Date Published: 10/11/10

Micro-Finance Banks and Malpractices

The Central Bank of Nigeri (CBN), and the Nigeria Deposit Insurance Corporation (NDIC) have for many years grappled with very difficult terrain of trying to cater for the majority of numerous households and economic units within the vast Nigerian rural communities that are under-banked. Unfortunately, those investors who claim to carry out their dream in the rural communities vowed to place their selfish and personal interest well above the nation. No wonder all efforts at setting all the microfinance institutions on the right part had continued to fail, even to the point that the CBN and the NDIC can no longer continue to baby them. The microfinance story in Nigeria is like the story of a man who continues to behave like a boy at 60.

The revocation of the operating licenses of 224 Microfinance Banks (MFBs) on September, 24th 2010, by the CBN, and their consequent takeover by the NDIC, is long expected, as that action is long overdue. Most Nigerians who have been victims of these banks feel that a reprieve has come after all, and that it is time to really say that enough is enough. The fact remains that the MFBs had been under emergency care for more than fifteen years now. They were conceived malformed, and had remained very problematic.

Upon their introduction, they were regulated and supervised by a non-financial regulator, the National Board for Community Banks, NBCB, 1991-2004. Majority of the inception operators of the community banks saw it as an opportunity to transform quickly to billionaires. This mentality had driven the psychic of most boardmen and managers of today's MFBs right from their days of existence as Community Banks, CBs, in late1991, up to the time they were transformed to their new-found status of MFBs by the CBN and the NDIC in 2008. Till today, the skin of the leopard had not changed. Some of the MFBs whose licences were revoked late last month, were even happy that the long awaited hammer had fallen for good.

After all, the regulators, specifically the NDIC, had assured that each depositor is covered to a maximum of N100,000.00. Some people had even argued that this is an unnecessary spoon-feeding of the greedy management, directors and promoters of these MFBs. My pity of NDIC and CBN derive from the fact that they under-rated the greed in the minds of most of the promoters of the MFBs. It is now obvious that most of them do not merit the confidence reposed in them by both the regulators and the Nigerian people. The regulators' sense of patriotism was clearly at variance with the selfish drive that constitute the main reasons why the promoters of these MFBs decided to venture into microfinance at the on -set. The mindset of most of them is filled with misfeasance rather than micro-finance. The antecedent of most promoters of the MFBs does not go down well with most Nigerians.

A good number of these promoters were former employees that had in the past contributed to the downfall of many Commercial banks. A significant number had in the past, been found guilty of serious banking misconduct. Some meaningful number were let-off the hook on technical grounds by the Courts, out of the rigors of criminal prosecution. A considerable number are dare devil politicians who do not know that commercial principles are infallible and that every gross infraction must translate into dire consequences. Going by a popular African epithet, a parent can go on to lay down the best rules for his beloved children, but a number of the children could as many times as they wish, choose to disobey and prepare unshaken for the doom day. The doom day surely comes. That doom's day was September 24th, 2010.

However, the dilemma of the NDIC and the CBN is that most of the microfinance banks had in actual fact, been misfeasance institutions from the very day they were licenced. My feeling is that most Nigerians now understand, and that many more should make efforts to appreciate the predicaments of the CBN and the NDIC. My consolation is that the regulatory bodies are at home with the demands of their calling, and they are pursuing these most diligently.

The September 24th announcement came as a relief to some operators of some MFBs, while some still feel that they could take a gamble at it. The later group feels that they could seize the opportunity of the coming elections to allege political victimization. Some even feel that it is an opportunity to accuse the CBN and the NDIC of stifling credit at the grass-root economic units. Some of the 'controllers' of the MFBs feel also, that time have come for them to receive huge cash largesse in form of 'bailouts'. A good number of the affected ones had wrongly cried wolf that they have adequate capital base, when they had actually closed shop for a longtime. Some have even commenced arrangements for mergers without regulatory approval, while on the other hand, they had submitted their inability to continue the processes for the grant of final license. A sizeable number among the group of 224 MFBs had argued that the 2011 National Budget should contain a provision for Government to inject funds into the MFBs.

From the benefit of history, the microfinance policy was born in December, 2005, when it was obvious that only about 35% of Nigerian economically active population have access to financial services, and that 65% rely on the informal sector with less than half of rural households having access to formal financial and banking services. The aggregate micro credit facility accounted for as low as 0.2% of GDP and less than 1% of total credit to the economy. For these and other reasons, the CBN, in consultation with other relevant agencies included the microfinance policy as one of its initiatives that started in 2004.

The policy was designed to boost capacity of micro, small and medium enterprises towards economic growth and development through financial intermediation. This policy was aimed at stimulating rural entrepreneurship through synergistic mainstreaming, rural transformation, and the promotion of linkage programmes between the commercial banks, development banks, and specialized banks. In the wisdom of the regulators, instead of scrapping the entire community banking system as was the dictate of the times then, they were given the first option of converting to MFBs under very favourable conditions and incentives. Of the total number of Community Banks of 1,259, a total of 607 were found manageable as having met the mild licensing requirements.

The spread of the MFBs reflects the erstwhile commercial texture of the States within the Nigerian Federation, and it is further a reflection of the concentration of community banks before the transition that took place. Accordingly, Lagos accounts for the highest concentration with 23%, followed by Anambra State with 9%. The South West States of Oyo and Ogun constitute 6% each, while Imo State accounts for 5%. By inference also, the spread within each geo-political zone is not different: the highest concentration of 42% is within the South West, while South East accounts for 21%. The lowest of all the Zones is North East, which is 4%. This MFBs' density may also follow the same trend upon the roll call of those considered insolvent by the regulatory decision of 24th September, 2010.

The data above show that 48% of Community Banks technically survived entropy during the transition, as against 28% (25 out of 89), which survived termination within the commercial banks that went through the consolidation exercise. Aside from these, the MFBs enjoyed monumental incentives that were extended to them by the regulators - with the notion that they would understand the roles they were set out to live upto within the economy. The MFBs were granted tax exemption from VAT, and enjoyed non-taxable interest income. They also, for a long time, enjoyed CBN's liquidity support through a Rediscount and Refinancing Facility. The commercial banks also created the N50 billion Micro-credit Funds in February 2008, and also promoted the requirement on the part of State Governments within Nigeria, to allocate not less than1% of their annual budgets for microfinance activities.

It may be the case that most of the owners of the MFBs saw these incentives as an avenue to cheat the economy. After all, they may have concluded that the NDIC is always there to 'guarantee payments to depositors', and 'assist depositors', while they (the directors and mangers), smile to choice European and Asian banks with fat deposits. The regulators can only do their best in the circumstance. We were made to understand that all the MFBs were brought into the deposit insurance bracket of N100, 000.00 per insured depositor, and at least, 95% of depositors in MFBs are fully covered by the NDIC going through its annual report it can be seen that the NDIC had established a separate Deposit Insurance Fund known as Special Insured Institutions Fund, SIIF.

This Fund is drawn from the annual premium contributions by the insured institutions. The premium contributions by MFBs were however recently reduced to 50 basis points as against 80 basis points paid by deposit money banks. In order to ensure a speedy build- up of the SIIF, the sum of N5billion was made available to it from the NDIC's 2007 operating surplus. The NDIC had also established a separate department known as Special Insured Institutions Department to upscale off-shore surveillance, and premium assessment. According to newspapers reports and interviews with some Directors of MFBs, the regulators had in recent past extended capacity building assistance to the MFBs. The MFBs should not continue as a major weak axis of our financial sector. It is time for them to get ready for real microfinance business, or the remaining ones may also face the music. Why do I say this?

What we have in return for these huge costs to the tax-payers on account of sustaining the MFBs is monumental misfeasance and unwholesome practices. Instead of living up to the minimum expectations, most MFBs wallow in unmerited luxury: luxuriating and celebrating themselves in high places, moving with tinted dark jeeps, all at the expense of the very poor rural depositors. While they live very expensive life style, most of them do not hold board meetings, nor do they hold the statutory Annual General Meetings. It is right that the regulators have come to roost with what Nigerians have long awaited; a clear signal that there should be discipline.

It is a wholesale tale of woes and disappointments from most MFBs every where. A good number of them do not heed regulatory early warnings. A lot of them failed to adhere to the instructions that they should not utilize rural deposits to purchase shares which value they were not sure of. A large number of the MFBs have eroded their capital by granting themselves loans that were later written off under uncommon processes. Worst still, a lot of depositors funds were found to have been used in property speculation that had gone bad. The Corporate Affairs Commission, CAC, had not received any returns from a good number of these MFBs. Most of the MFBs exist only in name. Nothing short of license revocation could be appropriate.

My plea to the regulators is that they should assure themselves that all the 224 MFBs are actually guilty of the infractions leading to their licence revocation. I know that the banks which licences were recommended for revocation may not be the only ones that qualify for that disciplinary action; there is the possibility that some that could be managed to survive be expunged from that list. I could request that the CBN and NDIC publish the financial involvements of the key debtors of these failed MFBs, but for the possibility of the concerned debtors risking being lynched by their local community. To the CBN/NDIC, I say, please, don't publish, but confirm your data the second time. It is however, not out of place if the regulators reduce the revocation criteria a little, and release some back to business with the very last warning.

For minimum transparency, the CBN/NDIC should open a complaint center where the MFBs who feel that they have a case could complain and receive urgent democratic answers. This is very important so that they could hear instances where depositors were tricked to come and deposit money when the management knew quite well that closure was imminent.

It is my honest suggestion that the EFCC and ICPC should be left out of this for now, until the erring directors and management had failed to take opportunity of exercising the option of returning what they have stolen from the concerned MFBs, and from Nigerians.

For now, all Nigerians salute the CBN and the NDIC for this timely action. Another additional thanks to NDIC for its assurance that it is ready to pay all insured depositors with minimum delay. Kudos, NDIC!

Courtesy BusinessDay