The microfinance sector deserves better attention
In line with Sections 12 and 13 of the Banks and Other Financial Institutions Act (BOFIA), 2020, the Central Bank of Nigeria (CBN) recently revoked the operating licences of 46 microfinance banks (MFBs), citing their failure to adhere to regulatory requirements. The curtains were drawn on the banks for being in breach of one or more operational provisions, including insufficient assets to meet liabilities, closure of operations without CBN approval, prolonged inactivity and cessation of financial intermediation. Some also had their licences revoked for failure to commence operations within 12 months of licence approval as well as inability to maintain minimum capital requirements.
Regulated by the CBN and the Nigeria Deposit Insurance Corporation (NDIC), the MFBs sector relies heavily on both unit and state microfinance banks. And in taking the latest decision, the apex bank’s motive is to save depositors and ensure sanity in the sector. However, beyond the adduced reasons for the hammer on the 46 banks, there is a deeper concern -the continuing mortality rate of operators in the sector. In May 2023, the CBN had carried out a similar revocation exercise when it axed no fewer than 132 microfinance banks, three finance companies and four primary mortgage banks.
While it is correct to take out the MFBs for non-adherence to regulatory requirements, we implore the CBN, and by extension, NDIC, to take a closer look at many of the reasons why the licences of the banks are revoked from time to time. Licence revocations bordering on insufficient assets to meet liabilities, closure of operations without CBN approval, prolonged inactivity and cessation of financial intermediation as well as inability to maintain minimum capital requirements appear to be systemic challenges that need the intervention of the regulators to help the players surmount.
It is true that the expectations and enthusiasm that heralded the sector’s emergence in Nigeria when the policy and regulatory framework was launched in 2005 have almost completely disappeared. Over the years, some of the common complaints against microfinance banks include unauthorised deductions, failed electronic transactions, excessive interest rates, hidden charges, and unapproved branch closures. In severe cases, poor asset management and prolonged inactivity had led regulators to revoke licences and subsequent liquidations.
While some of the sector’s leading players have made a modest impact, the success story cannot be compared with the more robust performance of their peers in other developing countries such as Bangladesh, India and Indonesia, among others. Many operators in the MFBs sector, including those in the latest CBN hammer, have been bogged down by operational challenges that make it increasingly difficult for them to mobilise funds.
Besides, the sector has been buffeted by undue competition from the Deposit Money Banks (DMBs), otherwise known as commercial banks, and this needs to be addressed through creative and deliberate policy steps. There is also a very poor buy-in from the Nigerian elite and middle class, who would not place funds or transact their businesses through the MFBs, a development that has made it impossible for the microfinance institutions to raise the required capital.
From available records, the regulators (CBN and NDIC) appear not to have demonstrated active presence in the survival and sound health of the MFBs beyond licensing them and occasional routine supervision. While it is commendable that the CBN and NDIC wield the big stick when there are perceived infractions by players in the sector, we urge the authorities to lend a more purposeful support to take microfinance banking in Nigeria to the heights attained by their peers elsewhere, particularly Asia.
In several climes, the MFBs have served as one of the most potent channels of bridging the poverty gap and ensuring inclusive growth.