CBN And Microfinance Banks: Setting A Robust Village Economy

The recent conversion of the Community Banks (CB) into Microfinance Banks by the Central Bank Of Nigeria CBN is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance from other formal financial products. These are: the smallness of loans advanced and or savings collected the absence of asset-based collateral and simplicity of operations. In Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access to financial services. This 65% are often served by the informal financial sector, through Non-Governmental Organization (NGO)-microfinance institutions, moneylenders, friends, relatives, and credit unions. The non-regulation of the activities of some of these institutions has serious implications for the Central Bank of Nigeria’s (CBN’s) ability to exercise one aspect of its mandate of promoting monetary stability and a sound financial system. A microfinance policy which recognizes the existing informal institutions and brings them within the supervisory purview of the CBN would not only enhance monetary stability, but also expand the financial infrastructure of the country to meet the financial requirements

Microfinance refers to financial services provided to low-income people, usually to help support self-employment. Examples of microfinance products include: small loans, savings plans, insurance, payment transfers, and other services that are provided in small increments that low-income individuals can afford. These services help families to start and build “micro” enterprises, the very small businesses that are important sources of employment, income, and economic vitality in developing countries worldwide. Because salaried or wage-paying jobs are scarce in many developing countries, most citizens earn their livings through self-employment, creating and operating their own tiny enterprises. But without financial services to fuel their productivity, the poor can never grow their micro enterprises into businesses that help them escape poverty. The microfinance movement was born to ease the suffering caused by poverty, and to awaken the global economy’s sleeping giant: the under-capitalized productivity of the world’s working poor.

But successive government efforts to solve the problem, through several rural finance and development programmes, have met with unsatisfactory results. This was due to the lack of a mechanism, which would encourage the mobilization of savings among people at the grassroots level and at the same time simplify the disbursement of funds through loans and advances. The Rural Banking Scheme, instituted by the Central Bank in 1977, took off rather slowly. Even when the numerical target of at least one branch in every Local Government Area was met in 1991, these rural branches failed to meet the credit needs of the people and remained mere deposit takers. The People’s Bank (PB) was set up in 1989 to meet the credit needs of the rural and urban poor, artisans, farmers, petty traders, vehicle mechanics, etc. However, because it is supply-led and heavily dependent on subventions from the Federal Government for its operations, the recovery of loans has not been very efficient and it is facing problems of decapitalization due to heavy overheads that outstrip earnings.

By providing very poor families with small loans to invest in their micro enterprises, Village Banking empowers them to create their own jobs, raise their incomes, build assets, and increase their families’ well-being. Here’s how it works. Neighbors come together in financial support groups called “Village Banks.” Individuals borrow working capital for their micro enterprises, and because they have little to offer for collateral, the group guarantees those loans. As businesses grow, families earn more, purchase more nutritious foods, and parents are better able to send their children to school. After a year or more, many Village Bankers make significant improvements to their businesses, their homes, and their lives. Because neighbors support each other while growing their businesses, Village Banking helps invigorate entire communities.

Village Banking is designed to reach the poorest of the working poor. CBN will work closely with the Micro finance Banks to help them build their businesses so that they can earn more, become part of the larger marketplace, and enter the global economy. In addition to working capital, we provide them with insurance, savings plans, and other services to help them weather crises such as illness or death in the family, or natural disasters. See why Village Banking is a key strategy for achieving the Millennium Development Goals, eight important goals agreed upon in 2000 by 147 nations in order to put an end to severe poverty by 2015.

Informal forms of rural finance schemes exist in most parts of Africa and these have provided some basis for linkage with formal banking. CBs in Nigeria are established using the already existing rotating savings and credit associations (ROSCAs). The Bank is designed and modified to meet the needs of the small-scale entrepreneur who dominates the informal sector where many economic activities are carried out within a largely peasant mode of production. The National Board for Community Banks (NBCB), set up by decree 46 of 1992, is charged with the responsibility of promoting, developing, monitoring, and generally supervising the CBs. The Management and Board of each CB bears the responsibility for proper and sound operation, according to laid down provisions, and to ensure its profitability and viability in the prevailing economic climate. Since the first CB was commissioned in December 1990, they have grown to over 1000 units and are scattered ail over the country, operating in both urban and rural areas. The primary objective of any CB is to mobilize funds for deposit and disbursement as loans and advances to members of the community. They also provide trade (and export) development advisory information services, and they work with, and through commercial banks as their correspondent banks.

The CBs have been conceived to fill a gap within the financial system of Nigeria. Whereas there is a ‘boom’ of commercial, merchant and development banks in the formal credit delivery system, the operations of these banks are restricted to the elite urban population who constitute a very small proportion of the country’s total population. The lives of the majority of Nigerians – the rural people and the sub-urban poor – remain unaffected by the activities of these modem banks. The CBs, as unit banks owned by individual communities, have succeeded in serving as a credit mobilization and provision mechanism to a people who have hitherto been marginalized by modem banking. With the de-emphasis on assets, collateral and security, and the promotion of trust, character witnessing and social mobilization, people at the grassroots have been brought into the ambit of wealth creation directed at improving the quality of lives and ultimately creating the bedrock for more sustainable development. Petty traders, hawkers, artisans and small scale processors have benefited from the CBs and several hitherto insignificant businesses have been turned around resulting in improved living standard for individuals, families and even whole communities.

There exists a huge untapped potential for financial intermediation at the micro and rural levels of the Nigerian economy. Attempts by Government in the past to fill this gap, through supply-driven creation of financing institutions and instruments, have failed, due to the poor capitalization of such schemes and restrictive regulatory and supervisory procedures, among other factors. The community banks were designed to fill the gap, but their low capital base and isolated mode of operation have not enabled them to make meaningful contributions to microfinancing.

The microfinance banks being established in line with this policy framework shall be adequately capitalized, appropriately regulated and supervised to address the need of financing at the micro levels of the economy. The two categories of microfinance banks shall be Microfinance Banks licensed to operate unit banks (a.k.a. community banks) and Microfinance Banks licensed to operate in a State. Microfinance Banks licensed to operate unit banks shall require a minimum paid-up capital of N20 million and shall operate branches and/or cash centres. A Microfinance Banks licensed to operate in a State shall require a minimum paid-up capital of N1.0 billion and shall operate multiple branches within a State, subject to satisfactory prudential requirements and availability of free funds for branch expansion.

The existing community banks shall transform to Microfinance Banks within 24 months of approval of this policy, by increasing their shareholders’ funds unimpaired by losses to a minimum of N20.0 million. Any community bank which does not meet the new capital requirement within the stipulated period shall cease to operate as a community bank. The Central Bank of Nigeria shall supervise and regulate the microfinance banks. The Nigeria Deposit Insurance Corporation shall insure the deposits of microfinance banks.

Microfinance Banks are licensed to operate as a unit bank in a LGA to ease the financial burdens of those dwellers against their urban counterparts. Some microfinance banks licensed to operate in a state universal banks offer a minimum paid-up capital/shareholders’ funds N20.0 million (increased from N5.0 million) N1.0 billion N25.0 billion .These Banks are covered by license to operate within a Local Government Area and not to engage in sophisticated banking services, such as forex business but to receive tenured loans and equity from abroad unlike those services graced by her counterparts abroad. For instance, The National Microfinance Bank of Tanzania joined a syndicate of local banks and pension funds to lend USD 238million to her parastatal in the electricity industry, wholly owned by the Tanzanian government, money which could be used to pay off debts to suppliers and invest in new equipment. Currently the Tanzanian government owns 51% of the bank, having sold off the remainder of its stake in 2005. The loan syndicate involved in the bail out includes five banks and four pension funds all from Tanzania.

Many Microfinance clients worldwide favor commerce—businesses such as operating small convenience stores, fruit stands, selling cosmetics, food, and other goods—perhaps because of the rapid turnover of capital. Others are involved in production: preparing food for sale or catering, sewing and tailoring, and making crafts. A smaller percentage of clients run service-based businesses such as hair salons and bicycle repair shops. Because many of the world’s poorest people live in rural, agricultural-dependent communities, Microfinance also reaches out to small-holder farmers, clients who re-sell such farmers’ crops, those raising livestock, and others engaged in agricultural production and marketing. Because they have few resources to begin with, Microfinance clients typically run businesses out of their homes. Still others are “ambulatory”—selling door-to-door, on street corners, or carrying their wares to sell at construction sites or local events. As they grow and accumulate more capital, business owners may decide to erect small kiosks at busy intersections, or opt to rent a stall at the local market to give their businesses more exposure.