By Amaka Agwuegbo & Temilade Adegunlehin
The widespread illiquidity problem in the microfinance bank industry has been attributed to haste for profit and wrong lending practices.
Former Director, Special Insured Institutions Department,Â Nigeria Deposit Insurance Corporation (NDIC), Mr. Joel Ahimie, made this observation in an exclusive interview with Vanguard.
He said, â€œsome of the MFBs are already distressed and are unable to meet their depositors demand for funds. What could be responsible for this is that the management of these MFBs have not done their work the way it ought to be done. They were 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 a 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, making it impossible for IMFB to grow.
What Iâ€™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.
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, 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 organize.
MFBs are not supposed to make profit. In other countries, it takes MFBs 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, organize the poor into groups, and offer them counseling services because you are dealing with the poor who are to be educated by the staff of these MFBs.
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 entrepreneur 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 MFBs are bad and it is this class of people that have actually defaulted in the loan they have taken from the MFBs.â€
Ahimie commended the recent attempt by the Lagos State Chapter of the National Association of Microfinance Banks of Nigeria to address illiquidity in the industry to set up an intervention fund aimed at addressing the illiquidity problem in the industry.
â€œThe Intervention Fund that is being set up by the association is a step in the right direction. This shows that the association is concerned about the situation in the sub-sector and is actually willing to help the CBN by cushioning the effects of the illiquidity problems of these MFBsâ€