1.0 It is my great pleasure to deliver the keynote address at the 2014 workshop organized by the Nigeria Deposit Insurance Corporation (NDIC) in collaboration with Gombe State Government for MFBs in Gombe State with the theme: “Implementing Sustainable Financial Inclusion in Microfinance Banks (MFBs) In Nigeria”. It is pertinent to state at this point that in the NDIC’s continued quest to effectively promote safe & sound banking practice as well as contributing to financial system stability, the Corporation provides avenues for capacity building and knowledge sharing on sound practice of banking in Nigeria. This workshop presents such an opportunity, and this period, the Corporation is exploring avenues of instilling and deepening the practice of Microfinance in the North East region in general and in Gombe State in particular.
2.0 A Microfinance Bank (MFB) is a company licensed to carry out the business of savings mobilisation and granting micro-credits, promoting Social Objectives such as specialised loans to Women, Artisans and instilling financial literacy. Other functions carried out by Microfinance Banks are; drawing from Micro, Small and Medium Enterprises (MSME) ₦220 billion funds for on-lending and provision of financial advisory services to Small and Micro Enterprises. An MFB is therefore expected to source for savings from individuals, Cooperative societies, Organisations, Firms, Churches, Mosques etc. and utilise such deposits by providing loans to Artisans, Women, co-operative societies to engage in farming, petty trading etc. In addition to that, all MFBs also have a responsibility of accessing the MSME fund managed by the Central Bank of Nigeria (CBN).
Why do we require MFBs?
3.0 Distinguished participants, Nigeria is faced with a myriad of challenges and foremost of them is inadequate credit facilities for Nigerians especially, of middle and lower incomes. The latest EFInA report on Financial Inclusion showed that 39.7% or 65 million Nigerians are financially excluded. Of that number, about 80% of the market segment is in the North East region of the country. Also, according to the CBN report (2012), 54.4% of these are women. The yawning funding gap has been linked to inadequate micro-funding window targeted at the “Bottom of Pyramid” component of the population such as women, rural dwellers, artisan’s etc. The deficit raises the question of how speedily we can bridge the funding gap.
4.0 Addressing the identified funding requires a multi-dimensional approach especially in the area of micro funding. In Nigeria, efforts made in this direction include the creation of Community Banks, Co-operative societies and licensing of MFBs. Another step taken by the government is the recent provision of the Micro, Small and Medium Enterprises (MSME) a funding platform designed to bridge the funding gap of MFBs and Non-Bank microfinance institutions.
What are the recent regulatory & policy efforts to bridge the credit funding gap?
5.0 In Nigeria, the CBN launched a National Financial Inclusion Strategy (FIS) on 23rd October, 2012 aimed at reducing financially excluded adult Nigerians from 39.7% to 20% by year 2020. As part of Financial Inclusion Strategy, the CBN earmarked ₦220 billion for lending to MSME with 60% to women empowerment through rural microcredits. Under the CBN Revised guidelines for Microfinance Banks in Nigeria, MFBs would only be allowed to perform duties such as acceptance of savings and provision of micro-housing. The 2013 Guideline clearly streamlines the activities of MFBs to the provision of micro-finance and exclude other related activities such as Bureau De Change, Forex direct trading, Commercial paper and Provision of Bonds & Guarantees, Acceptance of public sector deposits and Clearing House activities.e.tc.
6.0 The NDIC is the sole agency empowered to guarantee depositors’ funds in deposit-taking financial institutions in Nigeria, including PMBs. The NDIC, as an insurer, reimburses depositors of all MFBs up to a maximum limit of N200,000 per depositor per PMB in the event of failure of such MFB. The new coverage level represents an increase of 100% over the earlier coverage level of N100,000. The NDIC has developed and deployed a framework for Financial Assistance for MFBs so as to promptly intervene and assist the MFBs to overcome temporary liquidity problems. Supervision of PMBs is jointly carried out by both CBN and NDIC. As a bank Supervisor, the Corporation protects Depositors by ensuring that banks’ affairs are conducted in a safe and sound manner. In addition to having the powers to prosecute erring Directors and Management of banks, the Corporation has also put in place a robust customer complaint resolution mechanism. Therefore, Depositors and stakeholders of MFBs have the confidence that their deposits and interests in the banks are protected at all times.
7.0 Distinguished participants, the Micro, Small and Medium Enterprises (MSME) Funding was established with ₦220 billion initial fund to: (i) Agricultural value chain Activities (ii) Trade and General Commerce; (iii) Cottage Industries; (iv) Artisans and (v) Service, schools and Laundry.
8.0 As you will recall that in August 2014, the Federal Government launched the first ₦220 billion Medium, Small & Micro-Enterprise (MSME) fund with initial disbursement to Niger, Delta and Akwa-Ibom State. However, for the MFBs to access the refinancing platform, the institutions are expected to demonstrate strong robust Enterprise Risk Management practice that are capable of enhancing the eligibility criteria, structure of lending and terms of payment for the MSME-assisted funding.
Research Monitoring & Evaluation expenses to get ₦22 billion which is 10% of the ₦220 billion. ₦198 billion or 90% is for lending to economic activities. A Special Purpose Vehicle (SPV) consisting Federal Government, CBN, NDIC and other Agencies is to be created to manage the fund to be given to MFBs at an interest rate of 9%.
Why should MFBs implement sustainable Financial Inclusion?
9.0. The institutionalisation of the MSME ₦220 billion wholesale financial assistance by CBN to improve the funding needs of MFBs necessitates sound risk management practice if the much desired financial inclusion is to be achieved as it is in DMBs.
In summary, eligible MFBs are to satisfy the under-listed requirements: (i) Registration with CAC or Co-operative Department of State, (ii) Evidence of acceptable corporate profile (iii) Evidence of approved Enterprise Risk Management Framework (iv) Sound Corporate Governance (vi) Membership of the Association with evidence of up to date payment of subscription, (vi) Up-to-date rendition of returns (vii) Irrevocable standing payment order with correspondence Deposit Money Bank (DMB) to recover Principal and accrued interest.
9.0 It is important to stress at this juncture that weak Corporate Governance and poor Risk Management frameworks can result in risky behaviours by the MFBs and this can result in the creation of huge toxic assets and ultimately put insured deposits at risk. Given the recent regulatory efforts and the associated high cost of cleansing the system of toxic assets of DMBs through the Asset Management Corporation of Nigeria (AMCON), the Supervisory Authorities are deeply concerned about the build-up of toxic assets of the microfinance banks (MFBs) which stood at about 45.70% as at 31st December 2013 as against the prescribed threshold of 5%. Our attention is now being focused on the Microfinance Bank sub-sectors so as to address the emerging challenges. Our efforts can only be successful if the Operators can embrace good corporate governance and sound risk management practices. We cannot afford the repeat of 2008/2009 financial crisis.
10.0 Microfinance Banks (MFBs) in Nigeria can create significant impact if only they adhere to recommended corporate governance practices based on effective and sustainable risk management practices as instituted by the Regulatory Authorities. In particular, MFBs should be interested in enhanced risk management standards because their loan portfolios are on a variable rate and therefore sensitive to Monetary Policy Rate (MPR) fluctuations. For instance, an increase in the interest rate could make micro-loan repayment difficult and result in default which may give rise to toxic assets. Furthermore, new loans could become less attractive for small borrowers due to affordability pressures. Therefore, MFBs should be able to assess borrowers’ capacity and willingness to continue with loan repayments in the case of an interest rate rise. A lack of thorough and effective assessments could pose a major risk for many MFBs.
Ladies and Gentlemen, in Enterprise Risk Management, Macro-prudential is now a necessary issue for MFBs. The recent Austerity measure announced by the Federal Government is sequel to: (a) Drop in Crude oil price by 28% since June 2014, (b) Stagnant global economy growth in USA, China, European Union and Brazil, (c) Increasing US supplies of Shale oil, (d) Increasing oil supplies in Russian/NATO embargo on Russia, (e) Foreign Portfolio Investors reducing their exposure in the Nigerian market by 14% with the end of USA Quantitative Easing. The impact of the items highlighted on the MFBs operations must regularly be reviewed.
Complementary Regulatory Efforts.
11.0 While I urge the Microfinance Banks in Gombe to look deeper into emerging risk management issues at their various institutions, I want to assure you that both the CBN and NDIC are making concerted efforts to ensure that risk management issues in the financial system are continuously addressed. To this end, we are rapidly developing capacity in the implementation of Basel II and III, Enterprise Risk Management and Internal Capital Adequacy Assessment Planning (ICAAP) measures.
12.0 Indeed, the NDIC has always placed a great importance on the design, development and implementation of sound risk management practices. The NDIC, through the Risk-Based Supervision of MFBs and off-site Surveillance continue to ensure that MFBs are conducting their businesses in safe and sound standards.
13.0 At this juncture, I wish to reiterate the fact that the ability of the NDIC to sustain its efforts in ensuring that all insured institutions are put on the path of sustainable growth and development depends largely on the Deposit Contribution by all the insured institutions.
14.0 Ladies and Gentlemen, the 2014 Workshop for MFB Operators in Gombe is organized by NDIC in collaboration with Gombe State Government to address some of the issues highlighted. Experienced subject matter Experts on Corporate Governance, Enterprise Risk Management, Loans & Advances, Liquidity Management and Social Performance Objectives have been selected to add value to the presentations. I urge you to take this opportunity and appreciate that the success of the workshop revolves around your constructive participation during the sessions. It is my sincere hope that you will find this workshop worthwhile and enriching.
Thank you for your attention.