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CBN battles to save N50b micro credit fund

By Babajide Komolafe

The Central Bank of Nigeria (CBN) is making frantic efforts to save the N50 billion Micro Credit Fund from   becoming  a failure . Introduced in 2008, the N50 billion Micro Credit Fund (MCF) was set up to enhance the flow of funds to micro enterprises in response to the short comings of the Small and Medium Enterprises Equity
Investment (SMEEIS).

The Fund was designed primarily to replace SMEEIS and its take off seed money was the unutilised portion of the SMEEIS Fund which was about N22 billion as at December 31st 2007. The operational funding of the scheme is supposed to be a partnership between the banks and state governments. This is not the case as both parties have paid less attention to the scheme since it was set up.

Under the Fund, banks are required to set aside five per cent of their profit after tax for micro credit lending. In the guidelines setting up the funds, it is required of them to “Put in place appropriate institutional arrangements for disbursing and recovering the amount to be accessed, which shall be confirmed by the Central Bank of Nigeria; show a commitment to supporting small and micro enterprises through setting aside a counterpart fund equal to the amount of the loan being sought.

CBN Governor Lamido Sanusi(left)
CBN Governor Lamido Sanusi (left)

According to the guideline, such state are to deposit the counterpart fund in the bank from which it is obtaining the Fund; set up a monitoring mechanism to ensure efficient utilisation of the Fund; Sign an irrevocable standing payment order (ISPO) in favour of the participating bank; and render periodic returns to the CBN on the operations of the Fund as required.

Where State Governments are unable to exhaust the Fund set aside by the banks inany year, Micro-finance Banks (MFBs) and Non Governmental Organization-MicroFinance Institutions (NGO MFIs) may also borrow from the Fund for on lending to small
and micro enterprises.

Further the guideline require that after each Government must have passed its budget, the CBN will assess the amounts set aside by the state for micro credit vis a vis the amount that banks are likely to set aside for the year and announce the amount available for  borrowing by the MFBs and NGO-MFIs. States with wide distribution of MFBs and
NGO-MFIs shall be encouraged to use the MFBs and NGO-MFIs in the administration of their micro credit fund.

But since 2008 when it was set up, the Fund has refused to take off due largely to seeming apathy on the part of
state governments and reluctance of the banks to path with their money. Consequently, nobody or micro enterprise has benefited from the scheme.

Investigations revealed that since the guidelines were released last year neither the apex bank, the banks or the state governments have done anything to indicate seriousness about the scheme.

It was gathered that the apex was too busy combatting the  impact of the global economic crisis on the banks and on the economy hence little or no attention was given to the Fund. This however gave the banks the opportunity to ignore the Fund by not setting aside the required five per cent of the after tax profit. For the state governments, the conditions attached to the Fund was to demanding hence they did not give it serious attention while limiting  the micro credit initiatives to what their budget could accommodate.

But with the audit and cleansing of the banks over and attention shifted to finding ways to stimulate credit to the economy, the CBN remembered the Fund, dusted the files and hurriedly called the chief executive officers of banks to a meeting last Tuesday to brainstorm on how to rescue the MCF.

Expressing the frustration of the apex bank with the lacklustre commitment of the banks to the Fund, the Deputy Governor, Financial Sector Surveillance, CBN, Mr. Kingsley Moghalu, said the participation of banks and the impact of the Fund on the economy after nearly two years of its operation had been far below expectation.

Moghalu, who was represented by the Acting Director, Development finance Department, Mr. JoeAlegienu said , “The MCF returns submitted by the deposit money banks as at October 31, 2009, showed that only six out of 24 deposit money banks sent monthly reports to the CBN. Out of six, only two, namely; Access Bank Plc and Intercontinental Bank Plc set aside funds of about N2.7bn.”

He said on the part of the state governments, only two states set aside funds for the MCF even though many of them had submitted that they provided micro-credit directly through their micro-finance and poverty alleviation agencies.

“Thus, impact has not been achieved in the required partnership with the banks in the area of providing funds for direct or on_lending to entrepreneurs. It appears that neither the state governments nor deposit money banks are conversant as they should be with the operational modalities of the Fund and the mutual benefits derivable from it,” he said.

He thereafter called for suggestions from the banks on how to revive the Fund and make it successful.
Vanguard reliably gathered that though the banks commended the MCF as a laudable program and pledge to work for its success, they said there is need to review some aspect of the guidelines.

“Everybody agreed that it is a laudable program and pledge to support it. But the claim that banks were not setting aside the required fund was contested. Some of the banks said they have been setting money aside but might not have been indicating it in the reports”, a source at the meeting confided in Vanguard

The banks complained that the implementation of the Fund is too tied to the apron of state governments and this is risky for them. They argue that the provision in the guidelines that require that state governments should put in place institutional arrangement to disburse and recover the loans needed to be reconsidered as they are not comfortable with a situation whereby a state government, which does not have the requisite skill and personal, be the one to disburse the loan while they which are to bear the risk of default have no idea of who the loans were being given to.

They said even though the guidelines say that states should sign an Irrevocable Standing Payment Order with banks, this is not a guarantee for their money. They noted that state governments are not favourably disposed to signing such order and that the process of obtaining the order in itself is too cumbersome as it involves the consent of the Accountant General of the Federation. Banks are also raising  the fundamental issue of what happens when there is change in state government administration.

The banks are also frowning at the eight per cent interest rate requirement saying this makes the scheme unattractive to the them. “One can get a higher interest rate doing commercial micro-finance lending directly or through the micro-finance banks”, a banker remarked.

A CBN source told Vanguard that the meeting with the banks is the first in a series of efforts to jumpstart the MCF. “We wanted to hear from the banks first before we bring all the stakeholders together for a meeting. Soon we are going to meet with the state governments and reintroduce the Fund to them and the benefits for their people as well as hear their suggestions too. The suggestions from these consultations and meetings would be presented and deliberated upon at an enlarged stakeholders meeting to be held after the meeting with the state governments” the CBN said.

According to the CBN source, the nest step is for the apex bank to talk to state governments, reintroduce the fund to them by highlighting the benefit of the scheme to their citizens.


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