be able to identify real MFBs. But I suppose that setting up an illegal institution is a crime and the Police should be involved. But we need to ask how the Police will know which MFB is legal or not.
So, it is left for the CBN to make its records available to the Police. Also, there is an association of MFBs in the country and I think it should have regional bodies with executives who should know which MFB in their regions that are licensed to practice. And if they see any institution that is not registered and licensed, they should inform the national chairman who will contact the CBN to find out if they just issued license to the institution.
Equally, the CBN should make it a point of duty to inform the association of any MFB that is issued licenses. I don’t think this is obtainable now because if this is not done, we would have serious problems. From what is happening, I know that quite a good number of them are operating illegally and they have deprived ignorant and unsuspecting customers of their hard earned money and we are treating this issue with kid gloves.
In fact, the CBN should be able to properly reorganize the microfinance banks’Â association so that they can be able to monitor who is setting up an office and immediately report to the CBN. This will enable the association check the excesses and illegalities of these MFBs that are springing up here and there.
When I was a bank manager in Onitsha, a group of people rented a building, repainted it, wrote the name of the bank and people started depositing their money there. Of course, they promised people mouth watering incentives and facilities but they didn’t stay for more than three months before they closed shop.
So I think the CBN has to link up with the association, with the association being grouped into regions and with more powers; because if there are almost 1000 MFBs, it would be very difficult for somebody sitting in Lagos or Abuja to supervise because apart from microfinance banks, he has other jobs.
During the days of community banks, they had an apex body (National Board for Community Banks, NBCB) and a vibrant National Association of Community Banks (NACOB). But when they transformed to MFBs, all these institutional arrangements were jettisoned by the CBN. Isn’t it obvious that these institutional arrangements are necessary?
Yes, they are necessary but not from the angle you are looking at it. Why NBCB was jettisoned is because it was not recognized by the law, though they claimed that there was a Decree, but if you look at BOFIA, the CBN is actually given all the powers to oversee all financial institutions.
Another problem they had was that they were really not professionals. So when the CBN was given the powers to oversee all financial institutions, it then jettisoned NBCB. The boardÂ couldn’t be performing the role it was supposed to be performing because it hadn’t the powers and the kind of training it was required to have. NBCB couldn’t go to a bank and decide if its capital is adequate or not because it doesn’t have that kind of powers.
What you are looking at is not the board itself, because what you are saying now is that maybe the board ought to play the roles that I have just mentioned. No. what I’m saying is that it is the association itself, not the board, because the board will have an office, pay salaries and all that.
Are you canvassing for an apex body to oversee the affairs of these MFBs?
No. I mean there should be an institution, but not an apex body since the apex body will have the power and charter to regulate. The law says there should be self regulation, even as an association. The CBN should encourage andÂ empower the association. The CBN should inform the members of the association and the association itself must be able to protect themselves against these illegal institutions because when the illegal ones misbehave, it rubs off on the legal ones.
Is there anything wrong if the Federal Government and the CBN set up an apex body to regulate MFBs, just as the NDIC was set up for deposit insurance?
The question you need to ask is: even if an institution is set up to monitor MFBs, would it be easy for it as well? I don’t know if it would be easy, though I agree with you. But as an association, they can supervise themselves.
Considering the number of MFBs, I doubt if the CBN and NDIC would be able to carry out proper examination on them. The examination cycle is usually one year, so if the CBN and NDIC were to examine, it is not possible for the CBN to examine for 356 days in a year since it spends, at most, 3 days to carry out an examination, so it would not be able to examine 400 nor can the NDIC.
We also have to consider the quality of the examination and three days might be grossly inadequate to examine a bank. I should think that the CBN and NDIC, by now, should be thinking of outsourcing part of the supervision of the MFBs because when they were community banks , their examinations were outsourced by the CBN to some auditing firms. But we have to ask if the auditing firms are qualified enough to offer the kind of examinations that the Examination Department of the NDIC would provide.
Bank examination is not auditing. That means if the CBN would outsource, it has to train the people on how to conduct onsite examinations, but the training takes time and is expensive and I don’t think the CBN would want to train anyone for six months.
The NDIC and Federal Reserve Bank carry out their training twice a year and not only do they train people here, but abroad. The Examiners go almost every year because in the US, once you are an examiner, at the end of the examination school, they give you a certificate, a license and you become a Chartered Examiner, which we don’t have here.
When outsourcing, you have to consider if the people you want to contract it to would be able to do it the way it is supposed to be done. When the CBN outsourced the CBs’ examination, they didn’t do a proper job because the people lacked the training.
Bank examination includes risk management and the banks have to know what their risk exposures are so as to put certain measures in place to help them manage the risks. Also, the MBFs should have some capital charges so that in case of failure, this is the capital they are putting on ground to mitigate the loss. It the MFBs do this, they will be okay. For any bank to be able to do this, the profit it would record wouldn’t be more than N2 million to N3 million per annum.
In the US, the risk element they put for mortgage is 35 per cent, so if you sell a house worth $120,000, 35 per cent of it in cash should be set aside in case it goes bad. In Nigeria, it is 100 per cent, but are the banks setting aside 100 per cent cash as capital charges against the risks they are taking? This is an area the bank examiners should look at because this is why when they examine them and they make provisions, the CBN and NDIC would tell them to make additional provisions which is what causes problems. This is because if they make adequate provisions, these banks would not have the problems they are having.
Also, the number of MFBs is getting very large, which is a good thing because the more they are, the more access the poor have to the banks, thereby creating wealth. But when they do this, they are putting their shareholders’ funds at risk and I don’t think there is anyone protecting these shareholders and depositors. I don’t know if the CBN and NDIC have the resources to monitor and supervise these 1000 institutions so that the depositors’ funds would not be lost because the examination cycle is supposed to be one year and I don’t know how they will examine 1000 banks within one year.
All these developments indicate that we went full scale into microfinancing without being prepared for it, especially looking at the rate at which licenses were given out. It wasÂ as if the authorities didn’t take cognizance of their resources and abilities to ensure that it works the way it ought to?
Look at the scenario from two angles. One of the reasons microfinance banking was introduced is because of the level of poverty in the country. About 87 per cent of Nigerians do not have access to banks, and by introducing microfinance banks, these percentage of people will now have access to banking services because microfinance is not banking per se. In a bank, you just have to have money to deposit, you will be charged and you can borrow based on the collateral you have.
But in microfinance, you don’t have to have money to save before you can even be part of the institution. It is the duty of the MFB operators to come into your village, organize you and see what you can do to improve your standard of living. By so doing, you will discover that there are avenues to make money and because you don’t have, the MFB can decide to lend you money because you don’t need to have collateral.
Money can be lent through group formation, peer persuasion where your friends will monitor you, and through organized group guarantee where you don’t have to secure your loan with anything nor do you need to have a facility with the bank because the bank can even make savings from you. So microfinance is mainly for small customers, hence the name. It was introduced by the CBN so that the level of poverty in our villages will be reduced and the more MFBs we have, the better it is for the economy. This is what is obtained in India, South America and Bangladesh.
The issue is that the CBN is happy we are having more MFBs. The important thing is that the MFBs we have should regulate themselves because there are people who own those banks and they should have over sight responsibilities towards their banks. This is why the CBN, in approving the list of directors, scrutinize the list of the directors that were given to them. Before a license is given, the CBN carries out an examination to scrutinize the board members.
To be honest with you, the CBN has done its job because the screening was rigorous. Apart from your business plan, you will be asked to send a list of your directors and yourself to the CBN and the banks complied.
The CBN didn’t rely on what was written, it even asked the NDIC to also look at the list and recommend if the operators are fit to run a bank. This is part of the regulation and supervision because these people are supposed to supervise their own banks since it is small money. The overall amount of money for the MFB sector is low and would have no significant negative impact on the total amount of money in circulation in the country.
We know that there are problems that can be taken care of not by the CBN and NDIC alone, but they have done a good thing. This is where the MFB association comes in to help regulate them, which may be a difficult thing to do. I know of a big MFB that gives out N1m, but if you look at the guidelines, the maximum that can be given to an individual is N500,000.
Our people were just too much in a hurry and most of the operators see microfinance bank as a mini bank and that is wrong. Some see it as a profit making business, forgetting that the profit will come but not now. The money lenders are making money and they charge 100 per cent interest, but MFBs charge over 30 per cent, which is a lot of money.
An MFB Managing Director once told me that he can’t rely on the poor because they have no money. Yes, the poor don’t have money, but when you talk of volume, they have.
MFB operators should not expect to make profit in the next five years and this is an area where the operators need to be counseled on though it is not the responsibility of the CBN to tell you how to run your business. The shareholders also need to be counseled not to put pressure on the operators. Being in microfinance business is to develop your local government area. The money will eventually come, butÂ it is not immediate.
In the textile industry, there were demands from East and Southern Africa because they didn’t have what we have. When they see Nigerians wearing our Ankara, iro and buba, they really liked it and wanted such from the Nigerian market. Trust Nigerians to attach high prices to completely sewn set of cloths. They have organized markets and they have more of malls than open markets, so you don’t just sell materials for them to sew, it has to be ready made. Nigerians went there and took over the market, but the people couldn’t afford it because they don’t make money the way we do here and Nigerians lost out. Togolese boys took over the market.
The problem with Nigerians is that we are always looking for profit. Microfinance is good and the operators are not supposed to be looking for profit in the next five to six years. Also, they are not supposed to invest in elaborate buildings because we have some MFBs’ offices that are better than some commercial banks’ offices. You see some having flat screen TV, flashy cars and everybody is wearing suits. When we went to Bangladesh and South America to look at how they run theirs, their MDs are in jeans and T-shirts and the marketing officers are local school certificate holders.
We thought the microfinance here would be able to provide jobs for school certificate and OND holders, but the operators insistÂ that people must have second class upperÂ as a graduate, which doesn’t make sense. When they go out, it is to go and meet big men and customers of commercial banks to mobilize funds and they are in cars.Â I think this is a misplaced priority and that is why their overhead cost is getting too high for them.
A lot of them will have illiquidity problem due to the way they are going. They are already having it and they are struggling because they pay high salaries, the MDs ride jeeps and it is not supposed to be like that. The cost of running the banks are high and the poor don’t really have much money to put in their savings because when you are talking about getting more money from savings from the poor, you are talking about increasing your outreach by going out and having lots of customers and you need to have a system in place that will capture the number of customers you have.
Then you have to consider customers loyalty so that they do not leave you and you need people who will be going out to organize the customers. When you give someone N50,000, within a week, it is gone, but when you give a poor woman the same amount, she will buy beans, grind, mix and sell akara and she will be paying back the loan on a daily basis. If you can get hundreds of people like that, you don’t have to be going from one person to the other demanding for money.
That is the reason the CBN set up the MFB policy but it is so unfortunate that the operators are not practicing it the way CBN wants them to. I understand the CBN is offering them some kind of training on how to run the banks. The CBN is doing a lot and even too much that I don’t know how they are going to keep it up.