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THE FUTURE OF MICROFINANCE IN NIGERIA: THE ROLE OF THE CENTRAL BANK OF NIGERIA, REMARKS BY THE DIRECTOR OF DEVELOPMENT FINANCE DEPARTMENT, CENTRAL BANK OF NIGERIA AT THE WORKSHOP ON MICROFINANCING AS A TOOL FOR POVERTY ERADICATION AND ECONOMIC GROWTH IN NIGERIA.

THE FUTURE OF MICROFINANCE IN NIGERIA: THE ROLE OF THE CENTRAL BANK OF NIGERIA, REMARKS BY THE DIRECTOR OF DEVELOPMENT FINANCE DEPARTMENT, CENTRAL BANK OF NIGERIA AT THE WORKSHOP ON MICROFINANCING AS A TOOL FOR POVERTY ERADICATION AND ECONOMIC GROWTH IN NIGERIA.

HELD AT SHELL HALL, MUSON CENTRE, ONIKAN, LAGOS ON MONDAY, 5TH SEPTEMBER 2011

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§ Protocol

§ Despite Nigeria’s enormous human and material resources, it has not met the desired objectives on a number of development indices, among which are the current low per capita income and 54% poverty prevalence level (people living below $1 a day). The 2009 UNDP Human Development Report estimated that the life expectancy in the country is about 48.4 and that the human development index is 0.423 —which ranks Nigeria as number 142 out of 174 countries in the world.

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§ Poverty and economic disadvantage emanate from accidents of birth, natural disasters, environmental and climatic factors, economic dislocation and other sociopolitical dysfunctions. The malaise reflects in malnourishment, inadequate educational attainment, poor and frail physiological and psychological state, mental incapacitation, poor housing/clothing and bleak future. In most cases, those entrapped by poverty are unable to come out of it through their own personal efforts, and thus require some external interventions.

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§ Poor people however, represent important economic agents in Nigeria. They are in agriculture, agro-allied processing, crafts, artisanship, trading and provision of various goods and services. Microfinance buoyed by necessary policies, framework and guidelines has been adopted as a strategy to increase access of the poor and low income population to financial services across the globe. In Nigeria, a plethora of interventions have been undertaken by government at federal, state and local government levels, the Central Bank of Nigeria, conventional banking community, development partners and a host of other relevant stakeholders. The sub-optimal performance of theses attempts and participation of stakeholders coupled with the low impact necessitated the launching of the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria in December 2005.

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§ The policy recognized microfinance as the provision of services such as credit, savings, payment services, micro leasing and micro insurance to micro entrepreneurs under flexible and affordable terms and conditions. The essential targets of the policy were poor people especially women, located in the urban, peri urban and the rural areas

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§ Specifically, the policy targets to improve on the share of micro credit as a percentage of total credit and GDP, access of women to financial services and linkages between conventional and microfinance institutions. An assessment of the microfinance sub-sector since the launching of the policy revealed heightened awareness among stakeholders, increased number of licensed microfinance banks (866) and improved capacity building, promotional and regulatory machineries. Accordingly, entrepreneurs are increasingly demanding for financial services such as credit, savings, payment services, financial advice and non-financial services.

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§ However, a study carried out by Enhancing Financial Innovation and Access (EFInA) in August, 2010 revealed that 39.2 million representing 46.3 per cent of the adults in Nigeria were excluded from financial services. Also, the results of the survey revealed that Nigeria was lagging behind South Africa, Botswana and Kenya with 26 per cent, 33 per cent and 32.7 per cent in financial exclusion rate, respectively.

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§ Several factors have accounted for the persisting gap in access to financial services namely;

§ Lack of needed organizational, structural and institutional changes as stipulated in the regulatory guidelines for microfinance banks, particularly those that converted from community banks.

§ Unwillingness of existing NGO-MFIs to upgrade to microfinance banks because of fears that the attendant regulation might impede their accustomed operational practices and expansion drive.

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§ Corporate image challenges owing to sub-optimal financial ratings, governance and risk management practices, inefficient operations, and liquidity constraints found in microfinance banks

§ Dearth of requisite practical microfinance skills among the institutions, as most of the microfinance banks recruited many of their staff from commercial banks staff that were downsized in the wake of consolidation.

§ Ostentatious mode of operations accentuated by over-.investment in fixed assets, and hence inadequate attention to necessary research, product development and marketing.

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§ Lack of sufficient own funds by MFIs to meet the requirements of their clients owing to low savings mobilization and unwillingness of commercial banks to extend on-lending and refinancing facilities to them.

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§ It is against this background that the 2005 Microfinance Policy was reviewed in March, 2011. The major highlights of the review are as follows:

Capital Requirements for Microfinance Banks

Former Policy Revised Policya) N20 million for Unit MFBs a) N20 million for Unit MFBsb) N1 billion for State MFBs b) N100 million for State MFBs

c) N2 billion for National MFBs

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§ Participation of Existing Institutions

§ Deposit Money Bank (DMB) wishing to engage in microfinance services can continue to do so through a designated Department/Unit and/or offer microfinance as a financial product. Holding Companies having a DMB as a subsidiary can invest in or own an MFB.

§ Unregulated credit-only, membership-based microfinance institutions such as NGOs, Financial Cooperatives can engage in the provision of microcredit to their targeted population but shall not mobilize deposits from the general public. An existing NGO-MFI or Financial Cooperative could incorporate a subsidiary MFB while still carrying out its NGO operations or transform to a MFB, subject to meeting stipulated provisions in the revised Regulatory and Supervisory Guidelines for MFBs.

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§ Removal of the Provision for Organic Growth Path for Microfinance Banks.

§ MFBs can now move to another State if they have established at least 5 branches in their original State of operation as against branches in 1/3 of Local Governments Areas in the previous policy.

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§ Microfinance Development Fund ((MFDF)

§ The revised policy recognizes the need for the Fund to give support to MFBs and MFIs that are doing well, to do more, expand outreach and provide effective and efficient financial services. Efforts are being made by the Bank to ensure its establishment.

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§ Special capacity building provisions have been provided for the following stakeholders in the revised policy:

§ Supervisors§ Operators§ Clients of the Institutions.

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§ Next Steps for the Orderly Growth of the Microfinance Sub-Sector

Garnering from the experiences gained in the implementation of the microfinance policy in Nigeria, further strategies that would enhance the success and impact of microfinance on poverty alleviation in Nigeria will be undertaken.

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§ 1. The Bank will engage in aggressive awareness campaigns and capacity building for stakeholders in the microfinance sub-sector to improve their financial services delivery strategies and further promote the establishment and or development of the following:

§ Microfinance Certification programme.§ Credit Bureaux.§ Rating agencies§ Micro, Small and Medium Enterprise Development Fund.§ Apex Association of microfinance Banks and unlicensed

microfinance institutions.

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§ 2. In order to continue to attract the participation of commercial banks in microfinance activities,

we shall endeavor to forge strong linkages between MFIs and such banks and encourage them to engage in downscaling activities to micro clients.

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§ 3. In addition to the review of the policy, the Bank in collaboration with the United Nations Development Programme (UNDP) has engaged Consultants to draft a Microfinance Development Strategy for Nigeria. A Round –table meeting held on 17th and 18th August at the Rock View Hotel, Abuja to garner stakeholders’ inputs into the strategy document. The aim of the strategy is to specifically apportion detailed roles to stakeholders in pursuit of the achievement of the policy targets.

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§ 4. The CBN Management has approved the establishment of three additional Entrepreneurship Development Centres (EDCs), one each in North East, North Central and South South following the successes and gains being experienced in the piloting of the programme in North West (Kano), South East (Onitsha) and South West (Lagos). The aim of the centres is to build the capacity of small entrepreneurs and customers to make them bankable.

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§ 5. The Bank recently launched the Nigeria Incentive-based Risk sharing System for Agricultural Lending (NIRSAL) to increase access of various clients in the agricultural value chain, particularly the smallholder producers to financial services. The system would create attractiveness/profitability by de-risking the agricultural value chain, and provide incentives that would make banks see business cases and lend with confidence to the sector. The Central Bank of Nigeria will vigorously pursue the implementation of the programme along the “Bread Basket” model with all identified and willing stakeholders

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§ 6. In order to further improve the level of access to financial services, the Bank has engaged the services of Messrs Roland Berger, a Strategy Consultant based in Germany and EFInA (Enhancing Financial Innovation and Access), along with relevant Departments of the CBN and other key stakeholders to draft a comprehensive Financial Inclusion Strategy for Nigeria.

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The strategy will be expected to articulate appropriate and enhanced models for implementing the following in Nigeria:§ Mobile banking§ Agent banking§ Financial literacy§ Consumer protection§ Non-interest banking § Point of sale services

The Bank recently joined the Alliance for Financial Inclusion (with about 78 global members) and the International Network for Financial Education. Its membership would enable it share and benefit from knowledge exchange offered by the organizations to further its financial inclusion programme.

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§ 7. Collaborations with development partners in conceptualizing their intervention programmes will be pursued. The Bank shall also continue to participate in the implementation of their ongoing programmes such as the Rural Finance Institution Building Programme (RUFIN) of the International Fund for Agricultural Development, the World Bank MSMEs Nigeria Project and the Sustainable Economic Development in Nigeria (SEDIN) initiative of the German Development Cooperation (GIZ).

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§ In Nigeria, microfinance continues to be a major plank for addressing poverty, promoting accelerated economic engagement by the poor and by implication, exponentially creating a growth and development. The ensuing challenges and gaps in the microfinance policy implementation process are necessary experiences for innovating and adopting workable strategies. It is expected that with concerted efforts of the government, Central Bank of Nigeria, and indeed all stakeholders, micro financing will succeed as an intervention in Nigeria.

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CENTRAL BANK OF NIGERIA,ABUJA.

SEPTEMBER, 2011