The Central Bank of Nigeria (CBN) on Wednesday released an exposure draft guideline for the regulation and supervision of microfinance banks (MFBs) in Nigeria following a review of the 2012 guidelines.
According to the apex bank, the need to reposition microfinance banks towards improved performance following a recent review of the sector informed the decision to review the guidelines.
Recall that the CBN had in 2019 revised the categories of microfinance banks and increased the minimum capital base of each category. According to CBN, there are 902 registered microfinance banks in Nigeria. Despite the high number, the eight largest national MFBs control c.45% of the market share.
In a bid to increase financial inclusion and improve access to financial services for the economically active poor, the CBN issued the Microfinance Policy, Regulatory and Supervisory Framework in December 2005. This was later revised in 2011. Microfinance banks were expected to provide access to financial services such as micro-savings, micro-credits, and other financial products to the economically active poor.
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Microfinance banks typically give small loans, do not have asset-based collateral and have a simpler operation when compared to commercial banks. Despite the rapid increase in the number of microfinance banks since the launch of the policy framework in 2005, available statistics do not suggest that they have significantly aided financial inclusion.
A recent survey conducted by EFInA (Enhancing Financial Innovation and Access) indicates that the proportion of those financially-included serviced by MFBs is only 3.8%. We think the major factor mitigating against the proper functioning of MFBs stem from their roots- most of the MFBs that were licensed after the launch of the CBN’s Microfinance Policy in 2005 were Community Banks. Before the repeal of their licences, Community Banks were seen as government-funded institutions who provided loans with little thought out plans towards recovery. This mindset led to the collapse of many MFBs.
That said, the concept of microfinance banks in Nigeria has not adequately achieved desired aims for several reasons such as inadequate supervision by CBN based on the large number of these banks, an attempt by operators to adopt spending and lifestyles similar to commercial banks, lack of focus on the target market and increasing cases of default especially in the face of the declining real income level occasioned by frail macro conditions.
In our view, fostering sustainable economic development in any nation requires rural transformation and the empowerment of rural dwellers, hence, we believe there is a need to reposition microfinance banks to take on their task of alleviating poverty and aiding financial inclusion among the economically active poor. Accordingly, we believe the recapitalisation exercise which is aimed at strengthening the existing MFBs coupled with improved supervisory oversight will aid rapid and sustainable growth of the microfinance industry.
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