Nirsal National Microfinance Bank: Calling on Emefiele to backpedal!
By Tiko Okoye
This article, first published in December 2018, reflected – and still reflects – my total disdain for then-CBN Governor Godwin Emefiele for getting his priorities upside-down. It is being republished in the light of the predictable and predicted abysmal failure of his pet project, the Anchor Borrowers Programme, in which security agencies seem very unlikely to recover over N5004B out of the three-year loan jamboree of N1.1T in compliance with President Bola Tinubu’s order. May this administration garner needful lessons from history.
The apex bank has over the past decade rolled out policy instruments and programmes aimed at improving the performance and contributions of the microfinance subsector towards poverty alleviation and national economic development. Still, the impact of microfinance banking activities as a contributor to the GDP has remained marginal despite their multiplicity of numbers.
The foregoing may have prodded the CBN Governor, Godwin Emefiele, to rue that “those microfinance banks that we have today are not doing what they are supposed to be doing.” His antidote to his perceived shortcomings of the microfinance subsector is the establishment of the behemoth Nirsal National Microfinance Bank jointly owned by CBN and the Bankers’ Committee. Let me now proceed to state reasons why this is toxic medicine that will ultimately end in failure, because any wrong diagnosis will culminate in wrong prescription and treatment.
Due cognizance has hardly been taken of the reality that the increase – as against the expected reduction – in the number of financially excluded persons over time is due to a milieu of factors, such as the effects of the relatively long recession, job losses, business failures, etc. It would be fool-hardy to point to the supposedly underwhelming performance of microfinance banks as the root cause.
It is an open secret that top management staff of the banking regulatory agencies lack comprehensive understanding of typical business models of sustainable microfinance. Studies done by Symbiotics – a leading global investment boutique specialized in emerging, sustainable and inclusive finance – indicate, among other things, that microfinance institutions are very labour intensive, with 15% operating expenses on the average – a figure 10 times higher than that of commercial banks!
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The cost of funds of a typical microfinance bank can exceed that of a typical commercial bank by as many as 15 times. When you get this kind of lethal combination – high operating costs and high cost of funds – the inevitable end-product is reflected in “usurious” rates.
Truth’s that microfinance banks have a dual mission: a social mission to escalate access to financial services to the economically active poor – unlike commercial banks that tend to focus solely on profit maximization – and full coverage of costs plus an ample return to shareholders in order to remain in business on a sustainable basis.
The CBN Governor equally lamented that “microfinance banks have made it nigh impossible for many small and medium enterprises to access the Federal Government’s loans aimed at stimulating local production and boosting non-oil export.” But why give a dog a bad name just to hang it or bulldoze a pet outfit into reckoning?
Let’s consider a key prudential guideline for the composition of a microfinance bank’s loan portfolio: the 80/20 rule. The apex bank requires each microfinance bank to lend 80% of its deposits in the form of microcredits and 20% to SMEs (the microcredit figure is a minimum while the SME figure is a maximum).
The operating costs associated with building an 80/20 loan portfolio is much higher than building a 20/80 loan portfolio because the clientèle base is atomistic and the loan size is very small, unlike when the operator is principally dealing with few SMEs with relatively larger loan applications. It doesn’t require a knowledge of rocket science to appreciate the adverse impact this would have on the operational costs of the average microfinance bank.
The National Microfinance Policy provided for the establishment of a Micro, Small and Medium Enterprises Development Fund (MSMEDF) to provide the much-needed liquidity to the subsector. Under the policy, the three tiers of Government are mandated to donate 1% of their budgets to the Fund. But it has remained a mirage since its launch in 2005 due to a lack of will on the part of the apex bank to enforce the directive.
Believing that the plethora of challenges facing the subsector is chiefly attributable to lack of sufficient capital to engage in intermediation activities – and given its inability to make the MSMEDF a raving success – the apex bank recently gave operators of existing categories of microfinance banks a grace period of 18 months to significantly shore up their capital – Unit MFBs from N20M to N100M, State MFBs from N100M to N500M and National MFBs from N2B to N5B – even as new applicants are to immediately comply with the directives.
In all this, the CBN has not bothered to take cognizance of the relatively steep cost of equity in the microfinance subsector when compared to other sources of funding and why equity investors seek more financial leverage rather than less. Even more confusing is that the apex bank had hardly rolled out the new directive than it announced plans to establish its own national microfinance bank!
There is a very wide disparity in the proportions of financially excluded persons among geopolitical zones – with the South-West having the least and the North-East having the highest. And while microfinance banks in zones that have achieved a relatively high level of financial inclusion inevitably continue lending to already financially included persons, resulting in repayment challenges associated with over-borrowing, those in zones with a lower proportion witness an alarming paucity of activities, even when the need for microfinance services is crystal-clear.
Furthermore, the variegated profiles of microfinance customers by geopolitical zones in terms of financial literacy, access to mobile phones, occupational type and rural/urban nature are very revealing.
What the combined picture goes to demonstrate is the imperative of decentralisation rather than centralisation. A clear and present danger also exists that a government-led initiative like a monolithic National MFB like Nirsal could easily foist its processes and procedures on the operators in the subsector by osmotic pressure without their willing buy-in to the detriment of the subsector and the national economy.
The National Microfinance Policy Framework issued by the CBN states that the government should play an enabling role rather than being a direct participant in microfinance. The establishment of a self-owned microfinance bank by CBN not only contradicts its own policy framework, but it also completely goes against the grain of the crystallizing global trend towards a demand for democratization of access to financial intermediation funds within low-income countries and emerging markets and away from centralized Government intervention/participation.
What’s simply required is for the apex bank to foster a conducive policy environment that supports product and service innovation while promoting customer protection, such as a tax-holiday incentive scheme that has a tenor not less than three years to motivate microfinance operators to establish their presence in disadvantaged territories.
The only way to wean microfinance banks out of their ultra-expensive funding mix is by developing an enabling IT infrastructure that would drive a successful mobilisation of savings from the public, including from large numbers of poor people. But since building up a sizeable savings portfolio takes time and a huge financial investment, the initiative would have to be initially led by the CBN, with operators’ buy-in.
Another way the apex bank can play a critical role in promoting microfinance activities is by assisting to build sustainable microfinance business models. Suffice to say that given its emphasis on SMEs, Nirsal isn’t a typical MFB, and can be called a “quasi-commercial bank” at best. But functioning as such on the tenets of microfinance portends very grave operational and financial risks.
What the CBN hardly gives any thought to, given its constant haranguing of microfinance service providers, is the steady erosion of whatever is left of public trust and confidence; which further makes savings mobilization in the regulated microfinance subsector a Sisyphean task.
Nirsal would have a crowding-out effect on existing microfinance banks as well as create a financial monopoly which in turn breeds inefficiencies. Empirical evidence exists to support the view that failure is always inevitable whenever, for a number reasons, the cost of such inefficiencies cannot be passed on to the customers.
I am also fully persuaded that in order to dispel the negative and constrictive public stereotyping of microfinance operators, the CBN should seriously consider a change of name from Micro Finance Banks to Financial Inclusion Banks.
Finally, it must be noted that collaborative projects between the apex bank and commercial banks are not a new development. In fact, the highway of their ‘joint projects’ is strewn and littered with the carcasses of good intentions and bad results, such as the Rural Banking Scheme (1977), People’s Bank of Nigeria (1990), Small and Medium Industries Equity Investment Scheme (2001) and Small and Medium Enterprises Equity Investment Scheme (2005).
What then is the basis for expecting that the envisaged Nirsal National Microfinance Bank would not follow the same pattern and end up being a colossal waste of financial resources and efforts with a prohibitive opportunity cost?