The Central Bank of Nigeria’s involvement in repositioning Microfinance Banks (MfBs) through increased funding and institutional support has contributed to boosting the fortunes of small businesses at the grassroots.
In the literal application of the word, a business implies any activity carried out with an underlying purpose of profit making. Getting returns from the undertaking may not necessarily be the major objective of the promoter, but the absence of profit making disqualifies it from being classified as a business. Every business so called, must have profit motive, otherwise it would be something else.
Most Nigerian small business owners and indeed everywhere in sub-Sahara Africa (although the narrative is fast changing), have carried on their trades with the notion, quite wrongly though, that profiting shouldn’t be the central theme in informal-small business undertakings, but rather, the need to provide social service, more or less to support relations and render assistance to neighbours, friends, et cetera. That is one major reason failure rate is high in many small businesses as there is no clear-cut distinction, or boundary between what constitutes finance for business and the one to address social needs. This is one headache institutionalised microfinancing is designed to address.
Microfinance, as the name implies, refers to the provision of micro or small credit to an entity, or enterprise to keep the business going. It equally applies to delivering financial services to the active poor, or low income individuals who either fall below the nationally defined poverty line, or slightly above it, as well as the un-banked as a prerequisite to improving their standard of living.
It can be stretched to include making efforts aimed at poverty alleviation, enhancing well-being chances for the poor by providing capital for micro-enterprise, encourage savings culture of the poor so that current problems and future risks could be curtailed. It also entails the means of access to finance by the poor people that allow them to utilise their capacities in favour of lasting development.
Microfinance is a multifaceted concept that encapsulates a set of flexible organisation structures and processes through which provision of essential financial services are offered to low-income earners and small business entrepreneurs on a continuous basis, and it has proven to be the most effective and powerful tool for poverty reduction through its provision of capital, social esteem, knowledge, information, empowerment, social capital and market access.
Enhancing microfinance benefits
There’s always a challenge when it comes to offering microfinance services to the segment of the society it is designed to serve, and the reason is not far fetched.The basic elements, such as basic education, availability of primary healthcare, organisational structure, among others needed to make microfinance service effective and impactful and attain its desired goals,which are most times not readily available.
And this is understandable. Microfinance is enacted to serve as a rescue agent, or vehicle to address the absence of these essential elements, the absence of which have created these festering problems in the first place.
Therefore microfinance must be brought to bear on the poorest segment of the society, the absence of the basic requirements for its success, not withstanding.
This is where the intervention of the Central Bank of Nigeria (CBN) in driving and expanding microfinance of small businesses is most welcome and appreciated.
Why? because the poorest from the vast majority of those without access to primary health care and basic education are the majority of those without access to microfinance. So denying them access to micro credit on the basis of lack of education, social standing and primary healthcare limitations they presently live with, will eventually result in compounding the very problems that microfinance is intended to address.
To attain to its set goals, microfinance must be administered to well identified and recognised groups, preferably cooperatives where the micro loans are utilised to create jobs. This way, chances that the beneficiaries will abuse the gesture would be mitigated and repayment of the loans could be largely assured.
Interventions
The Central Bank of Nigeria (CBN), having identified small businesses as a critical segment of the nation’s economic activity that contributes significantly to the overall growth of the economy and by extension, the the Gross Domestic Product (GDP), has turned attention to the Micro-Finance Banks (MFBs), equipping them statutorily to function as growth agents that offer the needed credit and financial services to the often neglected, but critical segment of the business community.
In recognition of the central role MFBs play in economic transformation of a nation if properly guided, empowered and engaged, the CBN under the leadership of the Governor, Godwin Emefiele, has now turned attention to re-organising and repositioning the MFIs and MFBs to act as growth institutions driving the economic fortunes of the citizenry at the grassroots level of businesses.
In achieving this, the apex bank has opened up the space for the licencing and registration of many MFBs. As at the last count, going by CBN data, about 916 firms have been licensed and registered to operate as MFBs as at 31st October, 2020.
In addition, the CBN has created its own micro financing bank-NIRSAL MFB with all NIPOST outlets in the states serving as branches, and as a ready outlets for advancing credit to small businesses.
This is a testimony to the seriousness the apex bank attaches to micro segment financing of small businesses and Micro Small and Medium Enterprises. It is comforting to know that through microfinance, millions of people formerly excluded from obtaining loans to run their businesses now have access to loans, savings, insurance and other financial support services.
Challenges
There are associated risks peculiar to MFBs arising majorly from their small size. They are therefore vulnerable due to resource constraints, as well as lack of basic education, among others. Just as fuel is to powering engines, so is capital to banks, that’s why the limited resources at their disposal renders them vulnerable, resulting in frequent failures.
Also, MFBs are disadvantaged due to their restrictive operational space. They operate mostly as one or a few branch network entities and thus constrained in many respects. Unlike Deposit Money Banks (DMBs) with large pool of depositors, assisted by a wide network of branches, the MFBs are at the receiving end, and so cannot take advantage of these options.
They have a restrictive client base, and an un-diversified loan portfolio and often restricted to few areas thus exposing them to systemic risks and more often than not, frequent failure rate.
Lack of capacity in practical microfinance banking, leading to possible mission drift by the operators; lack of sustainable source of wholesale funding for on-lending to MFBs and for social development; sub optimal existence of support institutions, such as rating agencies, credit bureaux and in particular the Microfinance Development Fund are some of the challenges the sector is faced with.
Microfinance policy
To address the lapses associated with frequent failures in the microfinance segment and enhance the efficiency of the MFB ecosystem, the CBN adopted certain measures, including a microfinance policy to ensure the growth of the microfinance sector. Before the policy came on stream in 2005, 65 per cent of the economically active population had no access to formal financial services. It became imperative, given the apex bank’s drive to push financial inclusion up to 80 per cent, that additional steps have to be taken to expand the horizon for more entrants into the microfinance segment in aid of operators in the MSMEs sector of the business community.
The CBN measures aimed at facilitating the smooth implementation of the microfinance policy, among others, include the establishment of the Microfinance Advisory Board (MAB) to coordinate and harmonise stakeholder interventions in the sub-sector, the establishment of the National Microfinance Policy Consultative Committee (NMFPCC), to provide direction and guidance on the policy implementation, as well as an Inter-Agency Technical Committee on the Implementation of the Microfinance Policy to address technical and conceptual issues related to the policy implementation.
The CBN has also established three Entrepreneurship Development Centres in Lagos, Onitsha and Kano on pilot basis to build the capacity and enhance the quality of potential clients of MFBs. The CBN also embarked on sensitisation and awareness campaigns to various stakeholders so as to encourage investors to set up micro-finance institutions, banks, Credit Bureaux, Rating Agencies, encourage governments to participate in the sub-sector and contribute to its development in the interest of their subjects, as well as educate them on ways of promoting sustainable microfinance programmes.
Deposit Money Banks are also encouraged to participate in microfinancing by setting up subsidiaries, departments or engaging in wholesale funding activities in favour of microfinance institutions; clients were enlightened on the opportunities in the microfinance sub-sector and enable them to access financial services; while Development Partners are encouraged to increase their activities in the sub-sector and ensure that they are aligned with the National Financial Sector Policy.
The CBN has equally initiated a review of the microfinance policy to address such areas as capital base, organic growth path, single obligor limit and restriction of operations of MFBs. To succeed and sustain microfinancing, either through MFIs or MFBs, there’s need to have good management and staff with proven skills.
Of equal importance, is the need for adequate understanding and appreciation by consumers of the financial implication for the microfinance programme, so as to eliminate, or mitigate the likelihood of systemic abuse, misapplication of funds and undermining the ethos upon which the concept of microfinancing rests. There’s no question that the concept of providing microloans at acceptable terms (low interest rate, collateral waiver) among others to alleviate the economically active poor has been widely proven and accepted across the length and breadth of the nation and elsewhere.
These microfinance schemes open a vista of finance for the poor and the unbanked who were denied, or alienated from having access to finance from the conventional banks as a result of absence of collateral.
Employment and Training
With over 916 licensed and registered microfinance banks, the direct and indirect jobs the MFBs have created is obvious. There are yet other jobs that have come on stream from other small businesses they have helped to create through their direct funding. MFBs in their operations, have equally boosted the managerial capacity of the youth and developed their potential to become future large corporate organisations. MFBs also offer financial services to the low-income earners who often do not have access to financial services offered by conventional banks due to high transaction and operational cost, and the high risk involved in extending credit to them.
