By Akinola Ajibade, The Nation

The Central Bank of Nigeria (CBN) has introduced measures to sanitise microfinance banks (MfBs). In this report, AKINOLA AJIBADE examines how effective the measures are.

The microfinance banking sub-sector is plagued by problems such as inadequate capital, bad debt, management ineptitude, weak corporate governance structures, faulty accounting procedures and corruption.

Others are poor skills, inability of the operators to properly understand the concept of microfinance banking, among others. These have eroded confidence in the sub-sector, making it a source of concern to many, especially the Central Bank of Nigeria (CBN). To revive the operations of the 898 microfinance institutions, CBN introduced some far-reaching measures, which are part of its reforms agenda for the banking industry, aimed at putting the banks on the path of profitability.

Like what happened to commercial banks, the reforms in the microfinance banking were introduced, inter alia, to lay to rest the notion that the banks were no longer capable of recording growth.

The reforms

Part of the reforms is the introduction of the electronic format of rendering returns to CBN against the manual method; categorisation of banks into unit, state or national level; the imposition of a new capital regime of N20 million, N100 million, and N2 billion on the banks; and granting the banks a waiver not to participate　 in the microfinance programmes.

Others include examination of the books of the banks, and the directives on a uniform accounting year for them, among others.

Since the reforms were introduced, the banks have been making frantic efforts to improve their operations albeit at a greater cost. While many have adopted cost-cutting measures to stimulate growth, others are fine-tuning plans to get sizeable shares of the market. In all these, stakeholders have described the reforms as the best thing to have happened to the sub-sector. They see a brighter future ahead for the banks.

Uniform accounting year

With the successful implementation of a uniform year-end for the commercial banks, the apex bank saw the need to do the same for microfinance banks.Consequently, it directed the microfinance banks and other companies in the Other Financial Institutions (OFIs) to adopt a common financial year-end with effect from December, 2012. The directive, as contained in a circular issued on Tuesday last week,　wants the companies under the umbrella of the OFIs to pass a resolution to that effect and further inform relevant agencies in line with Section 334 Sub Section 4 of the Companies and Allied Matters Act of 1990.

Speaking on the issue, the Chairman, National Association of Microfinance Banks (NAMBs), Lagos Chapter, Mr Olufemi Babajide, said the decision of commercial banks to implement a common year-end in 2009 sent a signal to other operators in the industry.

Babajide said the operators were not surprised by the directive on common financial year-end, because they have been looking forward to CBN to introduce the policy.

He said: “As a matter of fact, the microfinance banks operators have been using a common year accounting policy before the CBN issued a circular last week. We have started using a common financial year as far back as 2009. I’m talking in relation to the over 200 microfinance banks operating in Lagos. I think the banks in other parts of the country have been doing similar things. Now that the apex bank has compelled all the microfinance operators to adopt a uniform accounting year, the better for the sub-sector.”

He said the development would enable the CBN to do proper ratings of microfinance banks, and ascertain the liquidity positions of the banks.

“For instance, if my bank prepares its financial statement on December 1, and another bank does its own in July, there is no uniformity in that. That would not augur well for the system because the CBN would not be able to access enough information and further rate the banks. Now that the policy on common year-end has been put in place for the microfinance banks, it would be much more easier for CBN to get all the indices necessary for the growth of the banks,” he added.

The Managing Director, Havilla Microfinance Bank Limited,　Mr Rufus Oluyole, toed a similar path. Oluyole said microfinance institutions had since adopted a common year-end to stimulate growth. He said operators had no option than to adopt a common year-end policy, because the commercial banks had complied.

“Since the commercial banks have adopted the uniform financial year, it behoves on the operators of microfinance to adjust their financial statements in line with the policy,” he said.

Cashless banking

Following the implementation of the cashless banking policy in Lagos on January 1, industry observers thought the policy was an all-inclusive one involving stakeholders in the financial industry chain.

But it was not as if the CBN excluded microfinance banks from participating in the cashless banking initiatives. The development was attributed to issues such as illiteracy, lack of exposure and low adoption of electronic banking, among others.

According to Babajide, the exclusion of microfinance banks from cash-less banking implies that customers can now withdraw and deposit above the stipulated limit of N150,000 per individual and N1 million for a corporate entity.　 He said customers of MfBs have not embraced electronic banking such as Automated Teller Machine (ATM) transactions, adding that the development would pose a threat to the implementation of the cashless policy.

He said implementing the policy would not be an easy task in the sub-sector even though the banks have been persuading customers to pay in cheques and do other banking transactions electronically.

“Of course, we are now appealing to customers to pay with cheques and withdraw from ATM points with the aim to operate a cashless banking, but the compliance is not going to be immediate. It will take a gradual process before MfBs can join the initiative,” he said.

On his part, the Managing Director, Support Microfinance Bank, Mr Sunny Ahkamiokhor, said the microfinance market is not yet ripe for cashless operations. He said the banks would not be able to service its customers properly, if CBN insists on its cash limit for individual and corporate entities.

The Managing Director, Owotutu Microfinance Bank Limited, Mr Oladipupo Ajayi, said it would take time for customers to embrace cashless banking initiatives.

“The cash-less banking policy will give room for easy movement of cash, while it will also prohibit fraud, theft and armed robberies. In spite of these, the microfinance market is not ready for this policy. Microfinance banks are educating the masses on cash-less banking model, but it will take time because people don’t like change. My bank is sensitising the customers to key into this policy and we hope that the market will soon be ready for it,” he said.

New capital regime

Prior to the introduction of new capital requirements for the microfinance banks in June last year, the banks were under-funded. Most of them were operating partially, while others have closed shops. This made CBN to conduct a special examination of the banks in 2010. In the process, 224 microfinance banks were axed for poor performance.　 Subsequently, the apex bank imposed a new capital regime on the banks to strengthen their operations.

Industry observers said the imposition of a new capital base, was one of the major steps taken to re-invigorate the sub-sector.　 According to the Managing Director, Gold Microfinance Bank Limited, Mr Lanre Abiola, the development would improve the fortunes of the banks.　Abiola said the operational capital of the banks were not only small, but incapable of sustaining them.

He said many of the banks were struggling to survive last year, because they were not unable to advance credits to their customers. He added that the banks were finding it difficult attract more deposits, due to loss of confidence then.

“If you look the performance of some of the banks two years ago, it is nothing to write home about.　 The banks were grappling with challenges such as poor risk management framework, capital, skills and energy. Also, many operators were coming from the commercial backgrounds to manage microfinance banks.

“They have forgotten that the two are not same. So, there was a misplaced priority. At the end, many banks fizzled out within a short time. But that era has gone as banks are recapitalsing their operations in line with the regulatory policy,” he said.

Abiola said once the banks are fully recapitalised, they would be able to record better growth.

“I think the reforms have helped in returning confidence into the sub-sector. As time goes on, the banks would effectively serve those in the low-income bracket of the economy. That has been the expectations of the operators since the reforms started two years ago,” he added.

Online rendition ofreturns

Stakeholders have hailed the decision of CBN to introduce online rendition of returns for microfinance banks, describing it as a welcome development. They said electronic rendition of returns, was part of the efforts to make microfinance activities more attractive.

The Managing Director, MainStreet Microfinance Bank Limited, Mr Kashim Olanrewaju, said: “We have been rendering our returns both electronically and through hard copy. I think we have a system that is compliant. It is a very innovative measure that is capable of raising the standards of the banks. This is part of the reforms measures introduced to buoy activities in the sub-sector,” he said.

Responding to the development, the Managing Director, Accion Microfinance Bank Limited, Bunmi Lawson, said her bank has been rendering monthly returns in both hard copies and e-mails as the CBN required.

“You know that Accion is very keen on technology and, in fact, we use D 24, which is one of the most robust core banking platforms. We have been rendering our returns both in hard copies and e-mails,” she said.