It is estimated by UNICEF that 71% OF Nigerians live below a dollar per day and 92% on 2 dollars per day. This estimate shows the high level of poverty in the country. The social responsibility of any microfinance bank is to help alleviate poverty by filling the void created by conventional banks through the provision of the broad range of finance (ranging from savings to microloans) to the under-banked, people with little or no access to proper financing.
The Microfinance Industry in Nigeria has grown rapidly, with more than 1,000 licensed microfinance banks plying their trades across the nation. The total micro and SME loans are estimated to be more than N195 billion (USD541.67 million).
CBN estimates the total outstanding loans to be N183.96 billion (USD 511 million) as at December 2016.
This write-up would highlight the history, the regulations, the challenges, the
market growth, portfolio performance and the competition as it relates to the
microfinance industry in Nigeria.
BRIEF HISTORY OF MICROFINANCE IN NIGERIA
Before the creation of the Microfinance Banking Model in 2005 by The Central Bank of Nigeria, there were informal financial practices like Cooperatives societies, Esusu, daily contributions and the defunct community banks (most are now MFBs) through which the socially and economically marginalized, borrow and save. Since 2005, the industry has developed into a full-blown financial industry with professionals from all over world
contributing to the industry.
Microfinance Industry in Nigeria is regulated by the Central Bank of Nigeria. The regulations and guidelines are revised periodically as the industry is still a work in progress.
Below are the important regulations guiding the practice of Microfinance business in Nigeria:
A) Licensing Requirement: There are three categories of microfinance
banks in Nigeria namely Unit Microfinance, State Microfinance and
National Microfinance Banks.
The table below summaries the licensing requirement for each
|UNIT MFB (Allowed to
|Adequately Qualified and
|STATE MFB (Allowed to
operate branches /cash centers within a
|Adequately Qualified and
|NATIONAL MFB||2 billion naira||
B) Ownership Requirements
1. A microfinance bank may be established by individuals, a group of individuals, community development associations, private corporate entities and foreign investors.
2. No individual, group of individuals, their proxies or corporate entities and/or their subsidiaries shall own controlling interest in more than one MFB, except as approved by the CBN.
A bank holding company that intends to set up any category of MFBs as subsidiaries shall be required to meet the prescribed capital and other requirements stipulated in these Guidelines.
C) Prudential Requirement: To prevent mismanagement of fund and ensure sustainability, all MFBs are expected to follow prudent financial rules:
|1. INVESTMENT IN TREASURY BILLS||Minimum of 5% of deposit liabilities|
|2. LIQUIDITY RATIO||Maintain a minimum ratio of twenty percent
(20%) of its deposit liabilities in liquid assets,
including the investment in Treasury Bills
|3. CAPITAL FUND ADEQUACY||The minimum Capital Adequacy Ratio (Capital/Risk Weighted Assets Ratio) shall be 10%.|
|4. Limit of Investment in Fixed Asset||20% of its shareholders’ funds unimpaired by losses|
|5. Limit of Lending to a Single Borrower and Related Party||The maximum loan by an MFB to any individual borrower, Director or related borrowers
shall not exceed 1 percent, and in the case of group
borrowers, a maximum of five (5) per cent of the MFB’s shareholders’ fund unimpaired by losses or as may be prescribed by the CBN from time to time.
|6. Unsecured Lending Limits||Any unsecured advances or loans or credit facilities of an aggregate amount to an individual in excess of fifty thousand naira [N50, 000] is not permitted. For the purpose of applying this regulation to microfinance loans of MFBs, group guarantees
or third-party guarantees of an individual acceptable to the MFB shall qualify as collateral.
|7. PAR(PORTFOLIO AT RISK)||Maximum of 5% at any point in time|
CHALLENGES FACED BY MFBs IN NIGERIA
The growth of micro lending in Nigeria is crippled my few challenges, some of which are listed below:
1) Lack of Funding:
MFIs in Nigeria solicit fund from the following sources:
a. Shareholders’ funds – (paid-up share capital and reserves);
b. Deposits/Savings of customers;
c. Debenture/Qualifying medium to long term loans;
d. Grants/Donations from individuals, organizations, various tiers of government, and commercial funding from international sources.
Securing fund for lending is one of the biggest challenges facing MFIs in Nigeria, because of the level of credit risk inherent in lending business in Nigeria, investors are always reluctant to release fund to MFIs and when they do, it comes at an expensive rate which in turn makes MFIs lend to borrower at a more expensive rate. Lack of funding is a big threat to micro lending in Nigeria.
2) Inadequate Credit Infrastructure: In most developed countries, there is a robust credit infrastructure like personal identification system, Credit bureau, Credit rating and scoring and National credit registry, this makes lending seamless and less risky.The situation is different in Nigeria, there is no adequate credit infrastructure, making lending difficulty and risky. Although, there are recent developments like credit bureaus, BVN (bank verification Number) and some Fintech software, yet the credit infrastructure is not adequate enough to ensure a seamless and less risky lending process.
Lending is a risky business, no matter how you do it, but a robust credit infrastructure can reduce the risk exposure.
THE MARKET GROWTH AND COMPETITION IN THE INDUSTRY
Despite all odds, the microfinance industry has grown tremendously over the years, with new MFIs coming up at every corner of the country. The industry has attracted a few foreign investors from all over the globe.
African Development Bank, International Financial Corporation, One planet Finance, European Investment Bank, Genefiannce, Apis Partners, LFS financial services, Accion International, Finca International, Kfw, and AXA are some of the top foreign investors presently partnering with one or two MFIs in Nigeria.
The industry is presently made up of more than 1,000 licensed MFBs and more than 200 non-banking MFIs spread all over the country. Lagos being the commercial center of Nigeria has its own good share, with more than 300 MFIs in Lagos alone. CBN reported that average of 30 MFBs are licensed every year, a total of 31 new MFBs were licensed in 2016.
The total outstanding loan portfolio stands at N183.96 billion (USD 1.27 billion) as at end of Dec 2016.
According to the financial stability report 2016, the total assets of microfinance banks (MFBs) decreased to N341.68 billion at end-December 2016, from N455.96 billion at end-June 2016, reflecting a decrease of 25.06 percent. The shareholders’ funds also decreased by 42.91 percent from N135.09 billion to N77.12 billion at end-December 2016. The decrease in shareholders’ funds was largely attributed to losses by the microfinance banks resulting from increased provisioning for nonperforming loans.
Total deposit liabilities and net loans/advances also decreased by 13.05 and 20.96 per cent to N166.29 billion and N183.96 billion at endDecember 2016, compared with N191.25 billion and N232.73 billion at end-June 2016, respectively. Reserves also decreased by 24.39 percent to N16.80 billion at end-December 2016, from N22.22 billion at end-June
2016. The decrease in reserves was as a result of operational losses.
AVERAGE LENDING RATE AND PERFORMANCE OF MICROFINANCE LOANS IN NIGERIA
From research, it is observed that the average lending rate of MFIs is Nigeria is 5%.
Interest rates range between 2% and 6.5%.
Out of the total outstanding loan portfolio of 195 billion, 87.75 billion (45%) are non-performing loans. As at the time of this research, no MFI is maintaining a minimum PAR (Portfolio At Risk) of 5% as prescribed by CBN.
The huge amount of non-performing loans is caused by the macroeconomic instability, reckless lending by some MFIs, ineffective a legal framework for lending and recovery and poor credit infrastructure.
THE COMPETITION IN THE MARKET
Despite the huge number of MFIs in Nigeria, the large percentage of the market is controlled by the top 10 MFBs. CBN reported that just 10 MFBs contributes 40% of the total lending in the SME industry (including fund from other financial institutions) in Nigeria.
This implies an imperfect competition in the market; lenders are forced to make a choice between top 10 instead of big pool of 1,200 MFIs. Therefore there are a whole lot of borrowers buying from few lenders. This in turn makes borrowing relatively more expensive than it should be.
The Top 10 MFIs are able to dominate the market because of because they have better access to finance. They are able to solicit cheaper funds, hence they lend at a cheaper rate. They also have stronger financial support, thereby giving them the opportunity to acquire the best workforce, best technology, and best infrastructure.
|S/N||NAME OF MFB||HEAD OFFICE||INTEREST RATE||AVERAGE LOAN PROCESSING TIME||OUSTANDING PORTFOLIO (IN NAIRA)||MARKET SHARE||RANK (BY MARKET SHARE)|
|1||LAPO MFB (NATIONAL MFB)||BENIN||ABOUT 50 BILLION||25.64%||1ST|
|2||FORTIS MFB(NATIONAL)||ABUJA||ABOUT 12 BILLION||6.15%||3RD|
AB MICROFINANCE BANK(NATIONAL)
BETWEEN 3% AND 6.5%(REDUCING BALANCE)
2 WORKING DAYS
ABOUT 13 BILLION
|4||ACCION MFB(NATIONAL)||LAGOS||BETWEEN 3% AND 6%(REDUCING BALANCE)||3 WORKING DAYS||ABOUT 7 BILLION||3.59%||4TH|
|5||ADVANS LAFAYET MFB(STATE)||IBADAN||BETWEEN 2.8% AND 6.5%(REDUCING BALANCE)||3 WORKING DAYS||ABOUT 7 BILLION||3.59%||4TH|
|6||ADDOSER MFB||LAGOS||5%(FLAT RATE)||3 WORKING DAYS||ABOUT 1.3 BILLION||0.67%||7TH|
|7||LETSHEGO MFB(NATIONAL)||LAGOS||3 WORKING DAYS||ABOUT 2.5 BILLION||1.28%||5TH|
|8||MICRO CRED MFB(NATIONAL)||KADUNA||3 WORKING DAYS||ABOUT 2.5 BILLION||1.28%||5TH|
|9||FINA TRUST MFB(STATE)||LAGOS||3 WORKING DAYS||ABOUT 2 BILLION||1.03%||6TH|
|10||MAINSTREET BANK MFB(STATE)||LAGOS|
The sole purpose of microfinance is to provide affordable basic financial services to the socially and economically marginalized. There is no doubt that MFIs have improved access to basic financial services, as more people are now able to access basic financial services like savings, insurance, and loans through different MFIs.
The Industry has grown and still growing fast. Despite the high number of MFIs in Nigeria, lending is still not accessible as expected and lending rates are still not globally competitive.
The end goal of microfinance is to alleviate poverty and improve the standard of living.
While the industry has really grown, the end goal of alleviating poverty has not been really achieved as loans are still sold at the high-interest rate, making it difficult for borrowers to be profitable, thereby making loan repayment difficult.
This is evident in the amount of loan in overdue.
For microfinance to actually serve its purpose in the economy which is alleviation of poverty, credit has to be made accessible and relatively cheap.
MFIs must solicit fund from Investors whose sole objective is not making profit. Individual credit lenders can embark on the aggressive mobilization of relatively cheap funds to lower funding cost, and also pursue effective cost management strategies.
The major goal of alleviating poverty through microfinance can be surely achieved if proper steps are taken.
3. REVISED REGULATORY AND SUPERVISORY GUIDELINES FOR MICROFINANCE BANKS (MFBs) IN NIGERIA