Latest survey results by National Bureau of Statistics (NBS) and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) revealed that there are 37.1 million Micro, Small and Medium Enterprises (MSMEs) operating in the country. Despite this huge figure in a population of about 200 million, unemployment rate stood at 23.1 per cent by the end of September 2018 while underemployment or part-time employment rate was 20.1 per cent. In addition, the number of people in extreme poverty, according to the World Poverty Clock was 86.9 million by the middle of 2018. In other words, Nigeria has the highest concentration of extremely poor people in the world despite being just about one per cent the population of China or India.
Financial experts have attributed the prevalence of unemployment and poverty in the country to a preponderance of informal economy characterised by millions being excluded from the formal financial services sector. Although the first money bank in Nigeria is presently about 125 years old and hundreds of other banks have been established since then in various parts of the country, financial exclusion continues to be a major barrier to inclusive growth job creation and poverty alleviation.
The results of the EFInA Access to Financial Services in Nigeria 2012 survey showed that 34.9 million adults representing 39.7 per cent of the adult population were financially excluded. Only 28.6 million adults were banked, representing 32.5 per cent of the adult population. A significant amount of currency is thus circulated outside the banking system with its attendant negative impact on the country’s economic growth and development. The EFInA Access to Financial Services in Nigeria 2012 survey revealed that 23.0 million adults save at home.
In line with its core mandates, vision and mission, the CBN has played a key role in growing the real sector with its various on-going intervention schemes. Some of them include: Commercial Agriculture Credit Scheme (CACS); Real Sector Support Facility (RSSF); The Youth Entrepreneurship Development Programme (YEDP); Micro, Small and Medium Enterprises Development Fund (MSMEDF); Agricultural Credit Guarantee Scheme (ACGS); Anchor Borrowers’ Programme among others.
It is with a view to correcting these anomalies that Central Bank of Nigeria (CBN) introduced the policy framework on microfinance banking system.
Legal & Regulatory framework
Prior to the amendment of the Banks and Other Financial Institutions Act (BOFIA), the enabling Community Bank Decree, gave the responsibility for licensing and regulating community banks to the National Board for Community Banks (NBCB). However, the original legal and regulatory framework had many deficiencies including; absence of strategic intent to promote these community banks as rural and microfinance providers.
The banking consolidation exercise of 2005 and the collapse of many community banks, resulted in an increase in the ‘gap’ between the large ‘megabanks’ and the small community banks. CBN consequently initiated measures to sanitise the banking space and ensure the stability of the banking system. One of such measures was the introduction of the Microfinance Policy Framework in 2005 (revised in 2011) with the aim of strategically repositioning the sub sector.
Microfinance is the provision of financial services to the poor who are traditionally not served by the conventional banks. These financial services include credit, savings, micro-leasing, money transfer and payment services.
Some of the distinctive features of microfinance include the smallness of loans advanced to customers and beneficiaries as well as savings mobilised.
Because of the smallness of the businesses that it serves, microfinance usually does not ask for assets–based collateral while its operations are quite simple and uncomplicated.
It has the benefits of alleviating poverty; developing micro enterprise; increase savings; and engendering a change in borrowing patterns. It also has a positive impact on income; help in building asset base; while also improve quality of life.
Why the Microfinance policy framework
The Microfinance Policy framework published in 2005 and amended in 2011 was aimed at filling these gaps through a three-tiered licensing framework, whereby MFBs have the option of obtaining either a Unit, State or National license.
The primary goal was to achieve a regulatory environment that will ensure the emergence of robust, efficient and sustainable institutions.
CBN developed appropriate regulatory policies and measures to ensure long term sustainability of these institutions and their contribution to economic growth and development. Some of which include; Legal and Regulatory framework, Prudential Guidelines, Supervisory environment, risk management practices, and other sector related reforms.
The principal objective of the MF Policy is to create MFBs that are financially reliable, self-sustaining and integral to the communities in which they operate, with the potential to attract more resources and expand services to their customers.
CBN initiated a Microfinance Policy to among others, ensure market discipline and create a competitive environment aimed at maintaining soundness within the sub sector. Despite the establishment of community banks, it was still discovered that there was an existence of a huge unserved market and that the banks had weak capital base.
Microfinance banks are therefore to create economic empowerment of the poor; correct the poor banking culture and low level of financial literacy; strengthen institutional capacity of these small banks; increase interest of local and international investors in microfinance sector; and salvage the unserved population in the rural areas
Microfinance policy framework
The key objective of the Microfinance Policy Framework is to make financial services accessible to a large segment of the productive but financially excluded population. The policy is aimed to promote innovative, rapid and balanced growth of the industry, leveraging global sound practices.
A review of the sector’s performance over the past years showed that although challenges remain, some significant improvements are already visible.
Some key objectives of the Microfinance policy framework include: enhancement of service delivery to MSME’s; provision of timely, diversified and affordable financial services to the economically active poor; mobilisation of savings for intermediation and rural transformation; creation of employment opportunities and enhance living standard, especially for the financially excluded; enhance coalescence of all informal institutions, giving room for better oversight by CBN; promotion of linkage programmes between MFI’s, conventional banks, and specialised funding institutions; and provision of dependable avenues for the administration of microcredit programmes.
The policy also focuses on improving access to financial services for the active rural poor, increase financial inclusion rate in the country, eradicate poverty and contribute to economic growth and development.
Other details of the microfinance policy framework of the CBN show that it will provide access to financial services for the unserved and vulnerable groups; promote synergy and mainstreaming of the informal subsector into the national financial system; enhance service delivery by MFBs to MSMEs; contribute to rural transformation; promote linkage programmes between DFIs and MFBs.
In the end, MSMEs’ access to microfinance will enhance Nigeria’s gross domestic product (GDP); create more jobs and provide financial access for the economically active poor; create better financial access by microfinance institutions (MFIs) and eliminate gender disparities in wealth allocation
CBN’s microfinance policy is particularly targeted at the economically active poor; low-income households; the un-banked and underserved people; vulnerable groups: women, youths, the physically challenged; informal sector operators, micro-entrepreneurs and subsistence farmers.
Performance so far
So far, financially excluded population has declined by 4.8 per cent from 40.1 million to 36.6 million between 2016 and 2018 out of a total adult population as at 2018 is 99.6 million.
According to the CBN, pertinent objective of the revised framework is to “increase financial inclusion rate in the country, improve access to financial services for the active rural poor and pursue poverty eradication. Already, there is a noticeable increase in the usage of mobile money and microfinance banks. Financial inclusion has also had a positive effect in Nigeria as the exclusion rate reduced from 53.0 per cent in 2008 to 46.3 per cent in 2010 and 36.8 percent in 2018.
Even with the efforts of CBN, existing microfinance banks still price credits beyond the reach of MSMEs operating in the real sector of the economy, charging as high as 35 per cent interest per month.
In conjunction with the Bankers’ Committee therefore, CBN promoted the establishment of NIRSAL Microfinance Bank. Funding for the initiative was drawn from the Small and Medium Enterprises Equity Investment Fund (SMEIES). NIRSAL Microfinance Bank (NMFB) is an initiative of the Bankers Committee in collaboration with strategic partners; the Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL), and the Nigerian Postal Service (NIPOST). The bank has an initial paid up capital of N5 billion with Bankers’ Committee owns 50 per cent of the shares with NIRLSAL and NIPOST owing 40 per cent and 10 per cent respectively.
The bank is designed to drive and deepen financial inclusion; provide easy access to credit and other financial services to SMEs; reduce unemployment rate in the rural areas; and reduce rural-urban migration.
The bank aims to transform the microfinance landscape by providing easier access to affordable funds for small business owners. The bank will largely operate as a FINTECH. These services will facilitate wealth creation, increase employment and poverty alleviation – ultimately contributing to the growth of the economy.
NIRSAL Microfinance Bank according to CBN sources, which will already be operating from 50 branches by the end of 2019, will leverage NIPOST’s geographical reach; NIRSAL’s credit de-risking infrastructure; Bankers’ Committee, funding. It will also adopt and deploy cutting edge technology in order to quickly meet the needs of its Nigeria’s MSMEs.