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The benefits of CBN’s new minimum capital base for Microfinance Banks

Central Bank of Nigeria (CBN)
Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) recently increased the minimum capital base of Micro Finance Banks (MFBs) in Nigeria. Currently there are over 1000 microfinance bans scattered across Nigeria.

CBN in a circular on 22n October 2018 issued and signed by the director, financial Policy and Regulation department, Kevin Amugo, said that the new requirement is to strengthen the sub-sector and reposition microfinance banks towards improved performance.

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The new minimum capital requirement takes immediate effect for new applications while existing microfinance banks shall be required to FULLY comply with effect from April 01, 2020.

A copy of the circular posted on CBN website said “given the role of microfinance banks in economic growth and development, the Central Bank of Nigeria (CBN) introduced the Microfinance Policy, Regulatory and Supervisory Framework on December 15, 2005 (revised in 2011). The key focus of the policy was, among others, to increase financial inclusion rate in the country; improve access to financial services for the active rural poor; and pursue poverty eradication.”

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It noted that the “microfinance banking sub-sector, in pursuit of the above objectives, had been contending with such challenges as inadequate capital base, weak corporate governance, ineffective risk management practices, dearth of requisite capacity and mission drift.”

The circular also noted that the CBN has reviewed the state of health of the sub-sector and is of the view that microfinance banks, as presently constituted, would be unable to meet the critical targets set out in the Microfinance Policy, hence the need for specific reforms to strengthen the sub-sector and reposition microfinance banks towards improved performance.

Consequently, the CBN, in exercise of the powers conferred on it by the Banks and Other Financial Institutions Act and in furtherance of its mandate to promote a sound financial system in Nigeria, hereby increases the minimum capital requirement of microfinance banks as follows:

Unit Microfinance Bank: N200,000,000 (Two hundred million Naira); State Microfinance Bank: N1,000,000,000 (One billion Naira) and National Microfinance Bank N5,000,000,000 (Five billion Naira).

The CBN explained that “to meet these requirements, existing microfinance banks are expected to explore the possibility of mergers and acquisitions and/or direct injection of funds.”

“The Revised Regulatory and Supervisory Guidelines for Microfinance Banks, Code of Corporate Governance for Microfinance Banks and sector-specific Prudential Guidelines for Microfinance Banks would be issued in due course” the circular said.

Thus, institutions that meet the capital requirements as well as demonstrate the existence of strong corporate governance in their operations would be allowed to open account at the CBN office within their state of operation.

Such institutions would also be channels for micro funding activities of the CBN and the Development Bank of Nigeria the circular noted.

The health of micro fiancé banks has been a major worry for the CBN and the Nigeria Deposit Insurnace Corpotation (NDIC). Recall in September this year, the CBN said it would revoke 154 microfinance banks’ license over insolvency issues.

The CBN said 62 of the microfinance banks had already closed shop; 74 became insolvent; 12 were terminally distressed; while six voluntarily liquidated.

The NDIC has previously paid billions to depositors in failed micro finance banks.  For instance, in 2016, the NDIC said it had paid N2.9 billion to 81,328 insured depositors of failed Microfinance Banks (MfBs) across the country as at December 2015. It said a total of 187 MfBs whose licenses were withdrawn by Central Bank of Nigeria (CBN) were closed down within the same financial year.

Also at the end of September 2017, the Corporation paid a cumulative sum of N2.88 billion to 525, 009 depositors of closed Microfinance banks (MFBs).

Thus, given the high propensity of failing micro finance banks, experts are of the opinion that the micro finance banks needs to be strengthened to live longer as small depositors who are mostly customers to micro finance banks are losing huge funds. Experts also said the corporate governance architecture of the micro finance banks must be strengthened in addition to the minimum capital raise. They also say the management expenses of the micro finance banks should also be put under scrutiny as a lot of the micro finance banks owners are living ostentatious life styles at the expense of depositors.

Commenting on the recent CBN capital raise, Prof. Uche Uwaleke, the Head of Department, Nasarawa State University, Keffi State said “the whole idea behind Microfinance banks is to have institutions that are in a position to grant micro credit to micro and small enterprises. That does not mean that such institutions should be small in size.”

According to him, “as a matter of fact, they should be large and strong enough to perform their financial intermediation roles. In this regard, the directive to Microfinance banks to have their capital shored up by the year 2020 is welcome” he said.

He noted that “the reality is that many of the unit Microfinance banks in particular with a minimum capital base of N20 million are financially sick with very high non performing loans. The weak capital base hinders their ability to engage professionals in their operations as well as put proper risk management framework in place. Little wonder many of them are closing shop and their licenses being withdrawn by the CBN.”

“With sufficient capital, these Microfinance banks will be in a stronger position to engage competent staff and invest in the right technology. The development will also enhance their corporate governance. This CBN directive will no doubt sanitize the Microfinance sector and further stabilize the financial system” he said.

Also commenting, Mr. Rislanudeen Muhammad, Managing Partner at Trispeed Consulting, said “most of the micro finance banks have weak capital due to years of high non performing loans.”

He said the “CBN is right in raising their capital requirements so as to make them stronger and also  have capacity to absorb the shock of any potential provisioning  due to Non Performing Loans (NPLs)” he said.

He said “strong capital adequacy ratio for a bank is important to enable them remain on sound health and also have capacity to perform their financial intermediary services.”

 


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