Implementation Support, Regulation & Supervision for MFBs

Other Financial Institutions Department (OFID)

Implementation Support, Regulation & Supervision for MFBs

A Paper Presented at the National Start –Up/Sensitization Workshop of IFAD –Assisted Rural Finance Institutions Building Programme

(RUFIN) @NICON LUXURY, Abuja on Feb 2nd, 2010.

By

Adedeji .J . AdesemoyeAssist. Director, Other Financial Institutions

Supervision Dept.Central Bank of Nigeria


OUTLINE Introduction-Concepts & Complementary policies

Microfinance Policy Framework Policy objectives Implementation Structure –CBN, Operators, Market &

others Capacity building/Certification process Corporate Governance &Risk Mgt Compliance with prudential requirements Supervisory Framework (Central & Delegated,

Outsourcing Models) Sanitizing the distressed MFBs Expected Implementation supports going forward.

Conclusion & Way forwards


Introduction Understanding the MF policy, target& strategies Understanding of complementary policies such as

Consumer Credit Policy &Regulatory framework for Nigeria, Cooperatives policy

Enabling acts of the S.28 of CBN 24 of 1991 as amended, 2007 & S. 56 -60 of BOFIA 25 of 1991 and 2004 provide the legal backing

MF Regulations – Are set of rules of business of business of microfinance to promote orderly development of industry in sustainable way. This codified as guidelines

MF Supervision framework – To ensure compliance with the rules through regular monitoring and where necessary enforce sanctions & penalties


Introduction(contd.) Infractions and Deviation must Not be tolerated and Full disclosure must be encouraged to enable market

discipline have effect


Microfinance Policy Framework The important role of Microfinance (MF) in

promoting rapid economic growth and rural transformation in emerging economies cannot be over - emphasized. Global empirical evidence clearly shows that access to MF has been an important factor in the growth and development in many countries (developed or developing).

The National Economic Empowerment and Development Strategy (NEEDS) recognizes the importance of access to financial services by micro and small enterprises as a critical element in promoting private enterprise and empowering the most vulnerable groups.


Microfinance Policy Framework (contd.) MF has been acknowledged as one of the prime

strategies for achieving the Milliennium Development Goals (MDGs), particularly targets that relate to poverty eradication, gender equality and the empowerment of the disadvantaged groups.

Access to sustainable financial services enables microentrepreneurs to increase income, build assets, gradually create wealth and reduce their vulnerability. Enables households to improve their nutrition, children’s education, health and general living standards; and to foster the social empowerment of women.


Introduction (contd.) Recognizing the latent capacity of MF in

economic transformation and encouraged by the emergence of highly successful and fast growing Microfinance institutions (MFIs) around the world, the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria (MF Policy) was enunciated by the CBN and launched by Mr. President on 15th December, 2005.

The rest of this paper is devoted to discussing the policy objectives, the key policy issues as well as the challenges in implementing the MF Policy.


Microfinance Policy Framework - ObjectivesThe 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, thereby:

Providing access to financial services for the unserved and vulnerable groups;

Promoting synergy and mainstreaming of the informal subsector into the national financial system;

Enhancing service delivery by MFBs to MSMEs; Contributing to rural transformation; Promoting linkage programmes between DFIs and

MFBs.


Microfinance Policy Framework - Implementation Structure Categories of MFBs

Unit MFBs (N20 million capital base) State MFBs (N1 billion capital base)

Organic growth path for MFBs Ownership

Individuals/groups of individuals; Associations; Co-operatives

Private companies No government ownership - MFBs should be private-sector

driven Ownership diversification is encouraged

Participation of existing institutions Universal Banks – as an activity or product by establishing

subsidiaries or Departments/units for the purpose Community Banks - required to convert on or before 31

Dec. 2007 NGO-MFIs – can transform


Microfinance Policy Framework - Access to Finance

Provide access to financial services through: Licensing adequate number of (de novo) MFBs. Ensuring that as many CBs as possible are

converted before the stipulated deadline (Dec. 2007), without compromising set standards. This will reduce number of rural–based poor customers that will become deprived of financial services.

Ensuring a good geographical spread of MFBs without compromising set standards (political considerations).

Ensuring licensed MFBs are integral to the communities in which they operate.

Ensuring that the licensed MFBs are truly oriented and practice microfinance.


Microfinance Policy Framework - Access to Finance (contd)

Promote soundness of the financial system by licensing MFBs that are:

Financially reliable and stable and have strong capital base

Self–sustaining institutions Have strong MF orientation Practise good corporate governance Exhibit professionalism


Microfinance Policy Framework - Capacity Building

Facilitate continous capacity building and development of the fledging MF sub-sector – regulators, operators, service providers and the investing public.

Up-scale skills, technology and infrastructure to be able to compete with in-coming global players.

New skills are required by regulators in MF principles and practice; Risk-based Supervision.

New skills are required by operators in MF global best practice; credit administration; corporate governance; internal controls; risk management; etc.

Higher level of professionalism in line with global standards will be key.


Microfinance Policy Framework - Capacity Building (contd)

Certification Programme Establish an efficient and credible

certification programme for regulators and operators commenced 2009 and service providers subsequently.

Establish high standards for the certificate, benchmarked on international best practices and curricula.

Enforce compliance with the directive to undergo certification within three years.


Microfinance Policy Framework - Corporate Governance Ensure Board members are suitable in line with

the prescribed qualification and experience in the MF Policy and are “fit and proper” persons.

Ensure Board can add value, provide strategic direction and effective oversight.

Management must be suitably qualified, experienced, competent, committed and certified microfinance practitioners. Must also demonstrate high level of integrity and professionalism.

MFB is operating in line with commercial principles, best MF practices and high accounting, auditing and MIS standards.

Enforce the Code of Good Corporate Governance.


Microfinance Policy Framework - Prudential Requirements Compulsory investment in NTBs (5% of

deposits) Liquidity ratio (20%); Capital adequacy ratio

(10%); Adjsuted capital/net credits (1:10) Maintenance of capital funds (transfers to

reserves) Restrictions on declaration of dividends,

where necessary conditions have not been met.

Single obligor limits: Individuals (1%); Group (5% of SHF); Aggregate insider-related lending (max 5% of Paid-up capital)


Microfinance Policy Framework - Prudential Requirements (contd)

Equity investment holding ratio (7.5% of SHF)

Provision for classified assets Contingent items: BAs and CPs Limit of investment in fixed assets

(20% of SHF) Revaluation of fixed assets Unsecured lending limits (N50,000)


Microfinance Policy Framework - Operators Soft Requirements-

Person, knowledge & Skill requirement of the business- it is not all commoners business. It is NOT commercial banking

Appropriate low cost field based model would enhance sustainability

Institutions building support in the form –Manuals, operational policies, procedures etc

Collaboration with Development Partners to leverage on existing knowledge and supports


Microfinance Policy Framework - Operators Soft

Requirements (contd)

• Governance &strategy development• Credit process• Banking and Treasury operations• Investment &Finance• Savings& deposit mobilization• Risk Management• Human Resources Management• ICT& MIS simple technological platform • Accounting System and Records• Internal Audit and Control


Microfinance Policy Framework - Supervisory Framework

National Microfinance Policy Consultative Committee

Credit Bureau Promote private sector-driven Credit Bureau to

mitigate the credit risk of MFBs Rating

Promotion of credible Rating Agencies of international standard to carry out institutional assessment

Risk-based Supervision Adopt RBS for MFBs

Self–regulation Establish and nurture a self-regulating MFB umbrella

association


Microfinance Policy Framework - Supervisory Framework (contd)

Deposit Insurance Establishment of the Microfinance Development

Fund Provision of wholesale funding Promote the development of the industry

Policy implementation Fairness and firmness in implementing the MF Policy Minimizing regulatory arbitrage through periodic

reviews of the policy and guidelines Compliance with Anti-Money Laundering Act 2004

and Know Your Customer (KYC) circulars Insider abuse

Director-related loans Frauds


Microfinance Policy Framework - Supervisory Framework (Models)

Nigerian model –Central Supervision Central Bank handling the licensing & regulation Central Bank providing supervision and integrating the

structure into National Financial System Advantages are : Resources requirement are centrally provided The image necessary to enforce sound regulation Capacity building and institutional development get

attention It is the most effective and global practice Utilization of branch outlet for outstation gathering Disadvantage –Expensive resource and attention of

central regulator



Delegated model –Subsidiary Supervision Central Bank handling the licensing & regulation Other Institution providing supervision and reporting to the

Central Bank Advantages are : Resources requirement are budgeted by National Budget

centrally provided The supervision would be sole and flexible Specialization may be built overtimeDisadvantage –The lost of image necessary to enforce sound

regulation Capacity building and institutional development get attention It is fragmented and may be expensive



Outsourcing Supervision Central Bank handling the licensing & regulation Other Institutions and Agencies providing supervision and reporting to

the Central Bank Advantages are : Resources requirement are budgeted by Budgeted by Central Bank The supervision would be sole and flexible The agent can used for other assignments

Disadvantage –The lost of image necessary to enforce sound regulation Capacity building and institutional development get attention It is fragmented and may be expensive Compromise of standards Expensive in the long run


Conclusion & Way forward Uniform ICT platform for the operations, accounting &

report submission to the CBN Capacity building targeted at Governance, Risk

Management & information and Data Management Sustainable low cost model adapted to rural financing

structure & for rapid extension of access to finance in rural communities

Promotion of Rural financial literacy programme as integral part of National Financial literacy programme

Collaboration with Credit bureau & National Identity Management

Integrating Rural Finance into National payment system


Conclusion The potential of collaborative effort should be

carefully harnessed and supported in order to achieve the intended objectives.

The synergy between several on going interventions focused at the rural sector should integrated as part of National Rural Finance Development strategy

The role of advocacy and financial literacy programme would in financial education and consumer protection

All these would lead to support effort at establishing sound MFBs at rural sector & in fulfillment of the objective of Microfinance policy


Thank You

Documents

Implementation Support, Regulation & Supervision for MFBs