By Babajide Komolafe
The increasing incidence of fraudulent practices in the microfinance banking sub-sector indicate that the sub-sector may have been hijacked by fraudsters and quacks threatening the effectiveness of a policy aimed at creating millions of jobs and reducing poverty, Babajide Komolafe writes.
The telephone call shocked Ngozi, (not real name), and she wished she could do something about the call immediately. But it was Sunday, a day offices especially banks donâ€™t operate. Her account officer at Allmon Microfinance Bank, located in Ijanikin, Lagos State, informed her that the bank is having problems and advised her to come and close her account first thing on Monday.
That night she couldnâ€™t sleep.
She had been banking with the bank for about six months depositing her daily savings in the account. She hoped that the bank would overtime assist her with loan to enhance her little buying and selling petty trade. â€œIt canâ€™t be true,â€ she soliloquised, and if it is true at least, she has the opportunity to collect her money before it was too late to do so. But when she got to the office of the bank the following Monday, it was obvious, she might never be able to recover her money again. She was confronted with a crowd of customers like her who had been informed over the weekend to come for their money. Unfortunately for all of them, they met the bankâ€™s door under lock and key.
The scene at the Allmon Microfinance Bank that morning is fast becoming the trend in the microfinance sub-sector, with millions of small, micro savers like Ngozi facing the prospect of losing their hard earned money kept with these banks.
Microfinance banking is the most recent phenomenon in the Nigerian banking industry. It came into being in 2006 with the launching of the microfinance policy by the Central Bank of Nigeria (CBN). The policy was influenced by the globally acclaimed impact of microfinance in helping the economically active poor to exit the poverty threshold and thus leading to significant poverty reduction.
Microfinance banking was introduced with the expectation that over time it would help in reducing poverty in the country. Hence as stated in section 4:2:1 of the microfinance policy, the policy target includes â€œcovering the majority of the poor but economically active population by 2020 thereby creating millions of jobs and reducing povertyâ€.
To achieve this, the CBN introduced and licensed Microfinance banks, which replaced community banks. According to the policy, microfinance banks are to:
Â·Â Â Â Provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, that would enable them to undertake and develop long-term, sustainable entrepreneurial activities; Mobilize savings for intermediation; Create employment opportunities and increase the productivity ofÂ the active poor in the country, thereby increasing their individual household income and uplifting their standard of living; Enhance organized, systematic and focused participation of the poor in the socio-economic development and resource allocation process;
Â·Â Â Â Provide veritable avenues for the administration of the micro credit programmes of government and high net worth individuals on a non-recourse case basis. In particular, this policy ensures that state governments shall dedicate an amount of not less than 1% of their annual budgets for the on-lending activities of microfinance banks in favour of their residents; and Render payment services, such as salaries, gratuities, and pensions for various tiers of government.
Thus, microfinance banks were established to help the poor and micro businesses by extending financial services to them and in the process help them grow, generate income and employment.
The policy took off smoothly and overtime, especially after the expiration of the December 31st 2006 deadline given to community banks to translate to microfinance banks (MFBs), the number of licensed microfinance banks rose to more than 1000 by the end of 2008.
But unknown to Ngozi and others in her category as well as the regulators, many of the promoters of these MFBs were not in the business for the poor. They saw the microfinance banking policy as opportunity to obtain banking license on a platter of gold, and thereby mobilise deposits which could be used for their personal purposes.Â Even those that were not converting depositorsâ€™ money to personal use were not investing the money as stipulated by the guidelines. Rather than lend to micro businesses as expected and directed by the CBN, they were investing the money in real estate, petroleum business, schools, stock markets and to fund LPOs. These investments however became trapped following the impact of the global financial crisis on the economy.
As a result the MFBs started having liquidity problem and overtime they could not meet obligation to customers. These coupled with fraudulent practices by the officials of some MFBs culminated to the avalanche of closed MFBs across the country. In Lagos State, about three cases of such banks are with the police. They include Allmon MFB, First Call MFB and PS MFB. In addition is Green House Investment Solutions, a microfinance institution.
A reliable regulatory source told Financial Vanguard, many MFBs are having serious problem. Some have become insolvent while many are illiquid. The source however said that this development is not surprising. â€œMost of them are not doing microfinance banking. They were just mimicking the universal banks, their foundation not very good-too fast-too quick to go into the market.
â€œWhen they started, rather than focus on training, growing gradually and developing groups of small savers or trade associations for lending activities, they just went ahead and started lending to individuals.Â â€œIn microfinance, it takes about eight months to develop a group and more so you do not lend to all the members at once and you make sure you lend to the chairman last. But in most cases the MFBs were just lending to individuals, and these individuals are mostly upper class people. The situation was aggravated by the fact that they were lending huge amount of money like N500, 000 thousand to these individuals,â€ he said.
But a source close to the Nigeria Deposit Insurance Corporation (NDIC) blamed the regulatory authorities for these developments. He noted that from the beginning it was obvious that most of the promoters of these banks were not interested in microfinance banking. â€œFrom the kind of physical structure on ground and mode of operation of the banks you would know that these were not microfinance banks but camouflaged. But beyond this, is the fact that the regulatory authorities donâ€™t have adequate hands to supervise the banks.
â€œBetween the CBN and NDIC are departments expected to supervise and monitor these banks. How can two departments supervise over 1000 MFBs?Â In addition to these is the fact that examiners from both agencies are not thorough when examining these banks. They are not supposed to just concentrate on those parameters used for examination of universal banks for MFBs.
â€œThey are supposed to go deeper and look at their lending practices and structure. Who are they lending to? Are they lending more to individuals than to groups? Are they complying with rules on limit of loans per individuals? You look at their loans to see how much they are lending per person, whether it is small loans like N10,000 or huge loans like N100,000,â€ he said.
Investigation by Financial Vanguard revealed that notwithstanding these regulatory lapses, most MFBs that closed shop were victims of pure greed and haste for profit which led to fraudulent practices.
Like in the case of Allmon MFB, where the chief executive, Mr. Daniel Abu was alleged to have converted depositors funds totalling N100 million into personal use, many MFBs operators collected money from depositors which they did not remit to their banks. Further investigation reveals that apart from being poorly paid; the fraudulent activities of top officials motivated the staff in this regard.
The staff were given near impossible targets to generate per month. The salary was not only poor, in some cases N15,000 per month, the staff were not given money to move around to mobilise deposit. So overtime, they started helping themselves from money collected from depositors. With time, these develop into full blown fraudulent tendencies, with some absconding with huge sums of money belonging to depositors.
Commenting on this, Superintendent of Police and Public Relation Officer, Lagos Police Command, Mr. Frank Mba, told Financial Vanguard that given the severity of the fraudulent practices in the MFBs being investigated, the Police doubt if they were ever licensed by the CBN in the first place. â€œIn the case of Allmon, we believe that the bank is not licensed by the CBN,â€ he said.
The Police, he further said, believe in the microfinance banking systems and the objectives behind it. â€œWe believe that notwithstanding the activities of these fraudsters, there are a lot of MFBs out there doing genuine business and helping people and so the public should be careful before dealing with any MFB,â€ he warned.
In order not to fall prey to MFBs run by fraudsters, he said members of the public should look out for the conditions especially the interest rate offered by any MFB, and if the conditions are too attractive and a far cry from what obtains in the industry, they should know that something is wrong. â€œThey should also check the liquidity strength of the bank. If the bank is slow in honouring cheques or paying depositorsâ€™ money, the customer should quickly move out his funds from the bank.
â€œProspective customers should also ask questions and ask questions. Questions put off fraudsters and criminals and once they observe you are asking too many questions they would avoid you.
â€œCustomers should also endeavour to check the records or the history of MFBs before entering into any relationship with them. Though MFB is a recent creation, there are some that metamorphosed from community banks and have been in business for up to ten years and hence have some credibility. Customers should be interested in knowing how long the bank has been in business,â€ he cautioned depositors.